Materials and labour — common mistakes

In an exam question, always deduct trade discounts from the list price to find the cost of materials. Settlement (cash) discounts should be ignored when calculating the cost of inventory; they are a financing item recorded in the income statement.

Practice creating stores ledger cards with columns for Receipts, Issues, and Balance. For each transaction, update the balance immediately. For AVCO, remember to calculate a new average price only after a receipt, and use that price for all subsequent issues until the next receipt.

When calculating the value of an issue using FIFO, be systematic. Use a stores ledger card format to track quantities and prices. Ensure you completely use up the quantity of the oldest price batch before moving to the next price batch for a single issue.

A common mistake is to recalculate the average after an issue. Remember, the weighted average cost is only recalculated after a receipt of goods. For maximum accuracy, avoid rounding the average cost per unit during intermediate calculations.

Carefully read the question to determine if labour costs are direct or indirect. This distinction is crucial for correctly calculating the prime cost and total production cost. For overtime, the basic pay element for all hours worked is usually direct, while the premium element is usually indirect.

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.

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.

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.