Calculating and recording materials, labour and other expenses
Materials
Material cost entering the cost unit is purchase price plus carriage inwards, less trade discount, and excluding recoverable VAT. Carriage outwards is a selling and distribution cost and is never part of material cost. Stock is controlled using reorder level, minimum and maximum levels and the economic order quantity; issues are valued by FIFO or AVCO (weighted average cost). Free stock = stock in hand + stock on order − stock already allocated.
Labour
Gross pay depends on the remuneration method: time rate (hours × rate), piece rate (units × rate per unit) or a bonus scheme. Deductions turn gross pay into net pay, but the costing system records the employer's total labour cost. Direct time is charged to the cost unit; indirect time such as idle time, training and supervision goes to overhead.
Other expenses
Expenses must be matched to the correct period: accruals for costs incurred but not yet invoiced, prepayments for costs paid in advance, and depreciation as a non-cash expense apportioned consistently.
Worked example (FIFO). Opening stock 100 units at £5; purchases 200 units at £6; issue 150 units. Cost of issue = (100 × £5) + (50 × £6) = £500 + £300 = £800. Closing stock = 150 units at £6 = £900.
Traps: including VAT in cost; treating idle time or routine overtime premium as direct labour; using LIFO, which is not permitted; forgetting that under AVCO a new average is calculated after every receipt.