Elements of Costing Flashcards
6 cards from real AAT L2 practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Elements of Costing flashcards as text
Inventory valuation using FIFO (First In, First Out) assumes that:
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.
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?
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.
Overtime premium paid to production workers is usually treated as:
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.
A cost unit is:
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.
The LIFO (Last In, First Out) inventory valuation method:
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.
Production overheads include:
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.