Practice Questions: Material and Employee Cost
Chapter Twenty-Six
Syllabus topic Module II entire
Pages 75 to 78 of 82
How to use this chapter
Cover the answers. Work each question on paper, then compare. Where you differ, find the step rather than the figure: in these four questions the step is almost always one of four things - a new appointment counted as a replacement, a contribution taken on the wrong base, an issue priced before the receipt that preceded it, or a maximum usage put where a normal one belongs.
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Question 1: Economic order quantity and stock levels
A company uses 24,000 units of a material a year, evenly over 48 working weeks. The cost of placing an order is Rs 150 and the cost of carrying one unit for a year is Rs 5.
Usage is normally 500 units a week, but has fallen to 300 and risen to 700. The supplier takes between 4 and 6 weeks to deliver, 5 weeks being normal.
You are required to compute (a) the economic order quantity, (b) the number of orders a year and the total of ordering and carrying cost at that quantity, and (c) the reorder level, minimum level, maximum level and average stock level.
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Question 2: Stock ledger under two methods
The following are the receipts and issues of a material for January.
| Date | Transaction | Units | Rate, Rs |
|---|---|---|---|
| 1 January | Opening balance | 400 | 20 |
| 5 January | Purchased | 200 | 26 |
| 12 January | Issued | 500 | |
| 20 January | Purchased | 300 | 30 |
| 28 January | Issued | 300 |
Prepare the stores ledger under (a) first in first out and (b) the weighted average method, and state the value of the closing stock under each. Comment on the difference.
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Question 3: Labour turnover
A factory had 760 workers on its roll on 1 April and 840 on 31 March. During the year 48 workers left of their own accord and 16 were discharged. 40 workers were engaged in place of those who went, and 104 were engaged for a newly opened section.
Compute labour turnover by the separation, replacement and flux methods, and show the flux rate again on the basis that accessions include the new appointments. Verify your classification against the closing roll.
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Question 4: Halsey and Rowan compared
The time allowed for a job is 40 hours and the worker completes it in 25. His rate is Rs 60 an hour.
Compute his earnings and his effective hourly rate under the Halsey scheme and under the Rowan scheme. State which scheme the employer would prefer here and give the general rule. If the job consisted of 10 identical units, state the labour cost a unit under each scheme.
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Answers
Question 1
(a) Economic order quantity.
The formula is the square root of twice the annual consumption times the ordering cost, divided by the carrying cost a unit a year.
Practice Questions: Material and Employee Cost
| Twice annual consumption times ordering cost, 2 × 24,000 × 150 | 72,00,000 |
| Divided by carrying cost of Rs 5 | 14,40,000 |
| Square root | 1,200 units |
(b) Orders and cost at that quantity.
| Rs | |
|---|---|
| Number of orders a year, 24,000 ÷ 1,200 | 20 orders |
| Ordering cost, 20 × 150 | 3,000 |
| Carrying cost, half of 1,200 at Rs 5 | 3,000 |
| Total of ordering and carrying cost | 6,000 |
The two costs are equal, which is the property that defines the economic order quantity. If they are not equal in your answer, the quantity is wrong.
(c) Stock levels.
| Level | Formula | Working | Units |
|---|---|---|---|
| Reorder level | Maximum usage × maximum reorder period | 700 × 6 | 4,200 |
| Minimum level | Reorder level less normal usage × normal reorder period | 4,200 less (500 × 5) | 1,700 |
| Maximum level | Reorder level plus reorder quantity, less minimum usage × minimum reorder period | 4,200 + 1,200 less (300 × 4) | 4,200 |
| Average stock | Half of the minimum and maximum levels | (1,700 + 4,200) ÷ 2 | 2,950 |
Note the two forms of the average. Some texts take the average as the minimum level plus half the reorder quantity, which gives 1,700 + 600 = 2,300. Both are accepted; say which you have used.
Check the usage figure. The question gives annual consumption and the number of working weeks, and 24,000 ÷ 48 = 500 a week, which agrees with the normal usage stated. A question whose two figures disagree is telling you to use the weekly ones.
Question 2
(a) First in first out.
| Date | Receipts | Issues | Balance |
|---|---|---|---|
| 1 January | 400 at Rs 20 = Rs 8,000 | ||
| 5 January | 200 at Rs 26 = Rs 5,200 | 400 at Rs 20; 200 at Rs 26 = Rs 13,200 | |
| 12 January | 400 at Rs 20 = Rs 8,000; 100 at Rs 26 = Rs 2,600; total Rs 10,600 | 100 at Rs 26 = Rs 2,600 | |
| 20 January | 300 at Rs 30 = Rs 9,000 | 100 at Rs 26; 300 at Rs 30 = Rs 11,600 | |
| 28 January | 100 at Rs 26 = Rs 2,600; 200 at Rs 30 = Rs 6,000; total Rs 8,600 | 100 at Rs 30 = Rs 3,000 |
Cost of issues Rs 19,200. Closing stock 100 units, Rs 3,000.
(b) Weighted average.
A fresh average is struck after every receipt and never after an issue.
| Date | Units | Value, Rs | Average rate, Rs |
|---|---|---|---|
| 1 January, opening | 400 | 8,000 | 20.00 |
| 5 January, receipt | 600 | 13,200 | 22.00 |
| 12 January, issue of 500 at Rs 22 | 100 | 2,200 | 22.00 |
| 20 January, receipt | 400 | 11,200 | 28.00 |
| 28 January, issue of 300 at Rs 28 | 100 | 2,800 | 28.00 |
Cost of issues Rs 11,000 plus Rs 8,400 = Rs 19,400. Closing stock 100 units, Rs 2,800.
Practice Questions: Material and Employee Cost
The proof both methods must satisfy.
| First in first out, Rs | Weighted average, Rs | |
|---|---|---|
| Cost of issues | 19,200 | 19,400 |
| Closing stock | 3,000 | 2,800 |
| Total | 22,200 | 22,200 |
Material available was Rs 8,000 plus Rs 5,200 plus Rs 9,000 = Rs 22,200 under both. The method decides how that total is split between what went out and what remains; it cannot change the total. Do this proof before you leave the question.
Comment. Prices rose through the month, from Rs 20 to Rs 30. Under first in first out the older and cheaper units are issued first, so the cost of issues is lower and the closing stock higher, and reported profit is correspondingly higher. The weighted average smooths the rise, charging issues at a rate between the old and the new.
Question 3
Classify first, and check the roll.
| Separations, 48 who left and 16 discharged | 64 |
| Replacements, engaged in place of those who went | 40 |
| New appointments for the new section, not replacements | 104 |
| Roll | Workers |
|---|---|
| Opening, 1 April | 760 |
| Less: separations | 64 |
| Add: replacements | 40 |
| Add: new appointments | 104 |
| Closing, 31 March | 840 |
That is the closing number the question states, so the classification is right. Had the 104 been counted as replacements the rates would change while the roll still closed, which is why the classification must be argued and not merely assumed.
Average number on the roll = (760 + 840) ÷ 2 = 800.
| Method | Working | Rate |
|---|---|---|
| Separation | 64 ÷ 800 × 100 | 8 per cent |
| Replacement | 40 ÷ 800 × 100 | 5 per cent |
| Flux, separations plus replacements | (64 + 40) ÷ 800 × 100 | 13 per cent |
| Flux, separations plus accessions | (64 + 144) ÷ 800 × 100 | 26 per cent |
Accessions are 40 replacements plus 104 new appointments = 144. The two flux figures differ by the whole of the expansion, which is why the form used must be stated.
Question 4
Time saved is 40 less 25, that is 15 hours.
Halsey.
| Rs | |
|---|---|
| Time wages, 25 hours at Rs 60 | 1,500 |
| Bonus, 50 per cent of 15 hours at Rs 60 | 450 |
| Earnings | 1,950 |
Effective hourly rate = 1,950 ÷ 25 = Rs 78.
Rowan.
| Rs | |
|---|---|
| Time wages, 25 hours at Rs 60 | 1,500.00 |
| Bonus, 15 ÷ 40 of the time wages | 562.50 |
| Earnings | 2,062.50 |
Effective hourly rate = 2,062.50 ÷ 25 = Rs 82.50.
Which the employer prefers, and the rule. Here the employer prefers Halsey, which costs Rs 1,950 against Rs 2,062.50. The general rule is that Rowan pays more while the time saved is less than half the time allowed, the two are equal at exactly half, and Halsey pays more beyond that. Fifteen hours saved out of forty allowed is under half, so Rowan is the dearer, and the arithmetic agrees.
Practice Questions: Material and Employee Cost
Labour cost a unit, on 10 units.
| Scheme | Earnings, Rs | Per unit, Rs |
|---|---|---|
| Halsey | 1,950.00 | 195.00 |
| Rowan | 2,062.50 | 206.25 |
A closing observation worth a mark. At the ordinary rate the 40 hours allowed would have cost Rs 2,400. Both schemes cost less than that while paying the worker more than his time wage of Rs 1,500, and that division of the value of the time saved is the whole idea of a premium bonus scheme.
Marking yourself
| If you got | Then |
|---|---|
| The economic order quantity but not equal ordering and carrying costs | Recheck the quantity; the equality is the test |
| A stock ledger whose two methods give different totals | An issue has been priced before a receipt that preceded it |
| A turnover rate but a roll that will not close | A new appointment has been counted as a replacement |
| Rowan above Halsey with more than half the time saved | The bonus formulae have been exchanged |
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.