The annual demand for an item of raw materials is 4,000 units and the purchase price is expected to be £90 per unit. The cost of placing an order is £135 and the cost of storage is estimated to be £12 per unit per annum. You are required to: Calculate the economic order quantity (EOQ) and the total relevant cost of this order quantity. Suppose that the £135 estimate of the cost of placing an order is incorrect and should have been £80. Assume that all other estimates are correct. What is the cost of this error to the business, assuming that the order size identified in part i is implemented for one year? Assume at the start of the period that a supplier offers to supply 4,000 units at a price of £86. The materials will be delivered immediately and placed in the stores. Assume that the cost of placing this order is zero and the original estimate of £135 for placing an order for the economic batch size is correct. Should the offer be accepted? Present a performance report, assuming that the budget was based on the information presented in i above (Economic Order Quantity (EOQ)) and the purchasing officer accepted the special offer outlined in iii above. Discuss the report and its implications for the purchasing officer and the business. Businesses often offer customers a discount in exchange for prompt settlement of invoices. Briefly discuss the reasons behind this practice.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
The annual demand for an item of raw materials is 4,000 units and the purchase price is expected to be £90 per unit. The cost of placing an order is £135 and the cost of storage is estimated to be £12 per unit per annum.
You are required to:
- Calculate the economic order quantity (EOQ) and the total relevant cost of this order quantity.
- Suppose that the £135 estimate of the cost of placing an order is incorrect and should have been £80. Assume that all other estimates are correct. What is the cost of this error to the business, assuming that the order size identified in part i is implemented for one year?
- Assume at the start of the period that a supplier offers to supply 4,000 units at a price of £86. The materials will be delivered immediately and placed in the stores. Assume that the cost of placing this order is zero and the original estimate of £135 for placing an order for the economic batch size is correct. Should the offer be accepted?
- Present a performance report, assuming that the budget was based on the information presented in i above (Economic Order Quantity (EOQ)) and the purchasing officer accepted the special offer outlined in iii above. Discuss the report and its implications for the purchasing officer and the business.
Businesses often offer customers a discount in exchange for prompt settlement of invoices. Briefly discuss the reasons behind this practice.
Step by step
Solved in 2 steps
