Costing MCQ Questions and Solutions with Explanations | Commerce

Merricks multiple piece rate system has three rates. According to this plan, three piece rates for a job is fixed. None of these three piece rates are fixed below the normal level. These three rates are applied in the manner given below: Rates Bonus Incentive 1. Upto 83 '/3% Normal Rate 2. Above 83 1/3 % to 100% 110% of Normal Rate 3. Above 110% 120% of Normal Rate

Overhead is also known as ongoing cost. Overhead is those costs required to run a business, but which cannot be directly attributed to any specific business activity, product, or service.

Reorder level = maximum consumption X maximum reorder period.

Overhead can be classified according to function-wise as manufacturing o/h, administration o/h and selling & distribution o/h.

Allotment of overhead incurred for a particular cost centre to that specific cost centre is allocation. Allocation and apportionment are accounting methods for attributing cost to certain cost objects for budgeting, planning, and financial reporting.

The process of setting standards and comparing actual performance with standards with a view to control the cost is cost control. Cost control is the practice of identifying and reducing business expenses to increase profits, and it starts with the budgeting process. A business owner compares actual results with the budgeted expectations and if actual costs are higher than planned, management takes action.

Under ABC method of material control, the material are classified according to its value. The ABC analysis suggests that inventories of an organization are not of equal value. Thus, the inventory is grouped into three categories (A, B, and C) in order of their estimated importance.

This is a point at which the store keeper should initiate purchase requisition for fresh supply It is reorder level. Re-order level is a level of material at which the storekeeper should initiate the purchase requisition for fresh supplies. When the stock-in-hand comes down to the re-ordering level, it is an indication that an action should be taken for replenishment or purchase.

This is a level at which normal issue of material are stopped, but issued under special condition It is danger level. Danger level is a level of fixed usually below the minimum level. When the stock reaches danger level, an urgent action for purchase is initiated.

What is EOQ?
Imagine you run a shop. You need to order goods for your customers. If you order too much at once, you have to pay a lot to store them (this is called carrying cost). If you order too little, you have to order very often, and each time you place an order, it costs money (this is called ordering cost).
EOQ helps you find the 'just right' quantity to order each time to keep your total costs (ordering + carrying) as low as possible. It's like finding the perfect balance to save money!
The Formula for EOQ:
The formula to calculate EOQ is:
EOQ = Square Root of [(2 * D * O) / C]
Let's break down what each letter means:
* D = Annual Demand (or Usage) in units. This is how many units you need in a whole year.
* O = Ordering Cost per Order. This is the cost you incur every single time you place an order (e.g., administrative costs, paperwork, delivery arrangement costs).
* C = Annual Carrying Cost per Unit. This is the cost of holding one unit in your storage for a whole year (e.g., storage rent, insurance, costs due to damage, or the money tied up in inventory).
Let's find these values from our question:
1. Annual Usage (D): The question states "Annual usage is 6000 units".
So, D = 6000 units.
2. Ordering Cost per Order (O): The question states "Cost of placing an order is Rs 60".
So, O = Rs 60.
3. Annual Carrying Cost per Unit (C): This one needs a small calculation.
The question says "annual carrying cost of one unit is 10% of inventory value".
The inventory value (cost) per unit is Rs 20.
So, to find C, we calculate 10% of Rs 20:
C = 10% of Rs 20
C = 0.10 * 20 = Rs 2 per unit.
Now, let's put these values into the EOQ formula:
EOQ = Square Root of [(2 * D * O) / C]
EOQ = Square Root of [(2 * 6000 * 60) / 2]
Let's calculate step-by-step:
First, calculate the top part (numerator):
2 * 6000 * 60 = 12000 * 60 = 720,000
Next, divide by the bottom part (denominator):
720,000 / 2 = 360,000
Finally, find the square root of 360,000:
EOQ = Square Root of 360,000
EOQ = 600 units
So, the Economic Order Quantity (EOQ) is 600 units. This means ordering 600 units each time will be the most cost-effective way to manage inventory for this company.
Looking at the options:
Option A: 600 units
Option B: 750 units
Option C: 1200 units
Option D: 1250 units
Our calculated answer matches Option A.