CA Inter P4 · Chapter 2
Material Cost MCQs with Answers
12 multiple-choice questions on Material Cost for CA Inter P4 Cost and Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Annual requirement of a raw material is 32,400 units. Ordering cost is ₹200 per order, the purchase price is ₹60 per unit and the carrying cost is 15% per annum of the purchase price. The Economic Order Quantity (EOQ) is:
- A) 1,200 units
- B) 849 units
- C) 1,697 units
- D) 465 units
Show answer & explanation
Answer: A) 1,200 units
Carrying cost per unit per annum = 15% x ₹60 = ₹9. EOQ = sqrt(2AO/C) = sqrt(2 x 32,400 x 200 / 9) = sqrt(14,40,000) = 1,200 units. Omitting the 2 gives about 849 units, while using the purchase price instead of the carrying cost gives about 465 units (both rounded to the nearest unit).
Question 2
Using the data where annual demand is 32,400 units, ordering cost is ₹200 per order and carrying cost is ₹9 per unit per annum, what is the total annual ordering and carrying cost when orders are placed at the EOQ of 1,200 units?
- A) ₹5,400
- B) ₹16,200
- C) ₹5,600
- D) ₹10,800
Show answer & explanation
Answer: D) ₹10,800
Number of orders = 32,400 / 1,200 = 27. Ordering cost = 27 x ₹200 = ₹5,400. Average stock = 1,200 / 2 = 600 units, so carrying cost = 600 x ₹9 = ₹5,400. Total = ₹10,800. At EOQ the ordering cost equals the carrying cost, which is a useful check.
Question 3
For a component, weekly usage is: maximum 900 units, normal 700 units, minimum 500 units. Lead time is: maximum 6 weeks, normal 4.5 weeks, minimum 3 weeks. The minimum stock level is:
- A) 3,900 units
- B) 5,400 units
- C) 2,250 units
- D) 1,200 units
Show answer & explanation
Answer: C) 2,250 units
Re-order level = maximum usage x maximum lead time = 900 x 6 = 5,400 units. Minimum stock level = re-order level - (normal usage x normal lead time) = 5,400 - (700 x 4.5) = 5,400 - 3,150 = 2,250 units.
Question 4
A material has a re-order level of 5,400 units and a re-order quantity of 4,000 units. Minimum weekly usage is 500 units and the minimum lead time is 3 weeks. The maximum stock level is:
- A) 9,400 units
- B) 6,250 units
- C) 6,700 units
- D) 7,900 units
Show answer & explanation
Answer: D) 7,900 units
Maximum stock level = re-order level + re-order quantity - (minimum usage x minimum lead time) = 5,400 + 4,000 - (500 x 3) = 9,400 - 1,500 = 7,900 units.
Question 5
Opening stock of a material is 400 kg at ₹30 per kg. A purchase of 600 kg is made at ₹33 per kg. Thereafter 700 kg are issued to production. Under the FIFO method, the cost of material issued is:
- A) ₹23,100
- B) ₹22,260
- C) ₹21,000
- D) ₹21,900
Show answer & explanation
Answer: D) ₹21,900
Under FIFO the earliest units are issued first. Issue of 700 kg = 400 kg x ₹30 = ₹12,000 plus 300 kg x ₹33 = ₹9,900. Total cost of issue = ₹21,900.
Question 6
Using the same data (opening stock 400 kg at ₹30, purchase 600 kg at ₹33, issue of 700 kg after the purchase), what is the value of closing stock under the weighted average method?
- A) ₹9,540
- B) ₹9,900
- C) ₹9,000
- D) ₹9,450
Show answer & explanation
Answer: A) ₹9,540
Weighted average rate = (₹12,000 + ₹19,800) / (400 + 600) kg = ₹31,800 / 1,000 = ₹31.80 per kg. Closing stock = 1,000 - 700 = 300 kg x ₹31.80 = ₹9,540. Using a simple average of the two rates (₹31.50) ignores the quantities and is incorrect.
Question 7
Opening stock of raw material was ₹1,20,000, closing stock ₹1,80,000 and material consumed during the year ₹9,00,000. The inventory turnover ratio is:
- A) 5 times
- B) 7.5 times
- C) 3 times
- D) 6 times
Show answer & explanation
Answer: D) 6 times
Average stock = (₹1,20,000 + ₹1,80,000) / 2 = ₹1,50,000. Inventory turnover ratio = material consumed / average stock = ₹9,00,000 / ₹1,50,000 = 6 times. Dividing by closing stock gives 5 times and by opening stock gives 7.5 times, both incorrect.
Question 8
Under ABC analysis of inventory, the 'A' category generally consists of items that are:
- A) Large in number and account for a large proportion of total value
- B) Small in number and account for a small proportion of total value
- C) Large in number but account for a small proportion of total value
- D) Small in number but account for a large proportion of total value
Show answer & explanation
Answer: D) Small in number but account for a large proportion of total value
ABC analysis classifies inventory on the basis of value. 'A' items are relatively few in number (for example about 10% of items) but account for a large share (for example about 70%) of the total value, so they deserve the strictest control. 'C' items are numerous but of low total value.
Question 9
Loss of material arising from an abnormal cause, such as theft or fire in the stores, should be treated in cost accounts by:
- A) Inflating the issue price of the remaining good material
- B) Charging it to factory overheads
- C) Charging it to the Costing Profit and Loss Account
- D) Adding it to the cost of the next job issued
Show answer & explanation
Answer: C) Charging it to the Costing Profit and Loss Account
Abnormal losses are avoidable and are not part of the normal cost of production. Including them in product cost would distort the cost of output, so they are written off to the Costing Profit and Loss Account. Normal losses, in contrast, are absorbed by the good units.
Question 10
A company purchases 5,000 kg of a chemical at ₹42 per kg and pays freight inward of ₹6,000. A normal loss of 4% occurs due to evaporation in storage. The cost per kg of the chemical to be used for pricing issues is:
- A) ₹45.00
- B) ₹43.20
- C) ₹43.75
- D) ₹44.88
Show answer & explanation
Answer: A) ₹45.00
Total cost = 5,000 x ₹42 + ₹6,000 = ₹2,16,000. Normal loss is absorbed by the good units, so good quantity = 5,000 x 96% = 4,800 kg. Cost per kg = ₹2,16,000 / 4,800 = ₹45.00.
Question 11
Material with a list price of ₹2,00,000 is bought at a trade discount of 10%. GST at 18% is charged on the invoice and full input tax credit is available. Freight inward is ₹5,000 and a cash discount of 2% is received for prompt payment. Following the principles of CAS-6, the cost of material purchased is:
- A) ₹2,17,400
- B) ₹1,81,400
- C) ₹2,05,000
- D) ₹1,85,000
Show answer & explanation
Answer: D) ₹1,85,000
Purchase price net of trade discount = ₹2,00,000 - 10% = ₹1,80,000 (CAS-6: trade discounts and rebates are deducted). GST is excluded because input tax credit is available. Freight inward is added: ₹1,80,000 + ₹5,000 = ₹1,85,000. Cash discount is not deducted from the purchase cost under CAS-6 as explained in the ICAI Study Material; it is treated as a finance item, so deducting 2% (₹3,600) to get ₹1,81,400 is wrong. Including GST would give ₹2,17,400.
Question 12
Which of the following statements about a bin card is correct?
- A) It is kept by the storekeeper and records quantities only
- B) It is kept by the cost department and records quantities and values
- C) It is kept by the purchase department and records values only
- D) It is kept by the storekeeper and records values only
Show answer & explanation
Answer: A) It is kept by the storekeeper and records quantities only
A bin card is maintained by the storekeeper, usually attached to the bin or rack, and shows receipts, issues and balance in quantity only. The stores ledger is maintained in the cost accounting department and records both quantities and values.