Cost Accounting: Inventory Management and Cost Control

School: University of New Orleans - Course: ACCT 3131 - Subject: Accounting

MODULE 2: ACCOUNTING FOR RAW MATERIALS INVENTORY FOR PRODUCTION-- HOME WORK EXERCISES & MINI CASE E2-1; E2-2; E2-5; E2-13; E2-14; E2-17; AND E2-19. MINI CASE 1. E2-1Order Point Pershing, Inc. expects daily usage of 500 lb of material X, an anticipated lead time of seven days, and a desired safety stock of 2,500 lb. a.Determine the order point. Anticipated daily usage during the lead time (500 lb × 7 days ) 3,500 Safety stock required 2,500 =The order point is reached when inventory on hand reaches 6,000 lb b.Determine the number of pounds to be issued from safety stock if the new order is four days late. Anticipated daily usage during the 4 days (500 lb × 4 days) =The company will have to issue 2,000 lb from its safety stock to maintain the production level during the delay E2-2 Economic order quantity; order cost; carrying cost Epworth Co. predicts that it will use 360,000 gallons of material during the year. It anticipates that it will cost $72 to place each order. The annual carrying cost is $4 per gallon. a.Determine the most economical order quantity by using theEOQ formula. EOQ =(2* annual usage * cost per order / annual carrying cost per unit )^ ½ =( 2 * 360000 * 72 / 4 )^½ =3600 units b.Determine the annual order and carrying costs at the EOQ point. # of order = annual usage / EOQ =360000 / 3600 =100 Cost per order = $72 Annual order cost = number of order * cost per order =100 * $72 =$7200 Annual carrying cost = EOQ / 2 * carrying cost per gallon =3600 / 2 * $4 =$7200 7200+7200=$14,400 E2-5 Recording materials transactions Prepare a journal entry to record each of the following materialstransactions: a.Total materials purchased on account during the month amounted to $200,000. b.Direct materials requisitioned for the month totaled $175,000.

c.Indirect materials requisitioned during the month totaled$12,000. d.Direct materials returned to the storeroom from the factory amounted to $2,500. e.Total materials returned to vendor during the month amounted to $1,800. f.Payment during the month for materials purchased on account totaled $165,000. a.Materials200,000 AP200,000 (to record materials purchased on account) b.Work in Process 175,000 Materials175,000 (to record direct materials issued) c.Factory Overhead 12,000 Materials12,000 (to record indirect materials issued) d.Materials2,500 Work in Process2,500 (to record direct material returned) e.AP1,800 Materials1,800 (to record materials returned to vendor) f.AP165,000 Cash165,000 (to record payment of invoices) E2-13Recording materials transactions Broadwell Manufacturing Co. maintains the following accounts in the general ledger: Materials, Work in Process, Factory Overhead, and Accounts Payable. On July 1, the materials account had a debit balance of $10,000. Following is a summary of materials transactions for the month of July: 1.Materials purchased, $35,750. 2.Direct materials requisitioned to production, $29,250. 3.Direct materials returned to storeroom, $2,200. 4.Indirect materials requisitioned to production, $3,975. 5.Indirect materials returned to storeroom, $585. a.Prepare journal entries to record the materials transactions. b.Post the journal entries to ledger accounts (in T-accountform).