Material Usage Variance Formula

Material Usage Variance Formula

Material usage variance is difference between standard quantity and actual quantity and such difference is measured at standard cost. Material usage variance may be favorable or adverse.

Material usage Variance = Standard Price x (Standard Quantity- Actual Quantity).

Example

Actual Quantity Consumed = 5000 kg

Per unit Standard Price of material A = $ 8

Units produced=1000

Standard usage per unit = 6 kg

Price of Material = 40,000

Calculate Material Price Variance

Solution

Standard consumption = Units produced x standard usage

=1000 x 6

=6,000 kg

$ 8 x (6000-5000)

= $ 8 x 1000

= $8000 (material usage variance)

Material Price Variance Formula

Material Price Variance Formula

Material Price variance is difference between standard price and actual price of actual quantity consumed during the production. Material price variance may be favorable or adverse.

Material Price Variance = Actual quantity x (Standard price- Actual Price).

Example

Actual Quantity Consumed = 5000 kg

Standard Price per unit = $ 5

Price of Material = 40,000

Calculate Material Price Variance

Solution

Actual Price = 40000/5 = 8 

Material Price Variance = Actual quantity x (Standard price- Actual Price).

Material Price Variance = 5000 (5 – 8)

=5000 (-3)

=-15,000 (Adverse Material Price Variance)

Stock Turnover Period Formula

Stock Turnover Period Formula

Stock turnover period shows how long it will take stock period to be sold. Stock Turnover may be calculated by the following Formula

Stock Turnover Period =     Average Inventory     x 365

                                             Cost of Sales

Example

Stock= 5,000

Cost of Sales = 40,000

Calculate Stock Turnover period?

Solution

Stock Turnover Period =     Inventory or Average Inventory     x 365

                                                   Cost of Sales

= (5,000/40,000) x 365

= 45.6 days or 46 days

Short turnover period is preferred by the companies, because companies are interested to make more sales, and low stock period shows high selling of stock. in other word a long stock turnover period shows poor performance of sales department.

Stock Turnover Example

Stock Turnover Example

Stock Turnover is calculated to determine that how frequently stock is being sold i.e. how many times stock shall be sold during the period. This concept can be explained with following example

Stock Turnover =     Cost of Sales    

                                Inventory

Example

ABC Company Cost of Sales during the Year = 80,000

Closing Inventory Level = 20,000

Calculate Stock Turnover

Solution

Stock Turnover =     Cost of Sales    

                                Inventory

= 50,000/10,000

= 4 (times sold)

Above example shows that company has sold its inventory 4 times during the year. The performance of the company can be judged by comparing inventory turnover of the company with other comparable company.

Stock Turnover Formula

Stock Turnover Formula

Stock Turnover is calculated to show how many times inventory sold during the year

Stock Turnover =     Cost of Sales    

                                Inventory

Example

Cost of Sales = 50,000

Inventory = 10,000

Calculate Stock Turnover

Solution

Stock Turnover =     Cost of Sales    

                                Inventory

= 50,000/10,000

= 5 (times sold)

High stock turnover is preferred by the company, because it shows sales department doing hard work and all stock is being sold. Furthermore, high turnover reduces the inventory obsoleteness risk.

Stock Cycle Formula

Stock Cycle Formula

Stock cycle formula is used to calculate the frequency of order placing. Such frequency may be calculated in weeks or days. Stock cycle can be calculated by the following formula

Stock Cycle =     Number of Weeks    

                          Number of Order

Example

Number of Weeks = 52

Number of order placed during year= 30

What would be Stock Cycle?

Solution

Stock Cycle =     Number of Weeks    

                          Number of Order

=52/30

=1.733 Weeks

Re order Level Formula

Re order Level Formula

Re order level is a level at which management is required to place new order. Re order level name itself suggest that it is a level at which order to be placed for production.

Re order Level = Maximum usage x Maximum Lead Time

Example

8000 unit of material C is to be consumed per week

Maximum Lead time for the stock arrival= 6 weeks

What would be Re order level?

Solution

Re order Level = Maximum usage x Maximum Lead Time

= 8000 x 6

=48,000 units

When stock reaches the level of 48,000 unit, then management must consider the placing of order to avoid any shortage.

Minimum Stock Level Formula

Minimum Stock Level Formula

Minimum stock level formula may be calculated by the following formula

Minimum Stock Level = Reorder Level - (Average usage x average Lead Time)

Example

Re Oder level = 25,000

Average usage per week= 5,000

Average lead time = 3 weeks

Solution

Minimum Stock Level = Reorder Level (Average usage x average Lead Time)

= 25,000-(5,000 x 3)

=25,000-15,000

=10,000 (minimum stock level)

Company is required to maintain minimum level of stock to continue the operations. Any drop below the minimum level may result in shortage of supply and interruption in production.

Maximum Stock Level Example

Maximum Stock Level Example

Maximum Stock Level concept has been explained with following simple example.

Maximum level = Reorder level + reorder Quantity- (Minimum usage x Minimum lead time)

Example

Reorder level for the company = 30,000 units

Reorder Quantity of product A = 15,000

Minimum usage of Product A= 5000

Minimum lead time = 3 weeks

Solution

Maximum level = Reorder level + reorder Quantity- (minimum usage x minimum lead time)

=30,000 + 15,000- (5000 x 3)

=45,000+15000

=60,000 units

60,000 units are maximum level for the company. Any stock beyond this level would not only unnecessary tied up the capital, but also would result in high holding cost for the company.

Maximum Stock Level Formula

Maximum Stock Level Formula

Maximum Stock Level may be calculated by the following formula

Maximum level = Reorder level + reorder Quantity- (Minimum usage x Minimum lead time)

Example

Reorder level = 15,000

Reorder Quantity = 10,000

Minimum usage = 3000

Minimum lead time = 2 weeks

Solution

Maximum level = Reorder level + reorder Quantity- (minimum usage x minimum lead time)

=15,000 + 10,000- (3000 x2)

=19,000

Maximum stock level defines the maximum limit for the entity. Stock involves holding cost and company cannot afford high holding cost. Therefore maximum stock level helps management to reduce its holding cost

Average Stock Level Formula

Average Stock Level Formula

Average Stock level is calculated by the following formula. There are three stock level an organization can maintain i.e. minimum stock level, maximum stock level and average stock level.

Average Stock= Minimum level + (Reorder level/2)

Example

Minimum level = 15,000

Re order level = 20,000

Calculate Average Stock Level?

Solution

Average Stock= Minimum level + (Reorder level/2)

= 15,000 + (20,000/2)

= 25,000 (Average Stock Level)

Average Stock level is offer a balanced solution, and therefore is preferred by much organization.

Ordering Cost Formula

Ordering Cost Formula

Ordering cost of material or annual ordering cost of material may be calculated by the following simple formula i.e. multiplying the cost of per order with number of orders.

Number of Orders x Cost per order

Example

Number of order = 10

Ordering cost per order = 500

Solution

Number of Orders x Cost per order

Total ordering cot = 10 x 500

= 5000

Number of orders Example

Number of orders Example

Number of orders per year may be calculated by dividing annual demand with Quantity per order. This formula can be expressed as under

Number of order =    Annual Demand    

                              Quantity per Order

Example

Quantity required for the year = 80,000

Quantity to be ordered= 8000

Calculate number of order

Solution

Number of order =    Annual Demand    

                              Quantity per Order

= 80,000/8000

= 10 order

Number of orders Formula

Number of orders Formula

Number of orders can be calculated by the following formula

Number of order =    Annual Demand    

                              Quantity per Order

Example

Annual Demand of stock = 60,000

Each time 5,000 unit order

Calculate number of order

Solution

Number of order =    Annual Demand    

                              Quantity per Order

= 60,000/5000

= 12 order

Economic Order Quantity Formula

Economic Order Quantity Formula

Economic order quantity formula helps to determine the quantity to be order. This formula can be expressed as under;

EOQ = √2CoD/C_h

Where

D= Demand

C_{0 =} Cost of order

C_h= Cost of Holding

Example

Annual Demand = 50,000

Cost of placing order = 50

Holding Cost per unit= .8

Calculate Economic order Quantity

Solution

EOQ = √2CoD/C_h

= √2(50)(50,000)/.8

= 6,250 units