Question

Material Sampling – Analyzing Direct Material

You are reviewing a cost proposal, which includes an $800,200 direct material estimate. After initial examination of the proposal, you note that there are 500 material items, but you also note that 20 high-cost items account for $620,000 of the total. The remaining $180,200 is spread across 480 relatively small purchases.

Answer the following questions:

1. Examination of the 20 high-cost items (estimated at $620,000) shows that all are properly priced except one item. That item is overpriced by $20,000. What should be your objective for these 20 items?

2. After analyzing a sample of the remaining 480 items, you find that the sample is overpriced by six percent. Using this six percent decrement factor, what cost should you estimate for those items? Remember that the average sample item cost is 106 percent of what it ought to be.

3. Given your answers to Questions 1 and 2, what should you estimate for total material cost?

Answer 1

Answer:

1)

These are to be checked thoroughly for its quantity and price since these high cost items are contributing 78% of total costs for 4% of total number of items. The actual requirement of these items should be determined properly and the produduction process of the same should be properly scrutenized to ensure that no wastage or loss occurs in these items. Any item overpriced should be corrected as it will make a huge difference to the total costs.

2)

Remaining items are only 22% of total costs for 96% items. These are to be sample checked and the actual quantity and price should be ensured. The sample taken indicated that these are overpriced by 6%. This increase doesn’t justify full checking; however the proposal should be asked for correction for over-charged items, with a note that all remaining items should be rechecked for its quantity and price.    

Using this 6% decrement factor, the cost we estimate for those items will be $170,000.

3)

Total material cost would be $ 170000 + $ 600000 = $ 770000

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