unit 16: material + labor costs Flashcards
(6 cards)
explain direct + indirect materials
- direct materials= materials directly related to the cost of the unit
- indirect materials= materials used in manufacturing processes that can’t be traced to an individual product or job
explain direct + indirect labor
- direct labor= labor that converts direct materials into finished goods; its cots include wages and/or salaries of all laborers in the factory directly taking part in the production of the finished product
- indirect labor= the cost of any labor that supports the production process but which is not directly involved in the active conversion of materials into finished products
define the principle of valuing inventory
inventory should be valued at the lower of cost or net realisable value(NRV)
net realisable value= amount that can be obtained by selling an asset after deducting expenses incurred to get it in a saleable condition and actually completing the sale
explain the methods of inventory valuation
First In First Out (FIFO)
- method is based on the assumption that materials which are purchased first are issued first. uses the price of the first batch on all issues until all units from this batch have been issued.
Average Cost ( AvCo)
- calculates the cost of ending inventory and the cost of goods sold for a period on the basis of weighted average cost per unit of inventory
explain the advantages and disadvantages of FIFO
Advs
- valuation of inventory and codt of finshed goods is consistent and realistic
- accepatble method of valuing inventory for tax purposes
Disadvs
- usually more than one price has to be adopted for a particular issue
- the effect of current market pricesis not revealed in issues when prices are rising
explain the advantages and disadvantages of AvCo
Advs
- easy to calculate
- it using averages irons out effects of price changes on cost of production
Disadvs
- as it is not the actual price, it’s not realistic
- when prices change frequently, it’s inconvenient and complex
