ACCOUNTING FOR MATERIALS

Problem Material
2.4 Material A B

Annual deman 4000 63375

ordering cost 10 10
carryig cost 2 3
safety stock 250 lb 750 lb
lead time 20 days 10 days
daily usage 15 lb 250 lb

1 EOQ √(2*Q*OC)/CC
√(2*4000*10)/2 √(2*63375*10)/3
40000 422500
200 650
2 reorder point (daily usage x lead time) + safety stock
(15 x 20) + 250 (250*10)+750
550 3250

3 safety stock/daily usage

250/15 750/250
16.66667 days 3 days
4 no. of orders annual demand/eoq
20 orders 97.5 orders

5 Total ordering cost = no. of orders x cost per order

Total carrying cost = (order size/2) + safety stock x carrying cost per unit

Material A
order size 200

total ordering cost 20 orders x $10 200

total carrying cost (200/2)+250 x $2 700
total 900

order size 150

total ordering cost (4,000/150) x $10 266.67

total carrying cost (150/2)+250 x $2 650
total 916.67

order size 250

total ordering cost (4,000/250) x $10 160.00

total carrying cost (250/2)+250 x $2 750
total 910.00
P2-8

1.
a. Materials ............................................................................. 58,000
Accounts Payable ......................................................... 58,000
b. Work in Process ................................................................. 45,000
Factory Overhead, control .................................................. 8,000
Materials ....................................................................... 53,000
c. Materials ............................................................................. 900
Work in Process ........................................................... 900
d. Accounts Payable ............................................................... 1,500
Materials ....................................................................... 1,500
e. Accounts Payable ............................................................... 51,500
Cash ............................................................................. 51,500

2.
Cash Accounts Payable
Bal. 64,250 (e) 51,500 (d) 1,500 Bal. 29,000
12,750 (e) 51,500 (a) 58,000
53,000 87,000
34,000
 Materials Factory Overhead
Bal. 23,500 (b) 53,000 (b) 8,000
(a) 58,000 (d) 1,500
(c) 900 54,500
82,400
27,900

Work in Process
Bal. 31,000 (c) 900
(b) 45,000
76,000
75,100

3. a. Cash balance .................................................................................. $ 12,750

b. Inventory of materials on hand ........................................................ 27,900
c. Accounts payable ............................................................................ 34,000
P2-10

1.
a. b. c. d.
Book of Original Subsidiary Records
Date Form Used Journal Entry Entry Used Affected
Mar. 31 Purchase Requisition None None None
(for 1,800 aluminum
sheets)

Apr. 1 Purchase Order None None Material Ledger (if

“On Order” column
is used)

Apr. 6 Receiving Report Materials........................... 42,500 Purchases Journal Material Ledger; AP sub.
Vendor’s Invoice ............. Accounts Payable 42,500
(1,700 sheets @ $25)

Apr. 11 Receiving Report Materials........................... 2,500 Purchases Journal Material Ledger; AP sub.
Vendor’s Invoice Accounts Payable .......... 2,500
(100 sheets @ $25)

Apr. 16 Approved Invoice Accounts Payable ............. 42,500 Cash Payments None
Cash .............................. 41,650 Journal
Purchases Discount....... 850

Apr. 30 Materials Work in Process ............... 46,500 General Journal or Material Ledger
Requisition Materials ........................ 46,500 mat. Req. journal Job Cost Ledger

500 x $23 = $11,500

1,400 x $25 = 35,000
$46,500
Apr. 30 Returned Materials Materials........................... 500 General Journal or material Ledger
Report Work in Process ............ 500 mat. Req. journal Job Cost Ledger
(20 sheets @ $25)

Apr. 30 Inventory Report Factory Overhead............. General Journal material Ledger

(Inventory Short and Over) 550 Factory Overhead
Materials ........................ 550 Ledger
(22 sheets* @ $25)
*420 unused sheets - 398 sheets on hand

2.

a. $9,950 (398$25)
b. $46,000
P2-11

1. Troughput = ave. units in WIP/ daily usage = 200,000/50,000 = 4 days

2. 25%$1,000,000 = $250,000
3. [(200,000)]/50,000 = 2 day
4. By reducing the average work in process by 50% while keeping the daily production
constant, the velocity of production doubled.
5. 25%(1/2$1,000,000) = $125,000
P2-12

Backflush Accounting (JIT)

a. Raw and In-Process .............................................................. 150,000
Accounts Payable ............................................................. 150,000
b. No entry
c. Conversion Costs ................................................................... 25,000
Payroll ............................................................................... 25,000
d. Conversion Costs ................................................................... 100,000
Various Credits.................................................................. 100,000
e. Finished Goods ...................................................................... 275,000
Raw and In-Process ............................................................. 150,000
Conversion Costs ................................................................. 125,000
f. Accounts Receivable ................................................................ 400,000
Sales ................................................................................. 400,000

Cost of Goods Sold ................................................................... 275,000

Finished Goods ................................................................. 275,000

Traditional System

a. Raw materials ....................................................................... 150,000

Accounts Payable ............................................................. 150,000
b. Work in Process ..................................................................... 150,000
Raw materials ................................................................... 150,000
c. work in process ...................................................................... 25,000
Payroll ............................................................................... 25,000
d. factory overhead control ......................................................... 100,000
Various Credits.................................................................. 100,000

Work in process ...................................................................... 100,000

Factory Overhead Control ................................................ 100,000
(transfer of FO to WIP)
e. Finished Goods ...................................................................... 275,000
Work In-Process.................................................................. 275,000

f. Accounts Receivable ................................................................ 400,000

Sales ................................................................................. 400,000

Cost of Goods Sold ................................................................... 275,000

Finished Goods ................................................................. 275,000
Problem (Safety Stock; Order Point)

Starkville Company’s usage of Material A is 9,600 units during 240 working days per year.
Normal lead time and maximum lead time are 20 working days and 35 days, respectively

Assuming material A will be required evenly throughout the year, what is the safety stock and
order point?

Answer:

Safety stock =( maximum lead time – normal lead time) x daily usage
= (35 days – 20 days) x (9,600 units/240 days)
= 15 days x 40 units per day
= 600 units

Reorder point = (Normal lead time x daily usage) + safety stock

= (20 days x 40 units per day) + 600
= 1,400 units

Problem (EOQ and Quantity Discount)

A material is purchased for $3 per unit. Monthly usage is 1,500 units, the ordering cost is $50 per order,
and the annual carrying cost is 40%.

Required:
a. Compute the economic order quantity
b. Determine the proper order size if the material can be purchased at a 5% discount in lots of 2,000
units.

Answer:

Purchase price = $3
Annual usage = 1,500 x 12 = 18,000 units
Ordering cost = $50 per order
Carrying cost = $3 x 40% = $1.20 per unit

a. EOQ = √( 2 x 18,000 x $50)/ $1.20

= 1,225 units
Order size 1,225 units 2,000 units
# of orders per yr 14.7 9
carrying cost per unit = $3 x 40% =($3 x .95%) x 40%
= $1.20 =$1.14

Order size 1,225 units 2,000 units

total ordering cost
14.7 orders x $50 735
9 order x $50 450
total carrying cost
(1,225/2) + 0 x $1.20 735
(2,000/2) + 0 x $1.14 1,140
discount lost (total units x price x disc.)
12 x 1,500 x 3 x 5% 2700
total cost 4,170.00 1,590.00

conclusion: order 2,000 units