Chapert 13 Quiz

Machine hours, direct labor hours, and direct labor costs can all be used to allocate manufacturing overhead.

Since material cost is one of the key cost drivers for the production of the units, it is best to take

6. Other manufacturing overhead consisted of indirect materials $14,000, indirect labor $20,000, and depreciation on factory machinery $8,000.

Direct labor assembly costs are, by their nature, directly traceable to individual products. Therefore the relevant cost driver for this cost is the number of Direct Assembly Labor Hours. The other 21 cost categories are indirect costs.

The wages of general production employees who are idled due to machine breakdown are classified as indirect costs. Direct costs are usually variable and change as production volumes change. Thus, direct materials and direct labor are typically variable costs. For special orders, some direct costs can be fixed, however. The costs (depreciation, electricity, and routine maintenance) associated with a machine dedicated to one product are direct costs of that product. Indirect costs cannot be easily and conveniently assigned to a special order. Rather, these costs are common costs, in that they are incurred to produce a variety of special orders. Maintenance costs of general purpose equipment, the supervisor’s salary, and utilities are direct costs needed to produce special orders in general, but are indirect costs for a particular special order. Moreover, general production costs, including property taxes, insurance, lawn care, cafeteria costs, and miscellaneous supplies consumed in production are indirect costs properly allocated to special orders manufactured.

Direct materials Raw materials inventory ................. $ 0 (Dec. 1) Raw materials purchased ............... 70,000 Less: Raw materials inventory (Dec. 31) .................................... 0 Direct materials used............................... Direct labor .................................................

According to this method, every unit of the product is assigned all direct, fixed, and variable costs. This method includes the cost of direct materials and labor as well as a portion of the overhead costs associated with it in the final costing of every unit of the product.

Under the existing cost system for the turning machine area, there are two direct costs and three cost pools for overhead costs. The two direct costs are simply Direct Labor and Direct Material, which are traced to the cost object, which is Machine Parts. The total overhead is split into three cost pools, which are the following: overhead applied on direct labor, overhead applied on material dollars, and overhead applied on ACTS machine hours. Furthermore, each cost pool is broken down into direct and period sub categories. The mentioned cost pools for the following cost drivers: Direct Labor dollars, Material dollars, and machine hours.

unit, two types of costs are distinguished. Firstly the direct costs, consisting of the direct

The above graph suggests that volume based computation of overhead costs does not reflect the real overhead costs based on actual production per product line (computed maximum in excess over actual). On the other hand, if we follow the allocation of overhead costs based on prime costs as illustrated in Exhibit 2 of the case, we need to consider other quantitative factors: 1. No data is available to determine the amount of raw materials used in producing each of the products. While we can assume that the production of small, colored glass ornaments uses fewer raw materials (e.g. glass) than large, colored glass ornaments, the amount of glass used to produce specialty ornaments cannot be derived from the facts of the case. 2. There is also no data available to determine the number of direct labor hours consumed for producing each product type, although evidently, specialty ornaments use more direct labor hours. Based on the above considerations, we deem it inaccurate to base overhead on prime costs, a common practice in traditional costing. In addition,

The current method of apportioning production overheads based on direct labour hours can be described as a traditional approach to product costing. In a manufacturing company’s financial statements, each item produced must be allocated some of the production overheads to make the statements compliant. Sometimes the individual costs of these items can be calculated incorrectly based on overall production overhead and the system of allocating in place, however the overall financial statement can still be accurate. This traditional method of allocating the production

A direct cost can be traced to a product or service which includes: Direct labor- which is the cost of the labor that’s directly connected to a product or services. Direct labor is sometimes called touch labor, since direct labor workers typically touch the product while it is being made.( Ray H. Garrison, Eric W. Noreen and Peter C. Brewer p 39-40) An example of direct labor is an assembly line worker. Labor cost that cannot be physically traced to the creation of products, or that can be traced only at great cost and inconvenience, are considered to be indirect labot.( Ray H. Garrison, Eric W. Noreen and Peter C. Brewer p 40) Direct material are those materials that become an integral part of the finished product and whose cost can be traced to the finished product.( Ray H. Garrison, Eric W. Noreen and Peter C. Brewer p39-40) Manufacturing overhead is the third element so manufacturing cost, it includes all costs of manufacturing except direct materials and direct labor. Manufacturing overhead includes items such as indirect materials; indirect labor; maintenance and repairs on production equipment; and heat and light, property taxes, depreciation, and insurance on manufacturing facilities. Only cost associated with operating the factory are consider to be manufacturing overhead cost. A company also incurs other costs associated with its selling administive functions, but these costs are not included as part of manufacturing overhead. Only those

Under the new cost system, two broad sources of costs were identified: manufacturing and SM&A. All costs within these categories were reclassified as either volume driven or order driven. Hence, four cost pools were set up.

Direct costs are costs directly related to producing the products and services of a project. On the other hand, indirect costs are costs not directly related to a project’s products or services, but are indirectly related to performing the project.

Today companies produce a wide range of products; direct labour represents only a small fraction of total costs, and overhead costs are