Chapter 3 - Materials and inventory

Question 1

What are the three main types of inventory identified?

Answer 1

1. Raw materials
2. Work in progress (WIP)
3. Finished goods

Question 2

What are direct materials?

Answer 2

Direct materials are the raw materials used to produce one cost unit and can clearly be identified in the product.

e.g. wood, foam cushion, nails for a chair.

Question 3

What are indirect materials?

Answer 3

indirect materials are used in the production process, but cannot be attributed to an individual product.

e.g. Hydraulic oil used in production machinery.

Question 4

What is direct labour?

Answer 4

Direct labour is the labour that can be directly attributed to the production of a product.

e.g. A worker inserting rivets, or applying paint etc.

Question 5

What is indirect labour?

Answer 5

Labour that cannot be directly attributed to one cost unit.

e.g. A shift supervisor, administration workers, distribution staff.

Question 6

What is the prime cost?

Answer 6

The prime cost is the cost of direct materials and direct labour.

Question 7

Production cycle.

What are raw materials, work in progress, finished goods

Answer 7

Raw materials:
This is the raw materials to be used in the production process in storage awaiting to be used.

Work in progress:
Materials issued to the production cost centre that have been part produced, but are not the finished product as yet.

Finished goods:
A finished product that has been completed through the production line and sent back to a warehouse for storage awaiting sale.

Question 8

What 3 ways are commonly used to value raw materials?

Answer 8

1. FIFO - first in first out
   e. g. milk, meat and other perishables.
2. LIFO - last in first out
   e. g. stationary, tech and other non perishable good.
3. AVCO - Average costing.
   e. g. sand at a builders merchant.

Question 9

what 3 methods are used to absorb overhead costs?

Answer 9

> Unit basis
A portion of overheads costs is attached to each unit produced.

> Labour rate basis
Overheads are absorbed as a rate per direct labour hour.

> Machine hour basis
Overheads are absorbed as rate per machine hour.

Question 10

Finish the equation:

for retail
Cost of sales =

Answer 10

Cost of sales = opening inventory + purchases - closing inventory