Material control and Reporting Direct Material Cost

July 2021

Tests your knowledge of material control and reporting direct material cost, with out latest Test Bank.

Q1: Which IAS/IFRS deals with the treatment of Inventories?

Q2: How does the International Financial Reporting Standard referred to in Q1 state how inventories are to be valued?

Q3: Name the two methods of valuation recommended by the standard?

Q4: Name the method of valuation outlawed by the standard?

Q5: When establishing material control levels for each item in the inventory in a system of inventory control what three levels are usually set?

Q6: From the following information relating to a single item of inventory calculate the Minimum Level also referred to as the Buffer Level. Usage per month: maximum 1200 units, minimum 900 units per month. Estimated delivery period: maximum four months, minimum two months.

Management have set the Re-Order Level at 4,400 Units.

Q7: The Maximum Level is said to be that level to which inventories are normally allowed to rise and if such levels are constantly exceeded there is the risk of tying up excess what?

Q8: The following information relates to an inventory item. 6,000 units are required annually and the expenses relating to start up costs are £25 per order and carrying costs are £0.20 per unit per annum. Orders can be arranged in lots of 600, 1200, 2000, 3000 or 6000.

Calculate the Economic Order Quantity EOQ and the number of orders to be placed per annum.

Q9: Batcraft Ltd uses rubber grips in the production of its standard club short-handled bat. At the beginning of January it had 400 grips in stock at a cost of £4.00 per grip. During February it received a delivery of 200 grips for £812.00. During the remainder of February it issued 300 grips to production and in March a further 200 grips were issued to production.

In April 400 grips were received at a cost of £1640.00

Determine using the FIFO method of valuation the value of the closing inventory as at 30 April.

Q10: Using the above information determine the value of the closing inventory at 30 April based on the AVCO method of valuation.

Q11: Noble Fertilizers produce a liquid fertilizer that passes through three processes.

In January, 4000 litres of direct material entered process A where the anticipated normal loss was 2% of input. The output to process B was 3850 litres. Calculate the Abnormal Loss in units for the month.

Q12: Considering the information above if output to process B had been 3950 litres. Calculate the Abnormal Gain in units for the month.

Q13: Batcraft uses a system of standard costing in the production of its cricket bats. They pass through three separate cost centres: Machining, Finishing and Packing. In January 2021, they planned to produce 500 junior size 3 club bats.

Each unit of production requires five units of direct material at £10.00 per unit issued to the Machining cost centre. During the month 550 bats were machined and transferred to finishing and 2805 units of direct material were used at a cost of £28,611.

Calculate the Direct Material Cost Variance for the month.

Q14: Calculate the Direct Material Usage Variance for the month.

Q15: Calculate the Direct Material Price Variance for the month.

• Dr Philip E Dunn is a freelance author and technical editor for Kaplan and Osborne Books


Q1: IAS 2 Inventories
Q2: At the lower of cost and net realisable value
Q5: Maximum, Minimum (buffer) and the Re-Order Level
Q6: 1250 Units
Q7: Working Capital
Q8: 1225 units, approximately five orders per annum
Q9: £2046
Q10: £2042
Q11: 70 litres
Q12: 30 litres
Q13: £1,11 Adverse
Q14: £550 Adverse
Q15: £561 Adverse