a)
ROP
=(inventory used per period of time × order lead time) + safety stock
=(800 kg × 4 weeks) + 1,000 kg
=4,200 kg
b)
Cost per kg for the material brought forward:
$8,100 ÷ 1,350 kg = $6
Cost per kg for the material received on week1 day 5:
$16,000 ÷ 2,000 kg = $8
FIFO method:
The total cost of material used in week 1 day 3 issue:
600 kg × $6 = $3,600
The total cost of material used in week 2 day 2 issue:
390 kg × $6 = $2,340
The total cost of material used in week 2 day 4 issue:
255 kg × $6 = $1,530
The total cost of material used in week 3 day 3 issue:
105 kg × $6 = $630
450 kg × $8 = $3,600
The total cost of 4 issues in the three week period within the FIFO cost-flow assumption is:
$3,600 + $2,340 + $1,530 + $630 + $3,600= $11,700
c)
AVCO method:
The total cost of material used in week 1 day 3 issue:
600 kg × $6 = $3,600
The average cost of per kg material:
[($8,100 - $3,600)+ $16,000] ÷ [(1,350 kg - 600 kg) + 2,000 kg]=$7.45
The total cost of material used in week 2 & 3 issues:
(390 kg + 255 kg + 555 kg) × $7.45 = $8,940
The total cost of 4 issues in the three week period using the AVCO method is:
$3,600 + $8,940 = $12,540
Hence,when using the AVCO method, the cost of closing stock would be:
($8,100 + $16,000)-$12,540=$11,560
