CA Intermediate · Cost and Management Accounting

Material Cost: formula sheet

Full chapter guide

Key formulas

Cost of purchase (material cost): Material cost = Invoice price + Freight inward + Insurance in transit + Octroi/duties not recoverable + Other directly attributable costs − Trade discount − Rebates; Do not include taxes that are recoverable as credit (such as GST input credit). Cash discount for early payment is usually kept out of the material cost.
Direct material test: Direct material = Traceable to the cost unit AND forms part of the product economically; If either condition fails, treat it as an indirect material and put it in overheads.
Procurement document flow: Purchase requisition → Enquiry/Quotation → Purchase order → Receipt and inspection → GRN → Invoice check → Payment; Learn this order. Questions often ask who raises each document and why.
Reorder level (ROL): ROL = Maximum consumption × Maximum reorder period; Use maximum usage and maximum lead time. Use this when both maximums are given.
Minimum level: Minimum level = ROL − (Normal consumption × Normal reorder period); Use normal usage and normal lead time. Here the reorder period is the lead time. The danger level is usually set below this level, but the formula does not guarantee it.
Maximum level: Maximum level = ROL + ROQ − (Minimum consumption × Minimum reorder period); ROQ is the reorder quantity, often EOQ. Use minimum usage and minimum lead time.
Danger level: Danger level = Average (or normal) consumption × Lead time for emergency purchases; Some questions use maximum consumption. Follow the wording given in the question. It is usually lower than the minimum level, but it is calculated separately, so do not assume it.
Average stock level (method 1): Average stock level = (Minimum level + Maximum level) ÷ 2; The most common form in exam questions.
Average stock level (method 2): Average stock level = Minimum level + ½ × ROQ; Gives the same result as method 1 only when consumption and lead time are all at normal values (maximum level = minimum level + ROQ). Otherwise the two methods differ. Use the method the question specifies.
Economic Order Quantity: EOQ = √(2 × A × O ÷ C); A = annual consumption in units, O = ordering cost per order, C = carrying cost per unit per year.
Carrying cost per unit: C = Purchase price per unit × carrying cost % (+ any fixed storage cost per unit); If carrying cost is given as a percentage, it applies to the price. Under discounts, C changes with the price.
Total ordering cost: (A ÷ Q) × O; A ÷ Q is the number of orders a year.
Total carrying cost: (Q ÷ 2) × C; Uses average stock of Q ÷ 2.
Total inventory cost with discount: Total cost = A × Price + (A ÷ Q) × O + (Q ÷ 2) × C; Compute for each price band's quantity and choose the minimum.
Number of orders and cycle: Orders per year = A ÷ EOQ; Days between orders = days in year ÷ orders; Often asked as a follow-up part.
Annual usage value: Annual usage value = Annual consumption (units) × Unit price; This is the ranking base for ABC analysis.
Cumulative percentage: Cumulative % of value = Running total of usage value ÷ Total usage value × 100; Compute the same for cumulative % of items (items counted ÷ total items × 100).
Perpetual inventory balance: Closing balance = Opening balance + Receipts − Issues; Bin card shows this in quantity. Stores ledger shows it in quantity and value.
Stock discrepancy: Discrepancy = Physical stock − Book (bin card / ledger) stock; Found by continuous stock taking. Positive is excess, negative is shortage. Investigate and adjust.
Classification bases: ABC: value | VED: criticality | FSN: movement | HML: unit price | SDE: availability; Memorise the base. Questions often ask which method suits a given situation.
FIFO rule: Issue from the oldest lot in stock first; move to the next oldest lot when it is exhausted; Closing stock is valued at the latest purchase prices.
LIFO rule: Issue from the latest lot received first; move back to earlier lots when it is exhausted; In a perpetual ledger, a new receipt becomes the first lot to be issued from. Closing stock carries the oldest prices.
Weighted average rate (perpetual): Rate = Total value of stock after receipt ÷ Total quantity in stock after receipt; Recompute after every receipt. Issues do not change the rate.
Simple average rate: Rate = Sum of the rates ÷ Number of rates averaged; Ignores quantities. Use only when the question asks for it.
Stores ledger check: Opening stock value + Purchases value − Issues value = Closing stock value; Use it to check your work under any method.
Net cost of normal spoilage: Cost of spoiled units − Disposal value of spoiled units; Spread over good units (or charged to the specific job if caused by its special requirements). If it is general, charge to production overheads.
Net cost of abnormal spoilage: Cost of spoiled units − Disposal value of spoiled units; Write off to the Costing Profit and Loss Account. Do not load it on good units.
Cost per unit with normal loss: Total cost of input ÷ (Input units − Normal loss units); Use when normal loss has nil value. If it has scrap value, deduct that value from the total cost first.
Cost per unit with scrap value of normal loss: (Total cost − Scrap value of normal loss) ÷ (Input units − Normal loss units); Abnormal loss is valued at this same unit cost.
Normal loss of units: Normal loss % × Input units; Read carefully whether the percentage is on input or on output.
Defectives rectification: Rework cost charged to: (a) good units if normal and general, (b) the job if due to the job's special features, (c) Costing Profit and Loss Account if abnormal; Normal rework cost may also go to overheads and be absorbed.
Inventory valuation rule: Value of inventory = Lower of (Cost, Net Realisable Value); Apply item by item or to groups of similar items, not to the total of all stock mixed together.
Net realisable value: NRV = Estimated selling price − Estimated cost of completion − Estimated selling costs; For raw materials held for use, NRV of the finished product decides whether a write-down is needed.
Cost of inventory: Cost = Purchase price + Duties and non-recoverable taxes + Freight inward + Other directly attributable costs − Trade discounts and rebates; Exclude recoverable taxes, abnormal losses, storage (generally), selling and administration costs.
Inventory turnover ratio: Inventory turnover ratio = Cost of material consumed ÷ Average stock of material; Use cost of goods sold for finished goods. Result is in times per period.
Average stock: Average stock = (Opening stock + Closing stock) ÷ 2; If only closing stock is given, use it, and state that assumption.
Inventory holding period: Days of inventory holding = Number of days in period ÷ Inventory turnover ratio; Use 365 days for a year unless the question says otherwise, 360 if stated.

Quick revision

Material cost is the cost of direct and indirect materials; direct material is traceable to the cost unit.
Reorder level = Maximum consumption × Maximum reorder period.
Minimum level = Reorder level − (Normal consumption × Normal reorder period).
Maximum level = Reorder level + Reorder quantity − (Minimum consumption × Minimum reorder period).
Danger level = Average consumption × Lead time for emergency purchases.
EOQ = √(2 × A × O ÷ C), where A is annual demand, O is cost per order and C is carrying cost per unit per year.
At EOQ, total ordering cost equals total carrying cost.
ABC: A items are high value and few, so tight control; C items are low value and many, so simple control.
VED classifies by criticality (vital, essential, desirable); it suits spare parts.
FIFO issues at the oldest price; closing stock is at latest prices. LIFO is the opposite.
Weighted average price = Total cost of stock ÷ Total quantity in stock.
Inventory turnover ratio = Cost of material consumed ÷ Average stock.

Common mistakes

Treating every material in the product as direct material. Fix: Apply the tracing test. Minor items such as thread, glue or nails go to overheads as indirect materials.
Including recoverable GST in material cost. Fix: Exclude taxes for which input credit is available. Include only non-recoverable duties and taxes.
Using normal consumption and normal lead time to calculate the reorder level. Fix: Remember: ROL uses both maximums. Normal figures are only subtracted for the minimum level.
Subtracting maximum figures when finding the maximum level. Fix: In the maximum level formula, subtract minimum consumption × minimum lead time.
Using monthly demand directly in the formula. Fix: Convert to annual first, and check that C is also per year.
Taking carrying cost percentage on the wrong base. Fix: Carrying cost per unit = price × percentage. Under discounts, recompute it using the discounted price.
Ranking items by unit price or by units instead of usage value. Fix: Always multiply units by price first and rank on the product.
Using cumulative % of items without ranking first. Fix: Sort in descending value before any cumulative column.
Using the opening rate for the whole issue under FIFO even when the first lot is smaller than the issue. Fix: Issue the full quantity of the oldest lot, then take the balance from the next lot. Show each part separately.
Under LIFO, issuing from the oldest lot after a new purchase arrives. Fix: After each receipt, the latest lot sits on top. Issue from it first, then go back lot by lot.

Exam tips

For procedure questions, write the steps in order, each with its document name and purpose. This is the usual marking pattern.
In numericals, show the cost build-up line by line so you earn step marks even if one item is wrong.
Read whether the GST is recoverable. Most CA Intermediate cost questions ignore recoverable GST in material cost.
For direct vs indirect questions, give one example of each and the reason for the classification.
In MCQs, watch for traps on trade discount versus cash discount. Attempt every MCQ since there is no negative marking.
Write the formula before substituting. ICAI-style answers earn marks for method even if the final figure is wrong.
Read the question for which data is given. If only normal consumption and lead time appear, use them throughout and say so.
If the ROQ is not given but ordering and carrying costs are, calculate the EOQ first and use it as the ROQ.