AAT L2 Elements of Costing 4

Question 1

Inventory valuation using FIFO (First In, First Out) assumes that:

Accepted Answer

The oldest items in stock are issued first

Answer

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?

Accepted Answer

£7.00

Answer

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:

Accepted Answer

A production overhead (indirect cost)

Answer

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:

Accepted Answer

A unit of product or service to which costs are attributed

Answer

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:

Accepted Answer

Issues the most recent purchases first, meaning closing inventory is valued at older prices

Answer

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.

AAT Level 2 Practice Test

AAT Level 2 Practice Test

AAT L2 Elements of Costing 4