2. Calculating Unit Cost (Part 1)

Question 1

What is a products cost card?

Answer 1

A cost card is a record that lists all the costs associated with making a product

Question 2

How can we split cost cards into two key components?

Answer 2

We can split the costs between direct costs (the top half) and indirect costs (the bottom half)
Combined they will give the production cost

Question 3

With regards to calculating the the production cost of one unit of our product, what part of the costs will we look at in this chapter?

Answer 3

Identify and calculate direct materials costs and direct labour costs per unit of our product

Question 4

How do we treat direct production staff pay with regards to classification as direct or indirect?

Answer 4

• The basic pay of direct production workers will always be considered as direct.
• If staff work overtime and are paid an overtime premium, the overtime premium paid will be considered to be indirect unless the cost-unit is a ‘job’ (a bespoke service offered to a specific customer), where it would then be considered to be direct if worked at the request of the customer (e.g. in order for the job to be completed early), as it is directly traceable to that cost unit (the job)
• Bonuses paid to staff will also usually be considered to be indirect (as they are not directly traceable to individual cost units).
• Idle time, where staff are waiting around not working directly on product, is an indirect cost

Question 5

What are the three different approaches to valuing the materials issued to production?

Answer 5

• First In First Out (FIFO)
• Last In First Out (LIFO)
• Average cost (AVCO)

Question 6

Describe the FIFO method for valuing the materials issued to production

Answer 6

FIFO assumes that materials are issued out of inventory in the order in which they were delivered into inventory - items delivered earliest are issued out first

Question 7

Outline the method for calculating closing inventory value, total value of issues and profit using FIFO

Answer 7

METHOD

Question 8

Outline the advantages (3) and disadvantages (3) of the FIFO method for valuing the materials issued to production

Answer 8

Question 9

Describe the LIFO method for valuing the materials issued to production

Answer 9

LIFO assumes that materials are issued out of inventory in the reverse order from that in which they were delivered - items delivered most recent are issued out first

Question 10

Outline the method for calculating closing inventory value, total value of issues and profit using LIFO

Answer 10

METHOD

Question 11

Outline the advantages (2) and disadvantages (3) of the LIFO method for valuing the materials issued to production

Answer 11

Question 12

What are the two types of average cost (AVCO) methods?

Answer 12

• Cumulative weighted average pricing
• Periodic weighted average pricing

Question 13

In an exam which would you use in a given scenario?

Answer 13

If asked to calculate closing inventory value or value of issue using an average costing method, assume that you are to use the cumulative weighted average pricing unless told otherwise. The question will make specific reference to ‘periodic’

Unless stated to the contrary, assume the cumulative method is required in an exam question.

Question 14

Outline the method for calculating closing inventory value, total value of issues and profit using cumulative weighted average pricing

Answer 14

METHOD

Question 15

Outline the method for calculating closing inventory value, total value of issues and profit using periodic weighted average pricing

Answer 15

METHOD