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Sir can you explain the breakdown of opening inventory and closing inventory?
Is it true that inventory whether opening or closing is a finished goods when the product is ready to be sold which includes all the production costs such as:
Material $10
Labours $8
Variable overhead $5
Fixed overhead $2
Total inventory cost $25If we are using absorption costing then the value of inventory includes all production costs including fixed production overheads (and so on your figures is $25).
If we are using marginal costing, then the value of inventory includes all variable production costs, and so in your example is $23 per unit.
I do explain all this in my free lectures. The lectures are a complete free course for Paper MA and cover everything needed to be able to p[ass the exam well.
Thanks 🙂
I would also like to ask two questions here:
1) The value of inventory consists of all the production cost like material cost, labour cost and production overheads.
So I wanted to know do the opening and closing inventories also comprise of these same production costs?
2) Secondly, where thr inventory accounts like raw material, Work in process and finished goods are used?
Please explain how our production costs are involved in these account? I need to know the cost breakdown in these accounts.
Thanks again.
1. Inventory is valued the same way throughout whether it is the opening or the closing inventory.
We only include variable production overheads if using marginal costing. If using absorption costing we included both variable and fixed overheads. (Obviously for financial accounts we have to use absorption costing, but Paper MA is not testing financial accounting.)2. Those accounts are used by any company that manufactures their own goods! However you cannot be required to produce t-accounts in the Paper MA exam. What is relevant for the exam is all covered in my lectures on process costing and you cannot expect me to type out all my lectures again here 🙂
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