AAT L2 Elements of Costing 4 — Questions and Answers
Question 1: Inventory valuation using FIFO (First In, First Out) assumes that:
- The most recently purchased items are issued first
- The oldest items in stock are issued first (Correct answer)
- All items are valued at the average cost
- Items are issued at their replacement cost
Correct answer: The oldest items in stock are issued first
Under FIFO, it is assumed that the first items purchased (oldest stock) are the first to be issued for production or sale. Closing inventory is therefore valued at the most recent purchase prices.
Question 2: Using AVCO (Average Cost) method, if a business has 100 units at £5 and purchases 200 units at £8, what is the weighted average cost per unit?
- £6.50
- £7.00 (Correct answer)
- £6.00
- £8.00
Correct answer: £7.00
Weighted average cost = Total cost / Total units = (100 × £5 + 200 × £8) / (100 + 200) = (£500 + £1,600) / 300 = £2,100 / 300 = £7.00 per unit.
Question 3: Overtime premium paid to production workers is usually treated as:
- A direct labour cost
- A production overhead (indirect cost) (Correct answer)
- A selling expense
- An administrative overhead
Correct answer: A production overhead (indirect cost)
The basic rate element of overtime is treated as direct labour, but the overtime premium (the extra amount above the basic rate) is usually classified as a production overhead. This is because the overtime may be due to general demand rather than a specific job.
Question 4: A cost unit is:
- A department to which costs are charged
- A unit of product or service to which costs are attributed (Correct answer)
- The total cost of running a business
- A budget for the next financial year
Correct answer: A unit of product or service to which costs are attributed
A cost unit is a unit of product or service for which costs are ascertained. It could be a single product, a batch of products, a tonne of material, a passenger-mile, or any other measurable unit of output to which costs can be related.
Question 5: The LIFO (Last In, First Out) inventory valuation method:
- Is the standard method used under UK GAAP and IFRS
- Issues the most recent purchases first, meaning closing inventory is valued at older prices (Correct answer)
- Always gives the same result as FIFO
- Is the same as the weighted average method
Correct answer: Issues the most recent purchases first, meaning closing inventory is valued at older prices
Under LIFO, the most recently purchased items are assumed to be issued first. This means closing inventory is valued at the oldest (usually lower) prices. Note: LIFO is NOT permitted under UK GAAP (FRS 102) or IFRS, but AAT students should understand the concept.
Question 6: Production overheads include:
- Sales team commission
- Managing director's company car
- Factory heating and lighting (Correct answer)
- Advertising costs
Correct answer: Factory heating and lighting
Production overheads are indirect costs related to the manufacturing process. Factory heating and lighting cannot be traced to individual products but are necessary for production. Sales commission and advertising are selling overheads; the MD's car is an administrative overhead.
AAT L2 Elements of Costing 4
Inventory valuation using FIFO (First In, First Out) assumes that: