![]() ![]() Some companies treat fringe benefit costs as direct labor. These fringe benefit costs can significantly increase the direct labor hourly wage rate. Many employees receive fringe benefits-employers pay for payroll taxes, pension costs, and paid vacations. The wages paid to a construction worker, a pizza delivery driver, and an assembler in an electronics company are examples of direct labor. As with direct material costs, direct labor costs of a product include only those labor costs clearly traceable to, or readily identifiable with, the finished product. Indirect materials are part of overhead, which we will discuss later.ĭirect labor costs include the labor costs of all employees actually working on materials to convert them into finished goods. Indirect materials are materials used in the manufacture of a product that cannot, or will not for practical reasons, be traced directly to the product being manufactured. Such materials, called indirect materials or supplies, are included in manufacturing overhead. ![]() Some materials (such as glue and thread used in manufacturing furniture) may become part of the finished product, but tracing those materials to a particular product would require more effort than is sensible. In turn, steel becomes a direct material to an automobile manufacturer. For example, iron ore is a direct material to a steel company because the iron ore is clearly traceable to the finished product, steel. Direct materials are those materials used only in making the product and are clearly and easily traceable to a particular product. Materials are unprocessed items used in the manufacturing process. In manufacturing companies, a product’s cost is made up of three cost elements: direct material costs, direct labor costs, and manufacturing overhead costs. However, since many of you could have careers in service or merchandising companies, we also use nonmanufacturing examples. To ensure that you understand how and why product costing is done in manufacturing companies, we use many manufacturing company examples. Manufacturing companies use the most complex product costing methods. Product costs are the costs of making a product, such as an automobile the cost of making and serving a meal in a restaurant or the cost of teaching a class in a university. Product costs are the costs a company assigns to units produced. ![]() Merchandiser and manufacturer accounting: Differences in cost conceptsĬost is a financial measure of the resources used or given up to achieve a stated purpose. ![]()
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