Subject COST, Topic MATERIAL problem?

Dear Sri.Vikasji,

The quantity order will not be held under the next consignment arrives.  It will be consumed daily or so.  When the next consignment arrives, this material will be reduced to zero. Right?   As the consumption is on, quantity will be depleted.  Carrying cost is not incurred for the entire quantity bought.  So carrying cost is on the reduced quantity and becomes difficult to capture every day carrying cost.  So on an average carrying cost is captured.  (Opening stock+closing stock)/2 is av inventory.  Day 1 when quantity is arrived- opening stock, last day, stock is reduced to zero.

(quantity ordered + Nil)/2 is average.  This is what u ve Q/2

Ok

Hi,

 Friend carrying cost is for holding a unit for one year. Since we are not carrying the whole 3600 unit for one year because it will reduce day by day as we consume it, hence we takes an average of it. i.e. on an average we would be carrying 1800 units. Lets take an example you bought 3600 unit of raw material. your monthly consumption of raw material is 3600unit i.e 120 units per day. on day 1 inventory is 3600 units

                                  on day 2 inventory is 3480

                                  on day 3 inventory is 3360

                                  on day 30 inventory will be nil.

Hence if we take average, it will be 1800 units per day.

In the next month we again order for 3600 unit & same process will continue.

Hence during the whole year we will be carrying 1800 unit per day on an average.

Hope my explanation will halp you.

Hi

From the whole lot of purchases made ...its assumed that half of the material is issued to production and half is sent to stores...hence carrying cost is incurred only on half of the goods purchased.....for this reason 1/2 is used.....

Anu

hi