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It currently has no material Z in inventory. The current purchase price of material per kg is 20 and this is expected to rise to $24per kg in one month’s time. Material Z is perishable and normally 20% of stored material is lost permanently.
Sir in this case when my work book do the question it calculate 20/0.8 to get buying material of z now and for storing for the month with the loss.What your book has done is correct.
For every 10 kg that they buy they will loose 2 kg (20%) and will therefore only end up with 8 kg.
Putting it the other way round, for every 8 kg that they need to use they will have to buy 10 kg.
Therefore they will need to buy 10/8 times the amount they need (multiplying by 10/8 is the same as multiplying by 1/0.8)
Dear John,
I hope you are doing well,
Beside what my college had presented and and according to what understood from your nice explanation above is as following,
they will need to buy (10KG/8KG)*$20=$25 However, they will use an amount of (8KG/10KG)*20$=$16.
Which means that the difference between ($25 – $16)=$9 is the value of the 20% of lost material as mentioned in the question above.Have I understood you properly?
The cost of the material lost is not relevant.
The cost of the material used in production is calculated as being the cost of the material they need to buy (in order, after losing some, to have enough for production).
Dear John,
Thank you for your prompt response and collaboration.I am just asking about the calculation of the material lost,material used and amount of material should be bought expressed in dollars amount regardless the relevant cost question mentioned above.
I am talking about the calculation generally for the question likewise mentioned above.** Material should be bought for the production including waste of material in dollar term.
1- they will need to buy (10KG/8KG)*$20=$25 However,
** Material Actually Used into production in dollar term.
2- they will use an amount of (8KG/10KG)*20$=$16.
** Material waste expressed in dollars.
3- Which means that the difference between ($25 – $16)=$9 is the value of the 20% of lost
material as mentioned in the question above.Are my calculations of the material lost ,material used and material should be bought right or not?
Thank you in advance.No, it is not correct for two reasons.
Firstly the relevant purchase price is not $20, but is $24 as per the question.
Secondly, the lost inventory does not have a value – it is lost.
If they need (say) 8kg for production then they will have to buy 10 kg (because 20% of the 10 kg will be lost), and therefore the 8kg used in production will cost 10 x $24 = $240.
Every kg used for production is therefore costing them 240/8 = $30.
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