Material & Labour Costs; Inventory Control

Question 1

Explain the term direct materials

Answer 1

Materials directly used in production of product/ directly linked to the product
E.g. all the raw materials specifically purchased for production

Question 2

Explain the term indirect materials

Answer 2

Materials not directly related to the production process of the product/ not directly linked to the production of the product. It’s an expense which is included in the overhead cos of the manufacturing of the product or in the costs of goods sold
E.g. lubricants & machines

Question 3

Explain the term direct labour

Answer 3

Labour involved in the hands on production of goods

Question 4

Explain the term indirect labour

Answer 4

Labour which doesn’t directly link to the manufacturing of the product

Question 5

Explain the term net realizable value

Answer 5

Whatever amount inventory could be sold/ realised for less any expenses/ costs incurred in getting the inventory into a saleable condition

If net realizabe value is higher than the cost of inventory, inventory should remain at the cost value; however if the NRV is lower than the cost value then the NRV should be used, because of prudence concept

Question 6

Explain the prudence concept

Answer 6

Inventory should not be valued overstated and gross profit should not be overstated

Question 7

Explain fifo

Answer 7

Oldest inventory items are recorded as sold first, meaning the cost associated with the inventory that was purchases first is the cost accounted for first

Question 8

Explain avco

Answer 8

Uses the weighted-average of all inventory purchased at a certain period to calculate the value of closing inventory

Question 9

What are the advantages of of fifo & avco

Answer 9

Fifo:
- gives realistic views for closing inventory, as current prices are used
- it is an acceptable method of valuing inventory for tax purposes

Avco:
- being average, irons out effects of price changes on costs of production and sales

Question 10

What are the disadvantages of fifo & avco

Answer 10

Fifo:
Material issues are not priced realistically, especially in times of big price increases

Avco;
Issue prices may not represent any actual prices paid for materials