Material Costing: Purchasing, Stores Control, Inventory Valuation and Stock Levels Questions

Question 1

Define Goods Received Note (GRN).

Accepted Answer

Goods Received Note (GRN) is a document prepared by stores/receiving section to record the quantity of materials received from suppliers after verification/inspection.

Question 2

What is a bin card?

Accepted Answer

A bin card is a stores record kept at the bin showing receipts, issues and balance of a particular item in quantities.

Question 3

State the meaning of re-order level (ROL).

Accepted Answer

Re-order level is the stock level at which a fresh purchase order should be placed so that materials arrive before stock reaches the minimum level.

Question 4

Define Economic Order Quantity (EOQ).

Accepted Answer

EOQ is the quantity to be ordered each time that minimises the total of ordering cost and carrying (holding) cost.

Question 5

What is ABC analysis?

Accepted Answer

ABC analysis is an inventory control technique that classifies items into A, B and C categories based on annual consumption value to apply selective control.

Question 6

Differentiate scrap from spoilage in one sentence.

Accepted Answer

Scrap is incidental residue of small value, whereas spoilage refers to units damaged/defective beyond economical repair and not saleable as good output.

Question 7

Distinguish between bin card and stores ledger (any three points).

Accepted Answer

Bin card and stores ledger differ as follows:

| Basis | Bin card | Stores ledger |
|---|---|---|
| Maintained by | Storekeeper | Cost/accounts department |
| Records | Quantity only | Quantity and value |
| Purpose | Physical stock control at bin | Accounting/valuation control |

Question 8

Explain FIFO and LIFO methods of pricing material issues (brief).

Accepted Answer

FIFO (First In First Out) issues the oldest purchase lots first; closing stock tends to be valued at recent prices.

LIFO (Last In First Out) issues the latest purchase lots first; closing stock tends to be valued at older prices.

In rising prices, FIFO usually shows higher closing stock and higher profit than LIFO.

Question 9

Write short notes on stock levels: minimum, maximum and danger level.

Accepted Answer

- Minimum level: safety stock to avoid stock-out and production stoppage.
- Maximum level: upper limit to prevent overstocking, high carrying cost and obsolescence.
- Danger level: emergency level; reaching this needs urgent purchasing/alternative sourcing to avoid stoppage.

Question 10

Explain ABC analysis and how control differs for A, B and C items.

Accepted Answer

ABC analysis classifies items by annual consumption value (quantity × price).

- A items: high value, strict control, frequent review, tight authorization.
- B items: moderate control and periodic review.
- C items: low value, simple controls, bulk ordering and less frequent review.

Question 11

Differentiate between normal and abnormal material loss with examples.

Accepted Answer

Normal loss is expected and unavoidable under efficient operating conditions (e.g., evaporation, normal cutting loss). It is absorbed by good output.

Abnormal loss is unexpected/unusual (e.g., theft, fire, major mishandling). It is treated separately and charged to costing profit & loss.

Question 12

List any three documents used in material control and state their purpose.

Accepted Answer

Any three documents are:

1) Purchase requisition: initiates the need for purchase.
2) Purchase order: official order to supplier specifying quantity/quality/price/terms.
3) GRN: records receipt of materials in stores after verification/inspection.

Question 13

Explain EOQ and compute EOQ for: Annual demand = 10,000 units, ordering cost/order = ₹250, carrying cost/unit/year = ₹5.

Accepted Answer

EOQ is the order quantity that minimises total inventory cost (ordering + carrying).

Formula:

$$ EOQ = \sqrt{\frac{2AO}{C}} $$

Given: A = 10,000 units, O = ₹250, C = ₹5

EOQ = sqrt((2 × 10,000 × 250) / 5)
    = sqrt(5,000,000 / 5)
    = sqrt(1,000,000)
    = 1,000 units

So, the optimal order size is **1,000 units per order**.

Question 14

Prepare a stores ledger under FIFO for the following: Opening 100 units @ ₹10; Purchase 200 units @ ₹12; Issue 150 units; Purchase 100 units @ ₹13; Issue 120 units.

Accepted Answer

FIFO issues oldest stock first.

Step 1: Issue 150 units
- 100 @10 = 1,000
- 50 @12 = 600
Issue value = 1,600
Balance: 150 @12

Step 2: Purchase 100 @13
Balance lots: 150 @12 and 100 @13

Step 3: Issue 120 units
- 120 @12 = 1,440
Issue value = 1,440

Closing stock:
- Remaining from ₹12 lot: 30 units @12 = 360
- ₹13 lot: 100 units @13 = 1,300
Total closing stock value = 1,660

A compact FIFO stores-ledger view:

| Particulars | Receipts | Issues | Balance (lots) |
|---|---:|---:|---|
| Opening | 100@10 |  | 100@10 |
| Purchase | 200@12 |  | 100@10, 200@12 |
| Issue |  | 150 (100@10 + 50@12) | 150@12 |
| Purchase | 100@13 |  | 150@12, 100@13 |
| Issue |  | 120@12 | 30@12, 100@13 |

Question 15

Describe a material control system and explain the purchasing and stores control cycle with key documents (include a flow).

Accepted Answer

A material control system is a set of procedures to ensure right quality and quantity of materials are purchased, received, stored and issued at minimum cost with minimum loss.

Key stages and documents:
- Need identification: Purchase requisition
- Ordering: Enquiry/quotations, supplier selection, Purchase order
- Receipt: GRN, inspection report
- Storage/records: Bin card (qty), Stores ledger (qty + value)
- Issue: Material requisition note, return note

Flow (simplified):

```mermaid
flowchart TD
  A[Need identified
Purchase requisition] --> B[Enquiry & quotations]
  B --> C[Purchase order]
  C --> D[Receipt & GRN]
  D --> E[Inspection]
  E --> F[Storage & records
Bin card / Stores ledger]
  F --> G[Issue to production
Material requisition]
  G --> H[Pricing of issues
FIFO/LIFO/Avg]
  H --> I[Stock level control
ROL/Min/Max/Danger]
```

A good system reduces stock-outs, overstocking, pilferage and obsolescence, and improves working-capital efficiency.

Basis	Bin card	Stores ledger
Maintained by	Storekeeper	Cost/accounts department
Records	Quantity only	Quantity and value
Purpose	Physical stock control at bin	Accounting/valuation control

Material Costing: Purchasing, Stores Control, Inventory Valuation and Stock Levels

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