This question provides both demand of raw material and usage of raw material for the purpose of ANNUAL REQUIREMENT(A).
ICAI has used demand of raw material as ANNUAL REQUIREMENT(A).
Q.Is it correct and give reason. What should I do when both demand and usage is given to calculate ANNUAL REQUIREMENT(A)
Q. Why should not I use usage of raw material as ANNUAL REQUIREMENT for these type of questions.
In page 2.21 in SM,
Annual requirement (A) = It represents the demand for Raw material or Input for a year.
If it is clear cut given that an X amount of raw materials are consumed annually then we consider that.
if not, Average/normal usage is considered.
In this case, the latter will apply, we don’t take Annual market demand.
So, the question has fault I believe, because I have solved 2-3 similar question like that and every time usage was considered.
Now what should I do if this comes in exam because somewhere ICAI HAS TAKEN DEMAND AND SOMEWHERE USAGE for the purpose of ANNUAL REQUIREMENT
Always consider based on qty demanded not usage based….usage comes after deciding how many units do we need in a year…so usage is irrelevant in determining EOQ qty. Please write back if you still don’t understand.
I don’t understand what you said.
Basically I am asking ICAI Point of view.
Praharshaa you are saying it is correct on the other hand Gaurav is saying it is not.
Why???????
Vineet just to be clear i am also CA INTER student, ofcourse a teacher or expert will be able to advise you better.
Just wanted to pen down my opinion, that the market demand approach of ICAI was from nov 2018, and now if you find any similar question using ‘usage approach’ that is after nov 2018, follow that (latest one).
My contention was based on solution of Namit Arora sir, i will attach the link.
If you find any strong advice or solution to this query, do share with us too
Thank you so much Gaurav.
All the best.
Always consider based on qty demanded not usage based….usage comes after deciding how many units do we need in a year…so usage is irrelevant in determining EOQ qty.
There are questions where ICAI has taken usage as ANNUAL REQUIREMENT
And there are questions where ICAI has also used DEMAND as ANNUAL REQUIREMENT
what should I do…….
Is there anything wrong if I use USAGE AS ANNUAL REQUIREMENT in examination.
Please comment Praharshaa
Hi Vineet, EOQ gives us the optimum no. of units of X to be added to inventory of a firm. So, while carrying out it’s calculation, there is no reason to consider usage of that firm because while figuring out EOQ at the start of year we forecast annual requirement of X .
Usage is just like ki ab apna usage pattern kaisa rehta hai during the year..kabhi jada kabhi kam kabhi normal…vo helpful hai levels nikalne ke liye but year ke start mein hum eoq based on annual requirement forecasted kri hai uspr nikalenge.
In simple words, ANNUAL REQUIREMENT is annual purchase
And USUAGE IS CONSUMPTION.
PURCHASE IS NOT ALWAYS EQUAL TO USUAGE.
When the question states annual purchase then use it for the calculation of annual requirement only otherwise, take Usage only.
When nothing specifically mentioned in the question take it is assumed\presumed that annual purchase is usage, which is not always true.