TOPIC 3 - MATERIALS: ADDITIONAL QUESTIONS

1. Atlas Limited is having difficulty costing material X to the various jobs that it is used on. The
material is bought in bulk and recent receipts and issues have been:

1/6/03 Balance b/f 1000 kilos at RM4 per kilo

3/6/03 Receipts 2000 kilos at RM5 per kilo
6/6/03 Receipts 1500 kilos at RM5.5 per kilo
9/6/03 Issues 2500 kilos
12/6/03 Receipts 3000 kilos at RM4.5 per kilo
14/6/03 Issues 3500 kilos

Required:
i. Cost the issue of material X for June and calculate the value of the closing stock on
the following bases:
i. FIFO;
ii. LIFO;
iii. weighted average.
(10 marks)

b. Atlas is reviewing its stock control policy with regard to material X. You are told
that the cost of making one order is RM100, the cost of holding 1 kilo for one year is RM0.25
and the annual demand for material X is 80 000. There is no lead time or buffer stock.

Required:
Determine the following for material X:
i. the economic order quantity, briefly explaining what this figure represents;
ii. the average stock;
iii. the number of orders to be made per year.
(8 marks)

c. Explain what you understand by the terms ‘buffer stock’ and ‘lead time’, and
briefly consider any stock policy that would minimize or eliminate such stock costs.
(7 marks)

2. A company is planning to purchase 90 800 units of a particular item in the year ahead. The
item is purchased in boxes, each containing 10 units of the item, at a price of RM200 per box.
A safety stock of 250 boxes is kept.

The cost of holding an item in stock for a year (including insurance, interest and space costs)
is 15% of the purchase area. The cost of placing and receiving orders is to be estimated from
cost data collected relating to similar orders, where costs of RM5910 were incurred on 30
orders. It should be assumed that ordering costs change in proportion to the number of
orders placed; 2% should be added to the above ordering costs to allow for inflation.

Required:
Calculate the order quantity that would minimize the cost of the above item, and determine
the required frequency of placing orders, assuming that usage of the item will be even over
the year.
(8 marks)