Material Cost Question Bank Short Answer

 MATERIAL CONTROL

QUESTION BANK (PREVIOUS YEAR QUESTION PAPER)

SHORT ANSWER QUESTION AND ANSWER

1	What is the difference between direct material and indirect material?
	Direct Material Raw materials those are directly traceable to the finished product. Wood used to make furniture Fabric used in clothing manufacturing Tires in automobile production Indirect Material  Materials used in the production process, but cannot be directly traced to a specific product or their cost is too insignificant to track individually. Example: o    Glue used in furniture making o    Lubricants for machinery o    Cleaning supplies for production equipment
2	What are the two aspects of material control?
	The two main aspects of material control are: 1.      Control over Material Procurement (Purchasing Control): o    Ensuring that the right quality of material is purchased in the right quantity, at the right price, and at the right time. o    Involves vendor selection, purchase requisitions, purchase orders, and timely supply. 2.      Control over Material Usage (Consumption Control): o    Ensuring that materials are stored properly, issued only as required, and used efficiently in production. o    Aims to minimize waste, pilferage, and over-consumption while ensuring continuous production flow.
3	Name the techniques of material control
	i.            ABC Analysis (Always Better Control) – Classifying materials into A, B, and C categories based on value and consumption.       ii.            VED Analysis (Vital, Essential, Desirable) – Classifying items based on criticality of use.     iii.            FSN Analysis (Fast-moving, Slow-moving, Non-moving) – Classification according to movement/usage.     iv.            EOQ (Economic Order Quantity) – Determining the optimal order quantity to minimize cost.       v.            Re-order Level, Minimum Level, Maximum Level, Danger Level – Fixing stock levels for control.     vi.            Perpetual Inventory System – Continuous record-keeping of stock movement.   vii.            Bin Card and Store Ledger System – Recording and monitoring stock transactions. Just-in-Time (JIT) System – Procuring materials only when needed to avoid excess inventory.
4	What is re-order level
	Re-order Level (ROL): The re-order level is the level of stock (inventory) at which a fresh order for materials should be placed to avoid stock-out (shortage) before the new supply arrives. It acts as a signal point – when stock falls to this level, the storekeeper must initiate a purchase order. Formula for Re-order Level: Re-order Level=Maximum Consumption Maximum Re-order Period
5	What is maximum stock level
	The Maximum Stock Level (also called maximum inventory level) is the upper limit of inventory that a business allows itself to keep for a particular item. It is set to avoid overstocking, which can lead to: Excess capital being tied up in stock. Higher storage costs. Increased risk of obsolescence, theft, or damage. Formula (generalized): Maximum Stock Level=Reorder Level+Reorder Quantity−(Minimum Consumption×
6	What is economic order quantity?
	Economic Order Quantity (EOQ) is the optimal order size that a company should purchase to minimize the total cost of inventory, which includes: 1.      Ordering Cost (cost incurred every time an order is placed – e.g., admin, transport, paperwork). 2.      Carrying/ Holding Cost (cost of storing inventory – e.g., rent, insurance, deterioration, interest).
7	What are included under carrying cost
	Carrying Cost (also called holding cost) refers to all the expenses a company incurs for storing and maintaining inventory until it is sold or used. Items included under Carrying Cost: 1.      Storage Costs 2.      Insurance Costs 3.      Depreciation and Obsolescence 4.      Shrinkage / Losses o
8	What is ABC analysis?
	ategories in ABC Analysis: 1.      Category A (High-value items): o    Around 10–20% of items but account for about 70% of total inventory value. o    Require strict control, accurate records, frequent review, and close supervision. 2.      Category B (Moderate-value items): o    Around 20–30% of items and account for about 20% of total inventory value. o    Require moderate control and periodic review. 3.      Category C (Low-value items): o    Around 50–70% of items but account for only 10% of total inventory value. o    Require simple control, bulk purchase, and minimum records.
9	What do you mean by VED analysis
	VED Analysis is one of the important techniques of material control. It stands for Vital, Essential, and Desirable analysis and is used to classify materials (especially spare parts, maintenance items, and critical components) based on their criticality to production and operations.
10	Give various methods of valuing material issues?
	  First In, First Out (FIFO)   Last In, First Out (LIFO)   Simple Average Method   Weighted Average Method   Specific Price Method   Standard Price Method   Replacement Price Method   Market Price Method   Highest In, First Out (HIFO)
11	What factors considered for adopting a methods method pricing of material?
	list of factors to be considered while adopting a method of pricing material issues: 1.      Nature of material 2.      Price fluctuations 3.      Simplicity and ease of application 4.      Nature of the business / industry 5.      Effect on reported profits 6.      Effect on stock valuation 7.      Consistency requirement 8.      Government regulations / accounting standards 9.      Management policy and objectives 10.  Usefulness for cost control and decision-making
12	What are the advantages of adopting FIFO method
	  Simple and easy to understand.   Issues follow the natural flow of materials.   Prevents obsolescence and spoilage.   Closing stock valued at recent/current prices.   Provides realistic cost in periods of stable prices.   Widely accepted by accounting and tax authorities.   In periods of rising prices, shows higher stock value and higher profit (better financial position).   Reduces chances of manipulation in stock valuation
13	When can we adopt LIFO method
	  When prices are rising (inflationary period) – to charge higher costs to production and reduce profit (tax saving).   When it is necessary to match current cost with current revenue for realistic profit measurement.   When materials are not easily distinguishable (e.g., coal, bricks, sand, chemicals, liquids).   When management prefers to show conservative (lower) profits to avoid over-distribution of dividends. 
14	What is weighted average price?
	Weighted Average Price Method is a method of valuing material issues where the issue price is calculated based on the average cost of materials in stock, weighted by the quantities available. It gives more importance to the quantity purchased at each price, unlike the simple average method.
15	What is stores Ledger and give the specimen of stores ledger
	Meaning of Stores Ledger A Stores Ledger is a record maintained in the stores department which shows a detailed account of each item of material in stores. It contains information about: ·         Receipts of materials (purchases, returns, etc.) ·         Issues of materials to production or other departments ·         Balance of stock after each transaction ·         Rate and value of receipts, issues, and balance *Refer your class note book for the Specimen

 

 

 

MATERIAL CONTROL

QUESTION BANK (PREVIOUS YEAR QUESTION PAPER)

SHORT ANSWER QUESTION AND ANSWER

1	What is the difference between direct material and indirect material?
	Direct Material Raw materials those are directly traceable to the finished product. Wood used to make furniture Fabric used in clothing manufacturing Tires in automobile production Indirect Material  Materials used in the production process, but cannot be directly traced to a specific product or their cost is too insignificant to track individually. Example: o    Glue used in furniture making o    Lubricants for machinery o    Cleaning supplies for production equipment
2	What are the two aspects of material control?
	The two main aspects of material control are: 1.      Control over Material Procurement (Purchasing Control): o    Ensuring that the right quality of material is purchased in the right quantity, at the right price, and at the right time. o    Involves vendor selection, purchase requisitions, purchase orders, and timely supply. 2.      Control over Material Usage (Consumption Control): o    Ensuring that materials are stored properly, issued only as required, and used efficiently in production. o    Aims to minimize waste, pilferage, and over-consumption while ensuring continuous production flow.
3	Name the techniques of material control
	i.            ABC Analysis (Always Better Control) – Classifying materials into A, B, and C categories based on value and consumption.       ii.            VED Analysis (Vital, Essential, Desirable) – Classifying items based on criticality of use.     iii.            FSN Analysis (Fast-moving, Slow-moving, Non-moving) – Classification according to movement/usage.     iv.            EOQ (Economic Order Quantity) – Determining the optimal order quantity to minimize cost.       v.            Re-order Level, Minimum Level, Maximum Level, Danger Level – Fixing stock levels for control.     vi.            Perpetual Inventory System – Continuous record-keeping of stock movement.   vii.            Bin Card and Store Ledger System – Recording and monitoring stock transactions. Just-in-Time (JIT) System – Procuring materials only when needed to avoid excess inventory.
4	What is re-order level
	Re-order Level (ROL): The re-order level is the level of stock (inventory) at which a fresh order for materials should be placed to avoid stock-out (shortage) before the new supply arrives. It acts as a signal point – when stock falls to this level, the storekeeper must initiate a purchase order. Formula for Re-order Level: Re-order Level=Maximum Consumption Maximum Re-order Period
5	What is maximum stock level
	The Maximum Stock Level (also called maximum inventory level) is the upper limit of inventory that a business allows itself to keep for a particular item. It is set to avoid overstocking, which can lead to: Excess capital being tied up in stock. Higher storage costs. Increased risk of obsolescence, theft, or damage. Formula (generalized): Maximum Stock Level=Reorder Level+Reorder Quantity−(Minimum Consumption×
6	What is economic order quantity?
	Economic Order Quantity (EOQ) is the optimal order size that a company should purchase to minimize the total cost of inventory, which includes: 1.      Ordering Cost (cost incurred every time an order is placed – e.g., admin, transport, paperwork). 2.      Carrying/ Holding Cost (cost of storing inventory – e.g., rent, insurance, deterioration, interest).
7	What are included under carrying cost
	Carrying Cost (also called holding cost) refers to all the expenses a company incurs for storing and maintaining inventory until it is sold or used. Items included under Carrying Cost: 1.      Storage Costs 2.      Insurance Costs 3.      Depreciation and Obsolescence 4.      Shrinkage / Losses o
8	What is ABC analysis?
	ategories in ABC Analysis: 1.      Category A (High-value items): o    Around 10–20% of items but account for about 70% of total inventory value. o    Require strict control, accurate records, frequent review, and close supervision. 2.      Category B (Moderate-value items): o    Around 20–30% of items and account for about 20% of total inventory value. o    Require moderate control and periodic review. 3.      Category C (Low-value items): o    Around 50–70% of items but account for only 10% of total inventory value. o    Require simple control, bulk purchase, and minimum records.
9	What do you mean by VED analysis
	VED Analysis is one of the important techniques of material control. It stands for Vital, Essential, and Desirable analysis and is used to classify materials (especially spare parts, maintenance items, and critical components) based on their criticality to production and operations.
10	Give various methods of valuing material issues?
	  First In, First Out (FIFO)   Last In, First Out (LIFO)   Simple Average Method   Weighted Average Method   Specific Price Method   Standard Price Method   Replacement Price Method   Market Price Method   Highest In, First Out (HIFO)
11	What factors considered for adopting a methods method pricing of material?
	list of factors to be considered while adopting a method of pricing material issues: 1.      Nature of material 2.      Price fluctuations 3.      Simplicity and ease of application 4.      Nature of the business / industry 5.      Effect on reported profits 6.      Effect on stock valuation 7.      Consistency requirement 8.      Government regulations / accounting standards 9.      Management policy and objectives 10.  Usefulness for cost control and decision-making
12	What are the advantages of adopting FIFO method
	  Simple and easy to understand.   Issues follow the natural flow of materials.   Prevents obsolescence and spoilage.   Closing stock valued at recent/current prices.   Provides realistic cost in periods of stable prices.   Widely accepted by accounting and tax authorities.   In periods of rising prices, shows higher stock value and higher profit (better financial position).   Reduces chances of manipulation in stock valuation
13	When can we adopt LIFO method
	  When prices are rising (inflationary period) – to charge higher costs to production and reduce profit (tax saving).   When it is necessary to match current cost with current revenue for realistic profit measurement.   When materials are not easily distinguishable (e.g., coal, bricks, sand, chemicals, liquids).   When management prefers to show conservative (lower) profits to avoid over-distribution of dividends. 
14	What is weighted average price?
	Weighted Average Price Method is a method of valuing material issues where the issue price is calculated based on the average cost of materials in stock, weighted by the quantities available. It gives more importance to the quantity purchased at each price, unlike the simple average method.
15	What is stores Ledger and give the specimen of stores ledger
	Meaning of Stores Ledger A Stores Ledger is a record maintained in the stores department which shows a detailed account of each item of material in stores. It contains information about: ·         Receipts of materials (purchases, returns, etc.) ·         Issues of materials to production or other departments ·         Balance of stock after each transaction ·         Rate and value of receipts, issues, and balance *Refer your class note book for the Specimen