Skip to content
MarkSchemeMarkScheme
Sign up — no card

9706 · 2.1.1

Materials and labour — practice questions

Practice and worked examples for 9706 Materials and labour. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

A business has the following inventory transactions for Material X in March:

  • Mar 1: Opening inventory of 100 units @ $4.00 each.
  • Mar 10: Purchase of 150 units @ $5.00 each.
  • Mar 22: Issue of 180 units to production.

Calculate the value of the closing inventory at March 31 using (a) FIFO and (b) AVCO.

Show solution outline

1. Calculate Closing Inventory Units: Closing Units = Opening Units + Purchases - Issues Closing Units = 100 + 150 - 180 = 70 units

(a) FIFO Method: First-In, First-Out means we issue the oldest stock first.

  • The issue of 180 units is made up of:
    • 100 units @ $4.00 (from opening inventory) = $400
    • 80 units @ $5.00 (from Mar 10 purchase) = $400
  • Closing inventory consists of the remaining units from the latest purchase:
    • Remaining units = 150 - 80 = 70 units
    • Value of Closing Inventory = 70 units * 5.00=∗∗5.00 = **350**

(b) AVCO (Weighted Average Cost) Method: Recalculate the average cost after each purchase.

  • After the purchase on Mar 10, calculate the new weighted average cost:
    • Total Value = (100 units * $4.00) + (150 units * $5.00) = 400+400 + 750 = 1,1501,150
    • Total Units = 100 + 150 = 250 units
    • New AVCO per unit = $1,150 / 250 units = $4.60 per unit
  • Value the issue on Mar 22 using this new average cost:
    • Value of Issue = 180 units * 4.60=4.60 = 828
  • Value the closing inventory of 70 units:
    • Value of Closing Inventory = 70 units * 4.60=∗∗4.60 = **322**
    • (Alternatively: Total Value $1,150 - Issue Value $828 = 322)322)

Worked example 2

A factory worker, John, is paid a basic rate of $12 per hour for a 40-hour week. Overtime is paid at time-and-a-half (150% of basic rate). In the first week of May, John worked 45 hours. The company treats overtime premium as an indirect cost. Calculate: (a) John's total gross wage for the week. (b) The amount to be treated as direct labour cost. (c) The amount to be treated as indirect labour cost.

Show solution outline

Step 1: Calculate Basic Pay Basic pay for a standard week is for the first 40 hours.

  • Basic Pay = 40 hours × $12/hour = $480

Step 2: Calculate Overtime Pay Overtime hours are hours worked above the standard 40 hours.

  • Overtime hours = 45 hours - 40 hours = 5 hours
  • Overtime rate = $12/hour × 1.5 = $18/hour
  • Total Overtime Pay = 5 hours × $18/hour = $90

Step 3: Calculate Total Gross Wage (a) This is the sum of basic pay and total overtime pay.

  • Total Gross Wage = 480+480 + 90 = **570∗∗570**

Step 4: Allocate to Direct and Indirect Labour Costs

  • Direct Labour Cost (b): This is the cost of all hours worked at the basic rate.

    • Direct Labour Cost = 45 hours × $12/hour = $540

  • Indirect Labour Cost (c): This is the overtime premium, which is the extra amount paid for overtime hours.

    • Overtime Premium = Overtime hours × (Overtime rate - Basic rate)
    • Overtime Premium = 5 hours × (18−18 - 12) = 5 hours × $6/hour = $30

Summary of Allocation:

  • (a) Total Gross Wage: **570∗∗570**
  • (b) Direct Labour Cost: **540∗∗540**
  • (c) Indirect Labour Cost: **30∗∗30**
  • (Check: $540 Direct + $30 Indirect = $570 Total)
Mark a 9706 question on this topicFull lessonOpen in course studio