Material Cost and Labour Cost
Domain focus
This domain tests stores control, material valuation and wage systems. CHSE problems commonly ask EOQ, FIFO/LIFO stores ledger, time rate versus piece rate, and labour cost treatment.
Core rules
- Material control: purchase requisition → purchase order → goods received note → stores ledger and bin card. Bin card shows quantity only; stores ledger shows quantity and value.
- EOQ = √(2 × annual consumption × ordering cost ÷ carrying cost per unit per year). Reorder level = maximum consumption × maximum lead time.
- Valuations: FIFO (issues at oldest cost), LIFO (latest cost), weighted average (total cost ÷ total quantity). Normal loss is absorbed; abnormal loss is valued and written off.
- Labour: direct labour is traceable to the product; indirect labour is overhead. Time rate pays hours; piece rate pays output. Halsey and Rowan share savings from time saved.
- Idle time and overtime: normal idle time is overhead; abnormal idle time is written off; overtime premium is generally overhead unless caused by a specific job.
Worked example
Annual demand 12,000 units; ordering cost ₹100; carrying cost ₹6 per unit per year. EOQ = √(2×12,000×100÷6) = √400,000 = 632 units (approx.). At 632 units, ordering and carrying costs are balanced; ordering 1,000 units would raise carrying cost more than it saves.
Traps
Do not use monthly demand with annual carrying cost; do not value abnormal loss at selling price; do not treat all overtime as direct labour; bin card is not a valuation record.