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Inventory controls - K. K. ADVISORS

An internal audit is examining the inventory of trim store in F & M Company by doing certain tests and samplings. They extracted some points for the analysis which are:

An internal audit is examining the inventory of trim store in F & M Company by doing certain tests and samplings. They extracted some points for the analysis which are:

 

  • Trim division provides all its accessories to the finishing departments which made annual sales of Rs. 3000,000.

 

  • Gross profit of the said division id 30% of the sales.

 

  • Loss of 3% of the purchase amount is monitored due to theft, fraud or damage.

 

  • For controlling the loss, the company has to further expense Rs. 50,000 annually.

 

  • This control will minimize the loss upto 1%.

 

Should the control be recommended?

 

Solution:

 

Total loss is 3% of purchases 3000,000 x .7
2100,000 x .03 = 63,000
Total saving if we add controls 2100,000 x 0.02 (3%-1%) (2% saved by adding controls)
42,000
Cost for acquiring controls 50,000
Recommendation Acquiring control option should not be entertained as the cost is higher than the actual savings The annual expense of the department is Rs. 63,000 whereas after opting control this annual cost will reach upto Rs. 71,000 (50,000 + 21,000 (1% loss))

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