Calculating Unit Costs (Part 1)

Question 1

Which of the following would normally be classified as a direct labour cost?

A -The basic pay of production line staff
B - Overtime premiums paid – if the overtime is not worked at the specific request of a customer
C- The basic pay of production line supervisors
D - Idle time payments to production line staff

Answer 1

A: The basic pay of production line staff
If overtime is worked at the specific request of a customer then it is treated as a direct labour cost attributable to that job. However, the premium paid for general overtime not required for a specific job is generally treated as an indirect cost.

Question 2

A manufacturing firm is very busy and overtime is being worked.
Requirement
The amount of overtime premium paid to production line workers would normally be classed as
A - factory overheads
B - part of prime cost
C - direct labour costs
D - administrative overheads

Answer 2

A - factory overheads

Overtime premium payments are always classed as factory overheads unless the overtime is worked at the specific request of a customer (in order to complete the specific job more quickly) or worked regularly by a production department in the normal course of operations.

Question 3

Wage payments for idle time of direct workers within a production department are classified as:

A - direct labour cost
B - prime cost
C - administration overhead
D - factory overhead

Answer 3

D - factory overhead
Idle time is usually treated as an overhead because it cannot be identified with a specific cost unit. In this case the cost is incurred within the production department and is therefore a factory overhead

Question 4

Grant Leeve is an assembly worker in the main assembly plant of Gonnaway Co.

His gross pay for the week is as follows:

Basic pay for normal hours: 38 hours at £5 p/h = £190
Overtime: 8 hours at time and a half = £60
Gross pay = £250

Although he is paid for normal hours in full, Grant had been idle for 10 hours during the week because of the absence of any output from the machining department

The indirect labour costs that are included in his total gross pay of £250 are

A - £20
B - £50
C - £70
D - £110

Answer 4

C - £70
The indirect labour costs are made up of idle time costs and overtime premiums.

Idle time costs = 10 hours x £5 per hour = £50

Overtime premium = 1/2 x £5 = £2.50 per hour
£2.50 x 8 hours = £20

Therefore, indirect labour costs = £50 + £20 = £70

Question 5

Which of the following would be classified as indirect costs for a food product manufacturer?

1) Food label on a tin of beans
2) Maintenance materials used to repair production machinery
3) Cleaner’s wages in the factory

A - 1 only
B - 2 and 3 only
C - All of them
D - None of them

Answer 5

B - 2 and 3 only
Labels can be identified with a specific cost unit and form a part of the product. Therefore, the cost of food labels is a direct cost.
Maintenance and cleaning wages 2 and 3 are indirect costs because they cannot be specifically identified with a specific cost unit.

Question 6

A small engineering company that makes generators specifically to customers’ own designs has had to purchase some special tools for a particular job. The tools will have no further use after the work has been completed and will be scrapped.

Which of the following options is the correct cost classification for these tools?

A - Variable production overheads
B - Fixed production overheads
C - Indirect expenses
D - Direct expenses

Answer 6

D - Direct expenses

The cost of the tools is a direct cost of the job because it can be specifically identified with the job.

Question 7

Which of the following statements about a direct cost are correct?

1) A direct cost can be traced in full to the product, service or department that is being costed.
2) A cost that is a direct cost of one cost object might be an indirect cost of a different cost object.
3) A direct cost might also be referred to as an overhead cost.
4) Expenditure on direct costs will probably vary every period.

A - 1 and 2 only
B - 1 and 3 only
C - 1, 2 and 4 only
D - All of them

Answer 7

C - 1, 2 and 4 only

Statement 1 is correct. Direct costs are specific and traceable to the relevant product, service or
department.

Statement 2 is correct. For example, a departmental manager’s salary is a direct cost of the department but it is an indirect cost of the individual cost units passing through the department.

Statement 3 refers to an indirect cost as it cannot be specifically attributed

Statement 4 is correct. It is likely that if activity changes so will the expenditure on direct costs, as direct costs are usually costs such as materials, labour and other direct expenses.

Question 8

Which of the statements is is true?

A - Total direct costs are always greater than total indirect costs.
B - Indirect costs are alternatively called overheads.
C - Fixed costs per unit are the same at all levels of production.
D - A direct cost will always be a variable cost.

Answer 8

B - Indirect costs are alternatively called overheads

Question 9

A shop carries out repairs on customers’ electrical items, eg, televisions, DVD players.

From the point of view of costing individual repair jobs, identify the most appropriate description for each cost.

Repair person paid a fixed wage per week
A - Direct and variable
B - Direct and fixed
C - Indirect and fixed

Replacement electrical components:
D - Direct and variable
E - Direct and fixed
F - Indirect and fixed

Rent of the repair shop:
G - DIrect and variable
H - Direct and fixed
I - Indirect and fixed

Answer 9

B, D, I

B: The repair person’s wages can be analysed between specific jobs and accordingly would usually be classified as a direct cost. The cost is fixed because it does not vary with the level of activity

D: Direct and variable: The cost of electrical components can be traced as a direct cost of each job and the cost will increase as the level of activity increases

I: Indirect and fixed: The rent of the repair shop is an indirect cost because it cannot be traced to a specific repair job. It is a fixed cost because it does not vary with the level of activity.

Question 10

A company pays £1 per unit as a royalty to the designer of a product which it manufactures and sells.

When costing units of the company’s product, the royalty charge is classified as a:
A - direct expense
B - production overhead
C - administrative overhead
D - selling overhead

Answer 10

A - a direct expense

The royalty cost can be traced in full to units of the company’s product. Therefore, it is a direct expense

Question 11

Cigar Co had the following entries in its materials control account:

Opening inventory: £13,000
Closing inventory: £18,000
Deliveries from suppliers: £250,000
Returns to suppliers: £25,000

The value of the issue of materials to production is:

A - £220,000
B - £225,000
C - £230,000
D - £270,000

Answer 11

A - £220,000

T-Account:
DR:
Opening inventories £13,000
Deliveries £250,000
———
£263,000

CR:
Returns £25,000
Issue to production £220,000 (balancing)
Closing inventory £18,000
——-
£263,000

Question 12

Which three of the following are recognised and possibly acceptable methods of valuing inventory?

A - First in, Last out (FILO)
B - First in, First out (FIFO)
C - Last in, First out (LIFO)
D - Future anticipated cost
E - Standard cost

Answer 12

B, C, E
FIFO, LIFO, Standard cost

Question 13

A wholesaler had an opening inventory of 750 units of geronimo valued at £80 each on 1 February.
The following receipts and sales were recorded during February.

4 Feb: Received 180 units @ £85 per unit
18 Feb: Received 90 units @ £90 per unit
24 Feb: Sold 852 units @ £110 per unit

Using FIFO, what was the cost of the units of geronimo sold on 24 Feb?
A - £68,160
B - £68,670
C - £69,960
D - £93,720

Answer 13

B - £68,670

The FIFO method uses the cost of the older batches first

Cost of units sold on 24 February:
750 units @ £80 = £60,000
102 units @ £85 = £8,670
—-
852 units = £68,670

Question 14

A wholesaler had an opening inventory of 750 units of product A valued at £80 each on 1 February.
The following receipts and sales were recorded during February.

4 Feb: Received 180 units @ £85 per unit
18 Feb: Received 90 units @ £90 per unit
24 Feb: Sold 852 units @ £110 per unit

Using the LIFO valuation method (to the nearest £), what was the gross profit earned from the product A sold on 24 February?

A - £17,040
B - £23,760
C - £69,960
D - £93,720

Answer 14

B - £23,760

The LIFO method uses the cost of the most recent batches first.

Cost of units sold on 24 Feb:
90 product A @ £90 = £8,100
180 product A @ £85 = £15,300
582 product A @ £80 = £46,560
———
852 units = £69,960

Sales revenue = 852 units x £110 = £93,720
Less cost of units sold (69,960)
——
Gross profit = £23,760

Question 15

A wholesaler had an opening inventory of 330 units of mavis valued at £75 each on 1 February.
The following receipts and sales were recorded during February

4 Feb: Received 180 units @ £85 per unit
18 Feb: Received 90 units @ £90 per unit
24 Feb: Sold 432 units @ £110 per unit

Using the cumulative weighted average cost method of valuation, what was the cost of the mavis sold on 24 February?

A - £33,696
B - £34,560
C - £35,280
D - £38,880

Answer 15

A - £33,696

30 units @ £75 = 24,750
180 units @ £80 = 14,400
90 units @ £85 = 7,650
600 = 46,800

Weighted average cost per unit = £46,800/600
= £78.00
Cost of units sold on 24 February = £78.00 × 432 units
= £33,696

Question 16

At the beginning of week 15 there were 200 units of pixie held in the stores. 80 of these had been purchased for £7.55 each in week 14 and 120 had been purchased for £7.91 each in week 13.

On day 3 of week 15 a further 60 pixies were received into stores at a purchase cost of £7.96 each.

The only issue of pixies occurred on day 4 of week 15, when 75 pixies were issued to production.

Using the LIFO valuation method, what was the total cost of the pixies issued on day 4?

A - £566.25
B - £590.85
C - £593.25
D - £597.00

Answer 16

B - £590.85

60 pixies received on day 3 of week 15 @ £7.96 = 477.60
15 pixies received in week 14 @ £7.55 = 113.25
———–
75 = 590.85

Question 17

At the beginning of week 12 there were 500 units of component J held in the stores. 200 of these components had been purchased for £6.25 each in week 11 and 300 had been purchased for £6.50 each in week 10.

On day 3 of week 12 a further 150 components were received into stores at a purchase cost of £6.60 each.

The only issue of component J occurred on day 4 of week 12, when 90 units were issued to production.

Using the FIFO valuation method, what was the value of the closing inventory of component J at the end of week 12?

A - £585
B - £594
C - £3,596
D - £3,605

Answer 17

D - £3,605

Components issued on day 4 = 90 from week 10 receipts

Closing inventory week 12:

Remaining 210 components from week 10 @ £6.50 = 1,365
200 components from week 11 @ £6.25 = 1,250
150 components from week 12 @ £6.60 = 990
——
560 = 3,605

Question 18

In a period of falling prices, four students have recorded the cost of sales of commodity X. One student has used the FIFO method of inventory valuation and one has used the LIFO method. The other two students have used an average cost method, using the periodic and cumulative weighted average basis respectively.

The gross profits recorded by the students were as follows:
A = 12,600
B = 13,400
C = 14,500
D = 15,230

Which student was using the LIFO method of inventory valuation?

Answer 18

Student D:

The LIFO method charges the latest prices paid to cost of sales. In a period of falling prices the latest prices will be the lowest prices. Therefore, the student using the LIFO method would record the lowest cost of sales and the highest gross profit.

Question 19

Which of the following are true?

1) With FIFO, the inventory valuation will be close to replacement cost.
2) With LIFO, inventories are issued at a price which is close to the current market value.
3) Decision-making can be difficult with both FIFO and LIFO because of the variations in prices.
4) A disadvantage of the weighted average method of inventory valuation is that the resulting issue price is rarely an actual price that has been paid and it may be calculated to several decimal places.

A - 1 and 2 only
B - 1, 2 and 4 only
C - 1 and 3 only
D - 1, 2, 3 and 4

Answer 19

D - 1, 2, 3 and 4
With FIFO, the oldest prices are charged first to cost of sales and inventory is valued at the latest prices paid, which will be close to replacement cost.
With LIFO, the most recent prices are charged first to cost of sales, therefore inventories are issued at a price which is close to the current market value

Question 20

For many years Sunny has faced rising prices on his main raw material. He maintains inventories of this material at a constant volume. He uses the FIFO method of inventory valuation.

If he had used the LIFO method this would have resulted in:

A - higher cost of sales and lower inventory value
B - higher cost of sales and higher inventory value
C - lower cost of sales and lower inventory value
D - lower cost of sales and higher inventory value

Answer 20

A - higher cost of sales and lower inventory value

The LIFO method charges the latest prices paid to cost of sales. In a period of rising prices the cost of sales will be higher than with FIFO. The remaining items in inventory will be valued at the older, lower prices.

Question 21

G Ltd makes the following purchases and sales:

1 Jan: Purchases 4,000 units for £10,000
31 Jan: Purchases 1,000 units for £2,000
15 Feb: Sales 3,000 units for £13,000
28 Feb: Purchases 1,500 units for £3,750
14 March: Sales 500 units for £1,200

At 31 March which of the following closing inventory valuations using FIFO is correct?
A - £8,000
B - £7,500
C - £7,000
D - £6,500

At 31 March which of the following closing inventory valuations using LIFO is correct?
E - £6,500
F - £7,000
G - £7,500
H - £8,000

Answer 21

C - £7,000
G - £7,500

(Do the workings for this one)

Question 22

With all average price systems where it is required to keep prices up to date, the average price must be re-calculated:

A - each time an issue is made
B - each accounting period
C - each time a purchase is made
D - each time an inventory count is carried out

Answer 22

C - each time a purchase is made

Each time a purchase is made this is likely to change the average price of the items held in inventory.
If it is required to keep prices up to date, the average price must be re-calculated each time a purchase is made at a different price

Question 23

A wholesaler buys and resells a range of items, one of which is the Kay. Each Kay is resold for £3 per unit and opening inventory for June was 400 units valued at £1.80 per unit. The wholesaler purchased a further 600 units on 10 June for £2.10 per unit, and sold 800 units on 25 June.

What gross profit would be recorded for the sale of Kays during June, using the FIFO method of inventory valuation?

A £780
B £960
C £840
D £1,560

What gross profit would be recorded for the sale of Kays during June, using the LIFO method of inventory valuation?

E £840
F £720
G £780
H £1,620

Answer 23

C - £840

Sales value £3 × 800 2,400
Less cost of sales:
400 × £1.80 = 720
400 × £2.10 = 840
(1,560)
———
Gross profit = 840

G - £780

Sales value £3 × 800 2,400
Less cost of sales:
600 × £2.10 = 1,260
200 × £1.80 = 360
(1,620)
———-
Gross profit = 780