Test 4: Material Cost: answer key

Question 1 · 2 marks · Chapter 2: Material Cost · medium

Scenario. Pragati Engineering Components Ltd. manufactures precision-machined automobile components and industrial equipment parts. Its manufacturing facility has an annual installed capacity of 8,00,000 components and operates for approximately 40,000 machine hours and 28,000 direct labour hours annually. The company consumes six different grades of raw materials in its manufacturing operations. The purchase department has observed that excessive management attention is being devoted to low-value materials, while certain expensive materials are not receiving adequate monitoring. The finance and stores departments jointly prepared the following annual consumption statement: | Material | Annual Consumption | Unit Price | Annual Usage Value | | M1 | 4,000 units | ₹100 | ₹4,00,000 | | M2 | 6,000 units | ₹50 | ₹3,00,000 | | M3 | 3,000 units | ₹40 | ₹1,20,000 | | M4 | 4,000 units | ₹20 | ₹80,000 | | M5 | 6,000 units | ₹10 | ₹60,000 | | M6 | 4,000 units | ₹10 | ₹40,000 | Total annual usage value is to be determined from these figures. The company has decided to introduce ABC selective inventory control using the following policy: Category A includes items accounting for the first 70% of cumulative annual usage value; Category B includes the next 20%; and Category C includes the remaining 10%. Items are ranked in descending order of annual consumption value before classification. The management intends to exercise strict and continuous control over Category A materials, periodic review over Category B materials and comparatively less frequent review over Category C materials. The purchase committee wants to evaluate the financial significance of each category and determine how many items require the highest degree of control. The classification is based on annual consumption value rather than the number of physical units purchased.

Calculate the total annual consumption value of all six materials used by Pragati Engineering Components Ltd.

1. ₹9,00,000
2. ₹10,00,000 (correct answer)
3. ₹11,00,000
4. ₹12,00,000

Answer: B — ₹10,00,000

Explanation. Annual consumption value is obtained by multiplying the annual quantity consumed by its respective unit price. M1 = ₹4,00,000; M2 = ₹3,00,000; M3 = ₹1,20,000; M4 = ₹80,000; M5 = ₹60,000; M6 = ₹40,000. Total = ₹4,00,000 + ₹3,00,000 + ₹1,20,000 + ₹80,000 + ₹60,000 + ₹40,000 = ₹10,00,000. Physical quantities cannot be added directly to determine inventory investment.

Where it goes wrong. Adding physical quantities instead of calculating annual consumption value using quantity multiplied by unit price.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 2 · 2 marks · Chapter 2: Material Cost · hard

Under the prescribed ABC classification policy, to which category should Material M3 be allocated?

1. Category B (correct answer)
2. Category A
3. Category C
4. It cannot be classified without physical stock quantity.

Answer: A — Category B

Explanation. Total annual usage value = ₹10,00,000. M1 accounts for 40% and M2 accounts for 30%, so the cumulative value of Category A is 70%. M3 contributes ₹1,20,000 or 12%, taking the cumulative percentage to 82%. This falls within the next 20% assigned to Category B. ABC analysis is based on annual usage value, not simply the number of units purchased or held.

Where it goes wrong. Classifying an item according to its individual value percentage without considering its cumulative ranked position.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 3 · 2 marks · Chapter 2: Material Cost · medium

What is the cumulative percentage of total annual usage value represented by Materials M1, M2, M3 and M4 together?

1. 70%
2. 82%
3. 85%
4. 90% (correct answer)

Answer: D — 90%

Explanation. The combined annual usage value of M1 to M4 is ₹4,00,000 + ₹3,00,000 + ₹1,20,000 + ₹80,000 = ₹9,00,000. Total annual usage value = ₹10,00,000. Cumulative percentage = ₹9,00,000 ÷ ₹10,00,000 × 100 = 90%. Material M4 completes the Category B cumulative range. Using only M4's individual 8% contribution would not answer the cumulative-value question.

Where it goes wrong. Reporting the individual percentage of Material M4 instead of the cumulative percentage of all four ranked materials.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 4 · 2 marks · Chapter 2: Material Cost · hard

What is the combined annual usage value of all materials classified under Category C?

1. ₹80,000
2. ₹90,000
3. ₹1,00,000 (correct answer)
4. ₹1,20,000

Answer: C — ₹1,00,000

Explanation. The first two items represent Category A, and the next two represent Category B. Accordingly, Category C contains M5 and M6. Their annual usage values are ₹60,000 and ₹40,000 respectively. Combined Category C value = ₹60,000 + ₹40,000 = ₹1,00,000, representing 10% of total annual inventory usage value. The category must be determined from the cumulative ranking before aggregating its value.

Where it goes wrong. Including the B-category item M4 or omitting one of the remaining C-category materials.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 5 · 2 marks · Chapter 2: Material Cost · medium

Scenario. Apex Industrial Pumps Ltd. manufactures high-pressure pumps and hydraulic assemblies for industrial customers. The manufacturing facility has an annual production capacity of 1,50,000 pump assemblies and uses approximately 30,000 machine hours and 21,000 direct labour hours annually. The company maintains a specialised stores department for mechanical spares, electrical components and production-support materials. The production and maintenance departments have reviewed four inventory items to introduce VED and FSN classification. The maintenance manager has assessed the consequences of non-availability, while the stores manager has compiled issue-frequency records for the preceding twelve months. | Inventory Item | Stock Quantity | Unit Cost | Issue Transactions | Operational Consequence | | Spindle bearing | 20 | ₹1,500 | 18 | Its absence stops the main machining line | | Hydraulic seal | 50 | ₹200 | 5 | Its absence reduces output quality and production efficiency | | Decorative cap | 200 | ₹10 | 0 | Optional item; absence has no effect on production | | Control relay | 10 | ₹2,000 | 3 | Its absence stops the automated production line | The decorative cap was last issued 15 months ago. The other three items were issued during the preceding twelve months. For this exercise, the company has adopted the following FSN policy: Fast-moving items have at least 10 issue transactions during the last twelve months; Slow-moving items have between 1 and 9 transactions; and Non-moving items have no issue transactions during the last twelve months. VED classification is based on operational criticality: Vital items can interrupt production, Essential items can reduce production efficiency or quality, and Desirable items are optional. The company wants to combine the two classifications to determine which items deserve strict control and which may require disposal review. The stock quantities and unit prices are also provided to quantify the capital invested in Vital spares.

Under VED analysis, how should the hydraulic seal be classified?

1. Vital
2. Desirable
3. Essential (correct answer)
4. Non-moving

Answer: C — Essential

Explanation. VED classification is based on the criticality of an inventory item to production and the final product. The hydraulic seal does not stop production when unavailable, but its absence reduces output quality and production efficiency. Such an item is classified as Essential. Vital items cause production interruption, whereas Desirable items are optional and do not cause production or efficiency loss. Non-moving is an FSN classification, not a VED classification.

Where it goes wrong. Confusing production inefficiency with complete production interruption, or mixing VED and FSN classifications.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 6 · 2 marks · Chapter 2: Material Cost · hard

How should the decorative cap be classified under the company's FSN policy?

1. Non-moving (correct answer)
2. Fast-moving
3. Slow-moving
4. Vital

Answer: A — Non-moving

Explanation. The decorative cap has had zero issue transactions during the preceding twelve months and was last issued 15 months ago. Under the company's stated FSN policy, items with no issue transactions during the preceding twelve months are classified as Non-moving. Its optional production role is separately relevant to VED analysis and does not determine its FSN category.

Where it goes wrong. Using the operational importance of an item to determine its FSN category instead of examining its frequency of usage.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 7 · 2 marks · Chapter 2: Material Cost · medium

Calculate the total inventory investment in all Vital items held by Apex Industrial Pumps Ltd.

1. ₹30,000
2. ₹50,000 (correct answer)
3. ₹40,000
4. ₹70,000

Answer: B — ₹50,000

Explanation. The spindle bearing and control relay are Vital because their absence stops production. Spindle bearing investment = 20 × ₹1,500 = ₹30,000. Control relay investment = 10 × ₹2,000 = ₹20,000. Total Vital inventory investment = ₹30,000 + ₹20,000 = ₹50,000. The hydraulic seal is Essential and the decorative cap is Desirable, so neither should be included in this calculation.

Where it goes wrong. Including the Essential spare or excluding the Vital relay because its issue frequency is low.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 8 · 2 marks · Chapter 2: Material Cost · hard

Which inventory item belongs simultaneously to the Vital category under VED analysis and the Slow-moving category under FSN analysis?

1. Spindle bearing
2. Hydraulic seal
3. Decorative cap
4. Control relay (correct answer)

Answer: D — Control relay

Explanation. The control relay is Vital because its absence stops the automated production line. It has only three issue transactions during the preceding twelve months. Under the company's FSN criteria, between one and nine annual issue transactions indicate Slow-moving inventory. Therefore, the control relay is classified as Vital under VED and Slow-moving under FSN. Low usage frequency does not reduce its operational criticality.

Where it goes wrong. Assuming that all Vital items must necessarily be Fast-moving because of their importance to production.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 9 · 2 marks · Chapter 2: Material Cost · medium

Scenario. Zenith Components Ltd. manufactures precision electrical assemblies for automobile manufacturers. The company operates an integrated production facility with an annual practical capacity of 1,20,000 assemblies. During the year, its production departments utilised 48,000 machine hours and 30,000 direct labour hours. The direct labour expenditure was ₹45,00,000. Raw material procurement and inventory management are controlled centrally by the purchase and stores departments. The company is reviewing its traditional inventory system and considering the adoption of Just-in-Time (JIT) inventory management. Management believes that unnecessary stocks lock up working capital and increase storage, insurance and other carrying costs. Under JIT, materials should be purchased when actually required for production, and production should commence in response to customer demand. The supplier must coordinate deliveries with the production schedule. The raw material inventory records for the previous financial year are: | Particulars | Amount | | Opening raw material stock | ₹80,000 | | Purchases during the year | ₹7,30,000 | | Closing raw material stock | ₹80,000 | | Annual carrying-cost rate | 15% | The company uses 365 days for calculating average inventory holding days. For the proposed JIT arrangement, management expects average inventory investment to decline from ₹80,000 to ₹20,000, without changing annual material consumption. The annual carrying-cost percentage is expected to remain unchanged. The purchase department is also evaluating the order in which customer demand, production planning, purchase requisitions and supplier deliveries should occur under JIT. The cost accountant has been asked to calculate material consumption, inventory turnover performance and average inventory holding days before management finalises its proposal.

Which sequence correctly represents the JIT material procurement and production flow described in the ICAI study material?

1. Customer demand → Production starts → Material requirement sent to Purchase Department → Purchase order to supplier → Supplier delivers material for production (correct answer)
2. Supplier delivers bulk material → Inventory accumulates → Production starts → Customer demand is identified
3. Purchase Department orders annual requirements → Production maintains maximum stock → Goods are delivered whenever capacity is available
4. Production purchases material independently → Stores builds safety inventory → Customer demand initiates material inspection

Answer: A — Customer demand → Production starts → Material requirement sent to Purchase Department → Purchase order to supplier → Supplier delivers material for production

Explanation. JIT is a demand-pull system in which production starts after the customer order is received. Based on the demand, the production department determines its material requirements and communicates them to the Purchase Department. The supplier then delivers materials for production. The other sequences begin with unnecessary advance procurement or inventory accumulation, which conflicts with the JIT approach of purchasing materials when actually required.

Where it goes wrong. Reversing the demand-pull sequence by placing bulk purchases and inventory accumulation before customer demand.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 10 · 2 marks · Chapter 2: Material Cost · hard

Calculate the cost of raw materials consumed during the year by Zenith Components Ltd.

1. ₹6,50,000
2. ₹7,00,000
3. ₹7,30,000 (correct answer)
4. ₹7,50,000

Answer: C — ₹7,30,000

Explanation. Cost of materials consumed = Opening stock + Purchases − Closing stock. Substituting the figures: ₹80,000 + ₹7,30,000 − ₹80,000 = ₹7,30,000. Thus, annual material consumption is ₹7,30,000. Purchases alone would give the same result in this particular case only because opening and closing stocks are equal. Both stock figures must nevertheless be included in the formula.

Where it goes wrong. Using purchases alone without applying the inventory adjustment for opening and closing stock.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 11 · 2 marks · Chapter 2: Material Cost · medium

Calculate the raw material inventory turnover ratio of Zenith Components Ltd. for the year.

1. 8.50 times
2. 9.125 times (correct answer)
3. 9.50 times
4. 10 times

Answer: B — 9.125 times

Explanation. Inventory Turnover Ratio = Cost of raw material consumed ÷ Average stock held. Annual consumption = ₹7,30,000. Average stock = (₹80,000 + ₹80,000) ÷ 2 = ₹80,000. Therefore, turnover ratio = ₹7,30,000 ÷ ₹80,000 = 9.125 times. This indicates that the average raw material inventory was consumed and replenished at an equivalent rate of 9.125 times during the year.

Where it goes wrong. Dividing material consumption by closing stock without first determining average inventory.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 12 · 2 marks · Chapter 2: Material Cost · hard

For how many days, approximately, was the average raw material inventory held by Zenith Components Ltd. during the year?

1. 36.5 days
2. 42 days
3. 45 days
4. 40 days (correct answer)

Answer: D — 40 days

Explanation. Average inventory holding days = 365 ÷ Inventory Turnover Ratio. The turnover ratio calculated above is 9.125 times. Therefore, holding days = 365 ÷ 9.125 = 40 days. This calculation measures the average period for which material remains in inventory. Multiplying the turnover ratio by 365 or using the number of production days without an instruction to do so would produce an incorrect result.

Where it goes wrong. Multiplying the turnover ratio by 365 instead of dividing 365 days by the turnover ratio.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 13 · 2 marks · Chapter 2: Material Cost · medium

Scenario. A manufacturing company has an annual inventory usage value of ₹4,00,000. One component accounts for an annual consumption of 1,500 units at ₹40 per unit. Calculate the percentage contribution of this component to total annual inventory usage value.

A manufacturing company has an annual inventory usage value of ₹4,00,000. One component accounts for an annual consumption of 1,500 units at ₹40 per unit. Calculate the percentage contribution of this component to total annual inventory usage value.

1. 10%
2. 12.5%
3. 18%
4. 15% (correct answer)

Answer: D — 15%

Explanation. Annual consumption value of the component = 1,500 × ₹40 = ₹60,000. Total annual inventory usage value = ₹4,00,000. Percentage contribution = ₹60,000 ÷ ₹4,00,000 × 100 = 15%. ABC analysis uses the annual consumption value of individual inventory items relative to total annual consumption value. Using the quantity of 1,500 units directly would not measure its investment significance.

Where it goes wrong. Calculating the percentage using physical consumption quantity instead of annual monetary consumption value.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 14 · 2 marks · Chapter 2: Material Cost · hard

Scenario. An automobile manufacturer's maintenance department identifies a spare component whose absence does not stop production but reduces machine efficiency and results in a lower-quality output. Under VED analysis, which category should be assigned to this component?

An automobile manufacturer's maintenance department identifies a spare component whose absence does not stop production but reduces machine efficiency and results in a lower-quality output. Under VED analysis, which category should be assigned to this component?

1. Vital
2. Essential (correct answer)
3. Desirable
4. Fast-moving

Answer: B — Essential

Explanation. VED analysis classifies inventory on the basis of criticality. Vital items cause production interruption when unavailable. Essential items may not stop production but their absence can cause reduced efficiency or sub-standard output. Desirable items are optional and their absence does not result in production or efficiency loss. Since the component causes reduced efficiency and lower quality, its correct category is Essential.

Where it goes wrong. Classifying an item as Vital merely because its absence affects production performance, without distinguishing reduced efficiency from complete interruption.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 15 · 2 marks · Chapter 2: Material Cost · medium

Scenario. A factory follows the following ABC classification policy: Category A covers cumulative annual usage value up to 70%, Category B covers the next 20%, and Category C covers the remainder. The annual usage values are: | Material | Annual Usage Value | | Alpha | ₹4,20,000 | | Beta | ₹2,80,000 | | Gamma | ₹1,80,000 | | Delta | ₹80,000 | | Epsilon | ₹40,000 | To which category should Material Gamma be allocated?

A factory follows the following ABC classification policy: Category A covers cumulative annual usage value up to 70%, Category B covers the next 20%, and Category C covers the remainder. The annual usage values are: | Material | Annual Usage Value | | Alpha | ₹4,20,000 | | Beta | ₹2,80,000 | | Gamma | ₹1,80,000 | | Delta | ₹80,000 | | Epsilon | ₹40,000 | To which category should Material Gamma be allocated?

1. Category B (correct answer)
2. Category A
3. Category C
4. Category cannot be determined

Answer: A — Category B

Explanation. Total annual usage value = ₹10,00,000. Alpha contributes 42%, and Beta contributes 28%, taking the cumulative percentage to 70%. Gamma contributes 18%, raising cumulative value to 88%. Therefore, Gamma falls within the next 20% allocated to Category B. The material must be ranked by annual monetary usage value; classification based solely on its individual percentage would omit the cumulative analysis.

Where it goes wrong. Classifying Gamma as Category A because its individual annual value is relatively high instead of checking its cumulative position.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 16 · 2 marks · Chapter 2: Material Cost · hard

Scenario. A stores department has adopted the following FSN criteria: Fast-moving materials must have at least 12 issue transactions during the last twelve months; Slow-moving materials must have between 1 and 11 transactions; Non-moving materials must have no issue transactions during this period. A spare part has been issued 8 times in the last twelve months, and its last issue occurred two months ago. What is its FSN classification?

A stores department has adopted the following FSN criteria: Fast-moving materials must have at least 12 issue transactions during the last twelve months; Slow-moving materials must have between 1 and 11 transactions; Non-moving materials must have no issue transactions during this period. A spare part has been issued 8 times in the last twelve months, and its last issue occurred two months ago. What is its FSN classification?

1. Fast-moving
2. Non-moving
3. Slow-moving (correct answer)
4. Vital

Answer: C — Slow-moving

Explanation. The item has 8 issue transactions during the last twelve months. The company has defined Fast-moving as at least 12 transactions and Slow-moving as between 1 and 11 transactions. Therefore, the component is Slow-moving. Its last issue two months ago also confirms that it has moved during the review period. Vital is a VED classification and cannot be determined from the issue frequency.

Where it goes wrong. Treating a recently issued item as Fast-moving without checking the company's specified issue-frequency threshold.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 17 · 2 marks · Chapter 2: Material Cost · medium

Scenario. A manufacturing plant has a spare part whose absence would immediately stop the entire production line. However, the item has been issued only twice during the last twelve months. What is its combined classification under VED and FSN analysis?

A manufacturing plant has a spare part whose absence would immediately stop the entire production line. However, the item has been issued only twice during the last twelve months. What is its combined classification under VED and FSN analysis?

1. Essential and Fast-moving
2. Desirable and Non-moving
3. Vital and Fast-moving
4. Vital and Slow-moving (correct answer)

Answer: D — Vital and Slow-moving

Explanation. The absence of the component immediately stops production, making it Vital under VED analysis. The item has been issued twice during the preceding twelve months, which is a low frequency of usage. Therefore, it is classified as Slow-moving under FSN analysis. These classification methods measure different characteristics: VED measures operational criticality, whereas FSN measures movement frequency.

Where it goes wrong. Assuming that the highest operational criticality automatically means the item is Fast-moving.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 18 · 2 marks · Chapter 2: Material Cost · hard

Scenario. A manufacturer intends to implement JIT inventory management. Its existing average inventory is 5,000 units at ₹200 per unit. Under JIT, the average inventory is expected to decrease to 1,500 units. The annual inventory carrying-cost rate is 12%. Calculate the annual carrying-cost savings.

A manufacturer intends to implement JIT inventory management. Its existing average inventory is 5,000 units at ₹200 per unit. Under JIT, the average inventory is expected to decrease to 1,500 units. The annual inventory carrying-cost rate is 12%. Calculate the annual carrying-cost savings.

1. ₹84,000 (correct answer)
2. ₹72,000
3. ₹90,000
4. ₹96,000

Answer: A — ₹84,000

Explanation. Reduction in average inventory = 5,000 − 1,500 = 3,500 units. Value of reduced inventory investment = 3,500 × ₹200 = ₹7,00,000. Annual carrying-cost savings = ₹7,00,000 × 12% = ₹84,000. The benefit arises from reducing average inventory investment, not from multiplying the original inventory value by the carrying percentage without accounting for the reduction.

Where it goes wrong. Applying the carrying-cost rate to the original stock instead of calculating the decrease in inventory investment.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 19 · 2 marks · Chapter 2: Material Cost · medium

Scenario. A factory implementing JIT produces 600 finished units per working day. Each finished unit requires 2.5 kg of a particular raw material. The supplier delivers only the quantity needed for the next working day's production. Calculate the required daily material delivery.

A factory implementing JIT produces 600 finished units per working day. Each finished unit requires 2.5 kg of a particular raw material. The supplier delivers only the quantity needed for the next working day's production. Calculate the required daily material delivery.

1. 1,200 kg
2. 1,400 kg
3. 1,500 kg (correct answer)
4. 1,800 kg

Answer: C — 1,500 kg

Explanation. Daily production requirement = 600 finished units. Material requirement per finished unit = 2.5 kg. Accordingly, daily raw material requirement = 600 × 2.5 = 1,500 kg. Under the stated JIT arrangement, the supplier delivers the material required for the next working day's production. Ordering the entire monthly requirement would contradict the specified daily delivery arrangement.

Where it goes wrong. Multiplying material requirement by an assumed monthly production quantity instead of calculating the stated one-day production requirement.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 20 · 2 marks · Chapter 2: Material Cost · hard

Scenario. The following information is available from the material records of a factory: | Particulars | Amount | | Opening raw material stock | ₹1,00,000 | | Purchases during the year | ₹9,00,000 | | Closing raw material stock | ₹1,00,000 | Calculate the raw material inventory turnover ratio.

The following information is available from the material records of a factory: | Particulars | Amount | | Opening raw material stock | ₹1,00,000 | | Purchases during the year | ₹9,00,000 | | Closing raw material stock | ₹1,00,000 | Calculate the raw material inventory turnover ratio.

1. 8 times
2. 9 times (correct answer)
3. 10 times
4. 11 times

Answer: B — 9 times

Explanation. Cost of raw materials consumed = ₹1,00,000 + ₹9,00,000 − ₹1,00,000 = ₹9,00,000. Average stock = (₹1,00,000 + ₹1,00,000) ÷ 2 = ₹1,00,000. Inventory turnover ratio = ₹9,00,000 ÷ ₹1,00,000 = 9 times. The calculation requires the average of opening and closing stocks rather than the closing balance alone.

Where it goes wrong. Using purchases as the numerator without adjusting for opening and closing inventory, or using only closing stock in the denominator.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 21 · 2 marks · Chapter 2: Material Cost · medium

Scenario. A company's annual raw material consumption is ₹10,95,000. Its opening inventory is ₹1,00,000 and closing inventory is ₹1,40,000. Calculate the average number of days for which raw material inventory is held during the year.

A company's annual raw material consumption is ₹10,95,000. Its opening inventory is ₹1,00,000 and closing inventory is ₹1,40,000. Calculate the average number of days for which raw material inventory is held during the year.

1. 36.5 days
2. 45 days
3. 42 days
4. 40 days (correct answer)

Answer: D — 40 days

Explanation. Average inventory = (₹1,00,000 + ₹1,40,000) ÷ 2 = ₹1,20,000. Inventory turnover ratio = ₹10,95,000 ÷ ₹1,20,000 = 9.125 times. Average inventory holding days = 365 ÷ 9.125 = 40 days. The denominator is average stock rather than the closing stock, and the number of holding days is obtained by dividing annual days by the turnover ratio.

Where it goes wrong. Using closing stock instead of average stock or multiplying the turnover ratio by the number of annual days.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 22 · 2 marks · Chapter 2: Material Cost · hard

Scenario. A company reports annual raw material consumption of ₹14,60,000 and an inventory turnover ratio of 7.3 times. Determine the average raw material inventory held during the year.

A company reports annual raw material consumption of ₹14,60,000 and an inventory turnover ratio of 7.3 times. Determine the average raw material inventory held during the year.

1. ₹2,00,000 (correct answer)
2. ₹2,20,000
3. ₹1,80,000
4. ₹2,40,000

Answer: A — ₹2,00,000

Explanation. Inventory Turnover Ratio = Material consumed ÷ Average stock. Rearranging the formula, Average stock = Material consumed ÷ Inventory Turnover Ratio. Substituting = ₹14,60,000 ÷ 7.3 = ₹2,00,000. Therefore, the average inventory held is ₹2,00,000. Multiplying consumption by the turnover ratio would reverse the relationship and significantly overstate the average inventory balance.

Where it goes wrong. Multiplying annual material consumption by the turnover ratio instead of dividing it to find average stock.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 23 · 2 marks · Chapter 2: Material Cost · medium

Scenario. Two raw materials used by a manufacturing company have the following annual inventory information: | Particulars | Material A | Material B | | Annual material consumption | ₹10,00,000 | ₹10,00,000 | | Average inventory | ₹1,00,000 | ₹2,00,000 | By how many days is Material A's average inventory holding period lower than that of Material B?

Two raw materials used by a manufacturing company have the following annual inventory information: | Particulars | Material A | Material B | | Annual material consumption | ₹10,00,000 | ₹10,00,000 | | Average inventory | ₹1,00,000 | ₹2,00,000 | By how many days is Material A's average inventory holding period lower than that of Material B?

1. 18.25 days
2. 30 days
3. 36.5 days (correct answer)
4. 45 days

Answer: C — 36.5 days

Explanation. Material A turnover = ₹10,00,000 ÷ ₹1,00,000 = 10 times. Its holding period = 365 ÷ 10 = 36.5 days. Material B turnover = ₹10,00,000 ÷ ₹2,00,000 = 5 times. Its holding period = 365 ÷ 5 = 73 days. Difference = 73 − 36.5 = 36.5 days. Material A is therefore the faster-moving material.

Where it goes wrong. Comparing turnover ratios directly without converting both ratios into the corresponding inventory holding periods.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 24 · 2 marks · Chapter 2: Material Cost · hard

Scenario. A manufacturing company reports annual raw material consumption of ₹9,60,000 and average raw material inventory of ₹1,20,000. Calculate its inventory turnover ratio.

A manufacturing company reports annual raw material consumption of ₹9,60,000 and average raw material inventory of ₹1,20,000. Calculate its inventory turnover ratio.

1. 6 times
2. 8 times (correct answer)
3. 10 times
4. 12 times

Answer: B — 8 times

Explanation. Inventory Turnover Ratio = Cost of materials consumed during the period ÷ Cost of average stock held during the period. Substituting = ₹9,60,000 ÷ ₹1,20,000 = 8 times. Thus, average inventory has been turned over eight times during the year. The ratio measures inventory movement and should not be confused with the number of physical purchase orders or production batches.

Where it goes wrong. Using annual purchases or dividing average stock by material consumption instead of applying the prescribed turnover formula.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)

Question 25 · 2 marks · Chapter 2: Material Cost · medium

Scenario. A manufacturer evaluates its raw material inventory performance over two successive financial years: | Particulars | Year 1 | Year 2 | | Annual material consumption | ₹6,00,000 | ₹12,00,000 | | Average raw material inventory | ₹1,20,000 | ₹1,20,000 | Calculate the reduction in average inventory holding days in Year 2 compared with Year 1, using 365 days per annum.

A manufacturer evaluates its raw material inventory performance over two successive financial years: | Particulars | Year 1 | Year 2 | | Annual material consumption | ₹6,00,000 | ₹12,00,000 | | Average raw material inventory | ₹1,20,000 | ₹1,20,000 | Calculate the reduction in average inventory holding days in Year 2 compared with Year 1, using 365 days per annum.

1. 36.5 days (correct answer)
2. 30 days
3. 24.33 days
4. 18.25 days

Answer: A — 36.5 days

Explanation. Year 1 turnover = ₹6,00,000 ÷ ₹1,20,000 = 5 times; holding days = 365 ÷ 5 = 73 days. Year 2 turnover = ₹12,00,000 ÷ ₹1,20,000 = 10 times; holding days = 365 ÷ 10 = 36.5 days. Reduction = 73 − 36.5 = 36.5 days. Higher turnover indicates faster movement and lower average holding time when measured on the same annual basis.

Where it goes wrong. Calculating the difference between turnover ratios instead of calculating and comparing the corresponding inventory holding days.

Authority. ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)