ACCOUNTING FOR MATERIALS

Problem 2.4 Material A Material 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

√(2*Q*OC)/C
1 EOQ C
√(2*4000*10
)/2 √(2*63375*10)/3
40000 422500
200 650
(daily usage
x lead time)
reorder + safety
2 point stock
(15 x 20) +
250 (250*10)+750
550 3250
 safety
stock/daily
3 usage
250/15 750/250
16.66667 days 3 days

annual
4 no. of orders demand/eoq
20 orders 97.5 orders

Total
ordering cost
= no. of
orders x cost
5 per order
Total carrying cost = (order size/2) + safety stock x carrying cost per unit

Material A
order size 200

total 20 orders x
ordering cost $10 200
total (200/2)+250
carrying cost x $2 700
total 900

order size 150

total (4,000/150)
ordering cost x $10 266.67
total (150/2)+250
carrying cost x $2 650
total 916.67

order size 250

total (4,000/250)
ordering cost x $10 160.00
total (250/2)+250
carrying cost 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) 1,500Bal. 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
54,500
(c) 900
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 u

Apr. 6 Receiving Report Materials 42,500 Purchases

JournalMaterial Ledger; AP sub.
Vendor’s Invoice Accounts Payable 42,500
(1,700 sheets @ $25)

Apr. 11 Receiving Report Materials 2,500 Purchases

JournalMaterial 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.
journalJob 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.
journalJob Cost Ledger
(20 sheets @ $25)

Apr. 30 Inventory Report Factory Overhead General

Journalmaterial Ledger
(Inventory Short and Over) 550 Factory
Overhead
Materials 550 Led
(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 × (1− .5)]/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