The Hindu Business Line : How to bring order to your purchase orders

The cost of placing an order is Rs 60 per order and the annual carrying cost is Rs 5 per piece. What is the economic order quantity (EOQ) for placing the order?

Recently, the supplier expressed his willingness to reduce the price to Rs 48 if the total requirements are obtained from him in two equal orders and to Rs 47, if the entire quantity required is purchased in one lot. Analyse the costs of the three options and recommend the best course.

What other factors should also be considered before the decision is taken?

EOQ = square root of 2AO/C = the square root of (2 x 9,600 x 60 / 5) = 480

The cost of the three options is shown in Table 3.

Recommendation: The best course is to purchase at Rs 48.

Other factors: In this case there are two equal orders, that is, 9,600 / 2 = 4,800 units are to be ordered at a time.

Ordering once in six months: Before a final decision, it is to be examined whether the components will be spoiled during the six months period.

Be objective

IN A company there were 1,200 employees on the rolls at the beginning of a year and 1,180 at the end. During the year 120 persons left service and 96 replacements were made. The rate of labour turnover according to flux method is ________ per cent (5.04, 4.03, 9.08).

The rate of labour turnover according to the flux method is:

1/2 (No. of separations + No. of Replacements) / Average number of workers x 100

1/2 (120 + 96) / (1200+1180)/2 x 100 = 9.08 per cent

ii) The variable cost of a product increased by10 per cent and the management raises the unit selling price by 10 per cent. The fixed cost remains unchanged. Then, the break-even point (BEP) of the firm _________ (increases, decreases, remains the same).

The BEP of the firm remains the same.

Note: Such problems may be tackled by working out a small illustration as shown in Table 1.

iii) In a factory where standard costing is followed, 4,600 kg of materials at Rs 10.50/kg were actually consumed resulting in a price variance of Rs 4,800 (A) and usage variance of Rs 4,000 (F). The standard cost of actual production is Rs _____ (1,00,000, 96,000, 1,20,000).

Additional cost of materials: Rs 4,600 x 10.50 = Rs 48,300

Less: Price variance — Rs 4,800 A

Sub-total — Rs 43,500

Add: Usage variance — Rs 4,000 F

Standard cost of actual production — Rs 47,500

Note: There is a printing mistake in the question. It should be 9,600 kg of materials. The standard cost of actual production is worked out in Table 2.

iv) The annual credit sales of a firm amount to Rs 12,80,000 and the debtors, Rs 1,60,000. Then the debtors' turnover and average collection period are _______ respectively (four and 90 days, eight and 45 days, six and 60 days).

Debtors turnover = Credit sales in a year / debtors

12,80,000 / 1,60,000 = eight times

Average collection period = days in a year / debtors turnover

360 / 8 = 45 days.

Labour incentives

THE standard labour time required for the production of a certain component has been fixed as four hours. An incentive scheme was introduced recently to raise labour productivity. The relevant details of the scheme are as shown in Table 4.

Four workers A, B, C and D produced 16, 12, 14 and 10 units respectively in a particular week of 48 hours. The basic wages of all these workers is Rs 15 per hour.

Calculate the efficiency, incentive bonus, total earnings and labour cost per unit in respect of each of the four workers. The calculations are presented in Table 5.

Overhead apportionment

THE cost information given in Table 6 is available for a small engineering unit. Prepare an overhead distribution statement in detail. Service department costs are to be distributed by continued distribution, carried through three cycles. Calculations to be shown to the nearest rupee.

The total overheads are shown in Table 7.

Note: Continued distribution has been carried out through three cycles as required in the question.

Variance analysis

KOLKATA Furnitures manufactures modular tables, chairs and office desks. The standard labour times required per unit of table, chair and desk are 4 hours, 2 hours and 8 hours respectively. The budgeted production per week is 140 standard hours and budgeted fixed overheads per week is Rs 70,000.

Tables — 8 Nos; chairs — 8 Nos; and desks — 9 Nos. The actual fixed production overhead amounted to Rs 75,000.

Calculate: i) Fixed production overhead total variance; ii) fixed production; iii) overhead expenditure variance; iv) fixed production overhead volume variance

Working notes: BH — 140

SH — Tables 8 x 4 = 32

Chairs 8 x 2 = 16

Desks 9 x 8 =72

Total = 120

BFO — Rs 70,000

AFO — Rs 75,000

SFO — 120 hours at Rs 500 = Rs 60,000

SR = BFO / BH = Rs 70,000 / 140 hours = Rs 500 per hour.

Solution: i) Fixed production overhead total variance = SFO - AFO = 60,000 - 75,000 = Rs 15,000 A

ii) Expenditure variance = BFO - AFO

70,000 - 75,000 = Rs 5,000 A