Principles of Accounts for CSEC®

2nd edition

Answers to Chapter 10: Manufacturing and inventory

control
10.1 Manufacturing accounts
Question 1
Cost Direct Indirect
Cost of raw materials ✓
Salary of factory supervisor ✓
Lease of factory ✓
Machine depreciation ✓

Question 2
Direct costs are:
$
Cost of raw materials 112 600
Manufacturing labour 432 000
544 600

Question 3
S Ramjeet Ltd
Prime cost for the year ended 31 March 2018
$ $
Inventory of raw materials at 1 April 2017 6 200
Purchases of raw materials 21 000
Less inventory of raw materials at 31 March 2018 7 400
Cost of raw materials consumed 19 800
Direct wages 33 600
Direct costs 1 800
Prime cost 55 200

Question 4
Dorcas Ltd
Prime cost for the year ended 31 October 2018
$ $
Inventory of raw materials at 1 November 2017 16 850
Purchases of raw materials 132 400
Less inventory of raw materials at 31 October 2018 18 100
Cost of raw materials consumed 131 150
Direct wages 144 750
Prime cost 275 900
1 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
Answers to Chapter 10: Manufacturing and inventory control

Question 5
Kingdown Doors Ltd
Manufacturing account for the year ended 30 June 2018
$ $ $
Inventory of raw materials at 1 July 2017 26 000
Purchases of raw materials 132 000
Carriage inwards 1 600
133 600
Returns outwards 2 300
Net purchases 131 300
157 300
Less inventory of raw materials at 30 June 2018 24 500
Cost of raw materials consumed (a) 132 800
Direct wages 130 500
Prime cost (b) 263 300
Depreciation of factory 12 000
Factory lighting and heating 14 600
Factory supervisor’s wages 22 500
Total factory overheads (c) 49 100
Cost of production (d) 312 400

Question 6
Anderson plc
Manufacturing account for the year ended 31 March 2018
$ $ $
Inventory of raw materials at 1 April 2017 27 000
Purchases of raw materials 216 500
Returns outwards 16 300
Net purchases 200 200
227 200
Less inventory of raw materials at 31 March 2018 28 600
Cost of raw materials consumed 198 600
Direct wages 150 400
Prime cost 349 000
Factory insurance 3 520
Factory rent 42 000
Factory power 434 300
Factory salaries 25 700
505 520
Cost of production 854 520

2 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 10: Manufacturing and inventory control

Question 7
a.
Persad plc
Manufacturing account for the year ended 31 May 2018
$ $ $
Inventory of raw materials at 1 June 2017 21 450
Purchases of raw materials 234 090
Carriage inwards 750
234 840
Returns outwards 980
Net purchases 233 860
255 310
Inventory of raw materials at 31 May 2018 22 170
Cost of raw materials consumed 233 140
Direct wages 266 000
Prime cost 499 140
Factory overheads 138 000
Factory wages 84 800
Factory machinery depreciation 25 000
247 800
746 940
Opening work in progress 14 780
Closing work in progress 13 750
1 030
Cost of production 747 970

b.  Work in progress is partly finished goods.

c.  Cost per unit:
747 970
= $21.37 per unit
35 000

3 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
Answers to Chapter 10: Manufacturing and inventory control

Question 8
a.
I Mckoy Ltd
Manufacturing account for the year ended 30 April 2018
$ $ $
Inventory of raw materials at 1 May 2017 12 100
Purchases of raw materials 16 800
Carriage inwards 600
17 400
Returns outwards 1 400
Net purchases 16 000
28 100
Less inventory of raw materials at 30 April 2018 14 300
Cost of raw materials consumed 13 800
Direct wages 25 400
Prime cost 39 200
Factory rent 28 200
Factory electricity 16 300
Factory machinery depreciation 9 100
53 600
92 800
Opening work in progress 24 300
Closing work in progress 23 500
800
Cost of production 93 600

b.  Cost per carpet:

93 600
= $78
1 200

4 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
Answers to Chapter 10: Manufacturing and inventory control

Question 9
a.
G Singh
Manufacturing account
for the year ended 31 July 2018
$ $
Opening inventory of raw materials 27 000
Purchases of raw materials (less returns out 100 200
of $16 300) 127 200
Less closing inventory of raw materials 28 600
Raw materials consumed 98 600
Direct factory wages 50 400
Factory power 4 530
Prime cost 153 530

Indirect factory wages 25 700

Insurance 6 300
Power 40 770
Rent 62 000
134 770
288 300

Add opening inventory of work in progress 31 200

Less closing inventory of work in progress 36 500
5 300
Cost of production 283 000

Notes:
Direct factory power (42 600 + 2 700) × 0.1 = 4 530
Indirect factory power (42 600 + 2 700 ) × 0.9 = 40 770
Insurance 8 400 × 3/4 = 6 300
Income statement for the year ended 31 July 2018
$ $
Revenue 468 900
Less returns inwards 8 200
460 700
Opening inventory of finished goods 41 400
Cost of production 283 000
324 400
Less closing inventory of finished goods 49 400
Cost of sales 275 000
Gross profit 185 700
Administration 43 700
Insurance 2 100
45 800
Profit 139 900
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Answers to Chapter 10: Manufacturing and inventory control

c.
Statement of financial position (balance
sheet) at 31 July 2018 (extract)
$ $
CURRENT ASSETS
Inventories:
Raw materials 28 600
Work in progress 36 500
Finished goods 49 400
114 500

Question 10
a.
Navin plc
Manufacturing account
for the year ended 31 January 2018
$000 $000
Opening inventory of raw materials 42
Purchases of raw materials 567
Carriage inwards 15
624
Closing inventory of raw materials 65
Raw materials consumed 559
Direct factory wages (60% × 460) 276
Prime cost 835
Factory overheads:
Indirect factory wages (40% × 460) 184
Heating and lighting (75% × 68) 51
Power (80% × 110) 88
Rent and rates (75% × 84) 63
Depreciation of machinery 68
454
1 289
Add opening inventory of work in progress 19
Less closing inventory of work in progress (22)
Cost of production 1 286

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Answers to Chapter 10: Manufacturing and inventory control

b.
Income statement for the year ended 31 January 2018
$000 $000
Revenue 1 846
Opening inventory of finished goods 132
Cost of production 1 286
1 418
Closing inventory of finished goods 146
1 272
Gross profit 574
Carriage outwards 21
Heating and lighting (25% × 68) 17
Depreciation of office equipment 9
Office salaries 245
Power (20% × 110) 22
Rent and rates (25% × 84) 21
335
Profit 239

c.
Statement of financial position (balance sheet)
at 31 January 2018 (extract)
$000 $000
CURRENT ASSETS
Inventories:
Raw materials 65
Work in progress 22
Finished goods 146
233

10.2 Applying basic costing principles

Question 11
a.
$
Direct materials 420
Direct labour 510
Indirect costs 2 670
Total costs 3 600
Mark-up (60%) 2 160
Selling price for 120 products 5 760

The selling price of one windbreak is $48.

b.  The profit made on the order for 25 windbreaks is $450.

7 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
Answers to Chapter 10: Manufacturing and inventory control

Question 12
a.
$
Direct materials 2 940
Direct labour 2 380
Indirect costs 6 300
Total costs 11 620
Mark-up (40%) 4 648
Selling price for 70 products 16 268

The selling price of one barbeque is $232.40.

b.  The profit made on the order is $796.80.

Question 13
a.  Direct costs
$ $
Direct materials
Wood type A 1.5 kg × $15.40 per kg 23.10
Wood type B 0.25 kg × $24.60 per kg 6.15
29.25
Direct labour
Machining: 2.4 hrs × $12 per hr 28.80
Assembly: 0.8 hr at $9 per hr 7.20
36.00
Direct cost per unit 65.25

b.  Indirect costs

$
Factory rent 1 400
Depreciation of machinery 950
Factory maintenance 190
Indirect labour 3 480
Total indirect costs 6 020

Indirect costs per unit = $6 020/250 = $24.08

c.  Selling price per unit

$
Direct costs per unit 65.25
Indirect costs per unit 24.08
Total costs 89.33
Add mark-up (33 1/3%) 29.78
Selling price per unit 119.11

d.  Profit on order from State Sports Ltd

160 × $29.78 = $4 764.80
8 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
Answers to Chapter 10: Manufacturing and inventory control

Question 14
a.  Direct costs
$ $
Direct materials
Wood: 4 kg at $8.20 per kg 32.80
Glass: 2.5 kg at $11.80 per kg 29.50
62.30
Direct labour
Cutting: 1.8 hr at $12 per hr 21.60
Assembly: 1.25 hrs at $10 per hr 12.50
34.10
Direct cost per unit 96.40

b.  Indirect costs

$
Factory rent 2 350
Depreciation of machinery 480
Electricity charges 390
Manager’s salary 1 880
Total indirect costs 5 100

Indirect costs per unit = $5 100/40 = $127.50

c.  Selling price per unit
$
Direct costs per unit 96.40
Indirect costs per unit 127.50
Total costs 223.90
Add mark-up (75%) 167.93
Selling price per unit 391.83

d.  Profit on order from Deluxe Furnishings Ltd

20 × $167.93 = $3 358.60

Question 15
Indirect costs for November 2018
Printing Assembly
department department
$ $
Allocated costs
Department manager’s salary 2 400 2 100
Depreciation of equipment 400 100
Apportioned costs
Rent (ratio 4:1) 640 160
Insurance of equipment (ratio 8:1) 1 600 200
Total indirect costs 5 040 2 560

9 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 10: Manufacturing and inventory control

Question 16
Indirect costs for September 2018
Machining Finishing
department department
$ $
Allocated costs
Supervisor’s salary 2 900 2 500
Depreciation of machinery 5 000 1 200
Apportioned costs
Power (5:1) 4 500 900
Factory rent (ratio 3:1) 7 500 2 500
Total indirect costs 19 900 7 100

Question 17

Dominant factor Absorption rate calculation Absorption rate

Printing department Machine $5 040/1 000 machine hrs $5.04 per machine hour
Assembly department Labour $2 560/900 labour hrs $2.84 per labour hour

Question 18
Dominant factor Absorption rate calculation Absorption rate
Machining department Machine $19 900/2 400 machine hrs $8.29 per machine hour
Finishing department Labour $7 100/600 labour hrs $11.83 per labour hour

Question 19
a.  Charge to local college
$
Direct materials Paper and printing ink etc 1 800.00
Direct labour 10 hours at $15 per hour 150.00
Overheads: printing department 12 machine hours @ $5.04 per machine hour 60.48
Overheads: assembly department 3 labour hours @ $2.84 per labour hour 8.52
Total cost 2 019.00
Mark-up (75% of cost) 1 514.25
Total charge to customer 3 533.25

b.  Faye’s profit will be $1514.25.

Question 20
a.  Charge to customer
$
Direct materials 4 800.00
Direct labour 20 hours @ $12 per hour 240.00
Overheads: machining department 22 hours at $8.29 per machine hour 182.38
Overheads: finishing department 4 hours at $11.83 per labour hour 47.32
Total cost 5 269.70
Mark-up (40% of cost) 2 107.88
Total charge to customer 7 377.58

b.  Supaform Ltd’s profit will be $2 107.88.

10 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 10: Manufacturing and inventory control

10.3 Inventory control

Question 21

FIFO inventory calculations

Date Inventory in Inventory out Unsold inventory Value of
inventory
Aug 3 20 @ $600 each 20 @ $600 each $12 000
7 12 @ $750 each 8 @ $600 each $4 800
14 20 @ $620 each 8 @ $600 each $17 200
20 @ $620 each
21 11 @ $750 each 17 @ $620 each $10 540

Question 22
FIFO inventory calculations
Date Inventory in Inventory out Unsold inventory Value of
inventory
Feb 5 40 @ $100 each 40 @ $100 each $4 000
11 30 @ $150 each 10 @ $100 each $1 000
14 40 @ $110 each 10 @ $100 each $5 400
40 @ $110 each
21 30 @ $150 each 20 @ $110 each $2 200

Question 23
LIFO inventory calculations
Date Inventory in Inventory out Unsold inventory Value of
inventory
Aug 3 20 @ $600 each 20 @ $600 each $12 000
7 12 @ $750 each 8 @ $600 each $4 800
14 20 @ $620 each 8 @ $600 each $17 200
20 @ $620 each
21 11 @ $750 each 8 @ $600 each $10 380
9 @ $620 each

Question 24
LIFO inventory calculations
Date Inventory in Inventory out Unsold inventory Value of
inventory
Aug 5 40 @ $100 each 40 @ $100 each $4 000
11 30 @ $150 each 10 @ $100 each $1 000
14 40 @ $110 each 10 @ $100 each $5 400
40 @ $110 each
21 30 @ $150 each 10 @ $100 each $2 100
10 @ $110 each

11 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 10: Manufacturing and inventory control

Question 25
Date Inventory in Inventory out Unsold inventory Calculation of Value of
average cost inventory
Aug 3 20 @ $600 each 20 @ $600 each $600 $12 000
7 12 @ $750 each 8 @ $600 each $600 $4 800
14 20 @ $620 each 8 @ $600 each 8 @ $600 = $4 800
20 @ $620 each 20 @ $620 = $12,400
$17 200
so average cost per
unit is $17 200/28 =
$614.29
21 11 @ $750 each 17 @ $614.29 $614.29 $10 442.86

Question 26
Date Inventory in Inventory out Unsold inventory Calculation of Value of
average cost inventory
Aug 3 40 @ $100 each 40 @ $100 each $100 $4 000
7 30 @ $150 each 10 @ $100 each $100 $1 000
14 40 @ $110 each 10 @ $100 each 10@ $100 = $1 000
40 @ $110 each 40 @ $110 = $4 400
$5 400
so average cost per
unit is $5,400/50 =
$108
21 30 @ $150 each 20 @ $108 $108 $2 160

Question 27
Income statement (trading account) (showing effect of three inventory valuation methods)
Using FIFO Using LIFO Using AVCO
$ $ $ $ $ $
Sales (23 × $750) 17 250 17 250 17 250
Purchases (20 @ $600 and 20 @ $620) 24 400 24 400 24 400
Less closing inventory 10 540 10 380 10 443
Cost of sales 13 860 14 020 13 957
Gross profit 3 390 3 230 3 293

Question 28
Income statement (trading account (showing effect of three inventory valuation methods)
Using FIFO Using LIFO Using AVCO
$ $ $ $ $ $
Sales (60 × $150) 9 000 9 000 9 000
Purchases (40 @ $100 and 40 @ $110) 8 400 8 400 8 400
Less closing inventory 2 200 2 100 2 160
Cost of sales 6 200 6 300 6 240
Gross profit 2 800 2 700 2 760

12 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 10: Manufacturing and inventory control

Question 29
a. 
FIFO inventory calculations
Date Inventory in Inventory out Unsold inventory Value of inventory
Aug 1 5 @ $230 each $1 150
3 4 @ $240 each 5 @ $230 each $2 110
4 @ $240 each
9 4 @ $320 each 1 @ $230 each
$1 190
4 @ $240 each
15 6 @ $250 each 1 @ $230 each
4 @ $240 each $2 690
6 @ $250 each
21 4 @ $320 each 1 @ $240 each $1 740
6 @ $250 each
24 5 @ $260 each 1 @ $240 each
6 @ $250 each $3 040
5 @ $260 each
27 6 @ $320 each 1 @ $250 each $1 550
5 @ $260 each

Value of unsold inventory at 31 August is $1 550.

b.
LIFO inventory calculations
Date Inventory in Inventory out Unsold inventory Value of inventory
Aug 1 5 @ $230 each $1 150
3 4 @ $240 each 5 @ $230 each $2 110
4 @ $240 each
9 4 @ $320 each 5 @ $230 each $1 150
15 6 @ $250 each 5 @ $230 each
6 @ $250 each $2 650
21 4 @ $320 each 5 @ $230 each $1 650
2 @ $250 each
24 5 @ $260 each 5 @ $230 each
2 @ $250 each $2 950
5 @ $260 each
27 6 @ $320 each 5 @ $230 each $1 400
1 @ $250 each
Value of unsold inventory at 31 August is $1 400.

13 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 10: Manufacturing and inventory control

c. 
AVCO inventory calculations
Date Inventory Inventory Unsold inventory Calculation of Value of inventory
in out average cost
Aug 1 5 @ $230 each $230 $1 150
3 4 @ $240 5 @ $230 each 5 @ $230 each = $1,150
each 4 @ $240 each 4 @ $240 each = $960
$2 109.96
so average cost is
$2 110/9 = $234.44
9 4 @ $320 5 @ $234.44 each $234.44
$1 172.20
each
15 6 @ $250 5 @ $234.44 each 5 @ $234.44 = $1 172.20
each 6 @ $250 each 6 @ $250 each = $1 500
$2 672.23
so average cost is
$2 672.20/11 = $242.93
21 4 @ $320 7 @ $242.93 each $242.93 $1 700.51
each
24 5 @ $260 7 @ $242.93 each 7 @ $242.93 each =
each 5 @ $260 each $1 700.51
5 @ $260 each = $1 300 $3 000.51
so average cost is
$3 000.51/12 = $250.04
27 6 @ $320 6 @ $250.04 $250.04 $1 500.24
each

Value of unsold inventory at 31 August is $1 500.24.

Question 30
a.
FIFO inventory calculations
Date Inventory in Inventory out Unsold inventory Value of inventory
May 1 2 @ $120 each $240
5 4 @ $130 each 2 @ $120 each $760
4 @ $130 each
8 3@ $180 each 3 @ $130 each $390
14 10 @ $135 each 3 @ $130 each
10 @ $135 each $1 740
17 9 @ $180 each 4 @ $135 each $540
21 8 @ $140 each 4 @ $135 each
8 @ $140 each $1 660
29 5 @ $180 each 7 @ $140 each $980

Value of unsold inventory at 31 May is $980.

14 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 10: Manufacturing and inventory control

b. 
LIFO inventory calculations
Date Inventory in Inventory out Unsold inventory Value of inventory
May 1 2 @ $120 each $240
5 4 @ $130 each 2 @ $120 each $760
4 @ $130 each
8 3@ $180 each 2 @ $120 each
$370
1 @ $130 each
14 10 @ $135 each 2 @ $120 each
1 @ $130 each $1 720
10 @ $135 each
17 9 @ $180 each 2 @ $120 each
1 @ $130 each $505
1 @ $135 each
21 8 @ $140 each 2 @ $120 each
1 @ $130 each $1 625
1 @ $135 each
8 @ $140 each
29 5 @ $180 each 2 @ $120 each
1 @ $130 each
1 @ $135 each $925
3 @ $140 each

Value of unsold inventory at 31 May is $925.

c.
AVCO inventory calculations
Date Inventory in Inventory out Unsold Calculation of Value of
inventory average cost inventory
May 1 2 @ $120 each $120 $240
5 4 @ $130 each 2 @ $120 each 2 @ $120 each = $240
4 @ $130 each 4 @ $130 each = $520 $760
so average cost is:
$760/6 = $126.67
8 3@ $180 each 3 @ $126.67 $126.67 $380.01
14 10 @ $135 each 3 @ $126.67 3 @ $126.67 = $380.01
10 @ $135 10 @ $135 = $1 350 $1 730.01
each so average cost is:
$1 730/13 =$133.08
17 9 @ $180 each 4 @ $133.08 $133.08 $532.31
21 8 @ $140 each 4 @ $133.08 4 @ $133.08 = $532.31
8 @ $140 each 8 @ $140 = $1,120
so average cost is: $1 652.31
$1 652.31/12 = $137.69
29 5 @ $180 each 7 @ $137.69 $137.69 $963.83

Value of unsold inventory at 31 May is $963.83.

15 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 10: Manufacturing and inventory control

Question 31
a.  FIFO value of closing inventory of dishwashers is: 18 × $520 = $9 360
b.
Shanika
Income statement (trading and profit and loss account)
for the year ended 31 December 2018
$ $
Sales 592 000
Less returns inwards 5 100
586 900
Opening inventory 41 900
Add purchases 421 000
Less returns outwards 8 300
412 700
454 600
Closing inventory ($38 300 + $9 360) 47 660
Cost of sales 406 940
Gross profit 179 960
Operating expenses 82 700
Net profit 97 260

c.
Shanika
Statement of financial position (balance sheet)
at 31 December 2018
  $ $
NON-CURRENT ASSETS 500 000

CURRENT ASSETS
Inventory 47 660
Accounts receivable 17 200
Cash at bank 8 500
73 360
Less CURRENT LIABILITIES
Accounts payable 24 500
Net current assets 48 860
548 860
CAPITAL
Opening balance 496 300
Net profit 97 260
53 560
Less drawings 44 700
548 860

16 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 10: Manufacturing and inventory control

Question 32
a.  LIFO calculation of model in closing inventory: 30 @ $60 + 10 @ $65 = $2 450
b. 
Dillon
Income statement (trading and profit and loss account)
for the year ended 31 July 2018
$ $ $
Sales 384 280
Less returns inwards 4 490
379 790
Opening inventory 27 550
Add purchases 275 310
Less returns outwards 2 720
272 590
Carriage inwards 3 540
276 130
303 680
Closing inventory ($29 220 + $2,450) 31 670
Cost of sales 272 010
Gross profit 107 780
Add discounts received 470
108 250
Less discounts allowed 680
Operating expenses 113 740
114 420
Net loss 6 170

c.
Dillon
Statement of financial position (balance sheet)
at 31 July 2018
  $ $
NON-CURRENT ASSETS 385 200

CURRENT ASSETS
Inventory 31 670
Accounts receivable 8 390
40 060

Less CURRENT LIABILITIES

Accounts payable 14 760
Bank overdraft 3 400
18 160
Net current assets 21 900
407 100
CAPITAL
Opening balance 452 120
Net loss 6 170
445 950
Less drawings 38 850
407 100

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 Answers to Chapter 10: Manufacturing and inventory control

Develop your exam skills

Paper 1
1. B 2. B 3. A 4. B 5. B
6. B 7. A 8. B 9.  A
Paper 2
Case study 1: manufacturing organization
a.  Prime cost is the total of direct costs (direct materials + direct labour + any other direct cost).
b.  Manufacturing account
Nikolai
Manufacturing account for the year ended 31 October 2018
$ $ $
Raw materials consumed:
Opening inventory 10 730
Purchases 141 350
Less returns outwards 2 210
139 140
Add carriage inwards 4 840
143 980
154 710
Closing inventory 12 390
142 320
Direct wages 171 900
Prime cost 314 420
Add factory overheads:
Electricity (75% × $8 200) 6 150
Factory supervisors’ salaries 38 880
Insurance [80% × ($7 620 − $120)] 6 000
Machinery depreciation 45 400
96 430
Adjustment for work-in-progress: 410 850
Opening inventory 3 420
Less closing inventory 5 090
1 670
Cost of production 409 180

c.  Cost of one office desk:

Total cost of production/units produced, i.e. 409 180/800 = 511.48

d.  Selling price of a desk:

511.48 + 25% of cost = $639.35

18 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 10: Manufacturing and inventory control

Case Study 2: Applying basic costing principles

a. Allocating an indirect cost occurs when a cost is entirely linked to a specific department in an
organization; apportionment occurs when an indirect cost applies to a whole business and
has to be divided between departments on some rational basis.

b.  Total indirect costs for each department

Supersurf Ltd – monthly indirect costs
Cutting Finishing
department department
$ $
Allocated costs
Supervisor’s salary 3 100 3 400
Apportioned costs
Factory rent (ratio 3 : 4) 9 000 12 000
Power charges (ratio 4 : 3) 2 000 1 500
Depreciation of machinery (7 : 4) 3 500 2 000
Total indirect costs 17 600 18 900

c.  Overhead absorption rates for each department

Dominant factor Absorption rate calculation Absorption rate
Cutting department Machine $17 600/2 200 machine hrs $8.00 per machine hour
Finishing department Labour $18 900/1 800 labour hrs $10.50 per labour hour

d.  Amount charged to Making Waves Ltd for 80 garden umbrellas

$
Direct materials 80 garden umbrellas × 6 kg × $8.20 3 936.00
Direct labour 80 × 3.5 hours × $16 4 480.00
Overheads: cutting department 80 × 2.5 machine hours @ $8.00 per machine hour 1 600.00
Overheads: finishing department 80 × 2.25 labour hours @ $10.50 per labour hour 1 890.00
Total cost 11 906.00
Mark-up (50% of cost) 5 953.00
Total charge to customer 17 859.00

Case study 3: Inventory control

a. FIFO and LIFO are both methods of valuing inventory at cost price. FIFO means “first in first
out” where the assumption is made that the first items received are the first items to be sold.
LIFO means “last in first out” where the assumption is made that the last items received are
the first items to be sold.

19 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 10: Manufacturing and inventory control

b.
Purchases Sales Balance
Date Cost price Total value Cost price Total value
Unit Units Units
($) ($) ($) ($)
1 May 18 120 2 160
5 May 10 122 1 220 18 120 2 160
10 122 1 220
= 3 380
10 May 12 6 120 720
10 122 1 220
= 1 940
19 May 20 123 2 460 6 120 720
10 122 1 220
20 123 2460
= 4 400
24 May 24 12 123 1 476
28 May 15 124 1 860 12 123 1 476
15 124 1 860
=3 336
30 May 12 15 124 1 860

c. Prices are rising so FIFO produces a higher figure for closing inventory than LIFO. As a result,
profit for the year under review will be higher using FIFO than LIFO.

20 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019