Material costing : It is the process of determining the cost of material used in production of goods and services.

(1) Total Material cost = Purchasing cost of material + Ordering cost + Carrying cost

(2) Purchasing cost of material = Annual demand of raw material × Cost of raw material per unit

(3) Annual demand of raw material = Annual finished goods produced × Raw material required per unit of finished good

(4) Ordering cost : The cost which are associated with the ordering of material. It includes cost of staff posted for ordering of goods, expenses incurred on transportation, inspection expenses of incoming materials, handling cost of material etc.

(a) Annual ordering cost = No of order × Cost per order

(b) No of order = \( \frac{\text{Annual demand of raw material}}{\text{Order Quantity}} \)

(5) Carrying cost : The cost of holding the inventories. It includes the cost of capital invested in inventories, cost of storage, insurance, Pilferage etc. Annual carrying cost can be calculated using the following formula :

\[\left( \frac{\text{Order Quantity}}{2} + \text{Safety Stock} \right) \times \text{Carrying Cost per Unit per Annum}\]

(6) Re-order level : Re-order level is the quantity of material fixed in advance at which level, the stock should be re-ordered.

Re-order level = Maximum usage × Maximum lead time

(7) Maximum stock level : Maximum stock level is the maximum limit up to which the stock can be stored at any time.

Maximum stock level = (Re-order level + Re-order Quantity) - (Minimum usage × Minimum lead time)

(8) Minimum stock level : Minimum stock level is the minimum quantity that must be retained in stock. It is also known as Safety stock.

Minimum stock level = Re-order level - (Average usage × Average lead time)

(9) Average stock level can be calculated using the following formula :

\[\frac{\text{Minimum Stock Level} + \text{Maximum Stock Level}}{2}\]

(10) Danger level = Emergency period × Average usage

(11) Inventory turnover ratio = \( \frac{\text{Raw Material consumed}}{\text{Average stock of raw material}} \)

Note: High inventory turnover ratio is best.

(12) Economic order Quantity : It is the size of the order for which both ordering and carrying cost are minimum. Economic order Quantity can be calculated using the following formula :

\[ EOQ = \sqrt{\frac{2 \times \text{Annual Demand of Raw Material} \times \text{Ordering Cost per Order}}{\text{Carrying Cost per unit per Annum}}}\]

(13) Method of inventory valuation :

(a) First in - First out method (FIFO method)

(b) Last in - First out method (LIFO method)

(c) Simple average price method

(d) Weighted average price method

(e) Standard price method