9706 · 2.1.1
Materials and labour — FAQ
Frequently asked questions for 9706 Materials and labour. Direct answers first, then deeper explanation — then practise with marking.
Do I recalculate the average cost after every transaction (purchases and issues) when using AVCO?
No, this is a common error. You only recalculate the weighted average cost per unit after a purchase (receipt) of new inventory. All issues made before the next purchase are valued at the existing weighted average cost.
If a business physically uses its oldest stock first, does it have to use the FIFO method for accounting?
Not necessarily. The accounting choice (FIFO or AVCO) is an assumption about cost flow, not a rule about physical flow. A business can choose either method regardless of how it physically manages its inventory, as long as the chosen method is applied consistently in accordance with accounting standards.
Is overtime premium always an indirect labour cost?
Not always, although it is the most common treatment. If overtime is worked to meet a general increase in production demand, the premium (the extra amount paid above the basic rate) is treated as an indirect cost/production overhead. However, if the overtime is worked specifically to complete an urgent job for a particular customer at their request, the entire overtime cost can be treated as a direct labour cost for that specific job.