Page 228 - F1 Integrated Workbook STUDENT 2018

Chaptter 14

Exxampple 1

Thee following costs relaate to a unit of inventoory:

Cosst of raw mmaterials $1.00

Direect labour $0 0.50

Durring the yeear $60,0000 of fixed pproduction overheadss were incuurred. 8,0000
unitts were prooduced during the yeear which is lower thaan the normmal level oof
10,000 units. This was aas a result t of a fault wwith some machineryy which
resulted in 2,0000 units hhaving to bbe scrapped.

At tthe year-ennd, 700 unnits are in cclosing inveentory.

Reqquired:

Whhat is the ccost of cloosing inveentory?

Sollution

Prooduction ovverheads sshould be aallocated bbased on thhe normal level of
prooduction, i.ee. 10,000 uunits.

$600,000/10,000 units = $6.00 per unit.

Cosst per unit:

$
Raww materialss 1.000
Direect labour 0.500
Prooduction ovverheads 6.000
––––
Tottal cost perr unit 7.500
Cosst of 700 uunits in clossing inventtory = 700 × $7.50 = $5,250.

218