Direct vs Indirect Materials and Labour in Manufacturing

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Questions and Answers

Which type of materials are used for maintenance and repair of machinery and do not normally form a part of the finished product?

Indirect materials

What can be easily traced to individual units of product and involves workers directly engaged in the production process?

Direct manufacturing labour

Which one of the following examples represents indirect labour in a manufacturing setting?

Wages paid to cleaning staff and general helpers in the factory

Which category includes costs that cannot be economically traced to specific units of production and consist of expenses like factory maintenance staff wages?

Manufacturing overhead Signup and view all the answers

Which term is used to describe the assignment of indirect costs to a cost object?

Cost allocation Signup and view all the answers

What is an example of an indirect cost in the text provided?

Lease cost of a particular plant Signup and view all the answers

How would you categorize the cost of steel and tires in the context of cost allocation?

Direct materials Signup and view all the answers

If there is no separate lease agreement for the space used to make Baleno, how would you classify the lease cost?

Indirect cost of Baleno Signup and view all the answers

Which of the following best describes direct materials?

Materials that can be conveniently traced directly to the product Signup and view all the answers

What is a common cost driver for indirect materials?

Number of purchase orders made Signup and view all the answers

Which of the following is an example of direct manufacturing labor?

Workers assembling the product on the production line Signup and view all the answers

What could be a potential cost driver for manufacturing overhead?

Number of production hours worked Signup and view all the answers

What is the main implication of treating costs as expenses in the period they are incurred?

Increase in inventory value Signup and view all the answers

In which type of firm does the nature of the firm have the greatest impact on determining which costs should be included in product costs?

Manufacturing firm Signup and view all the answers

Which of the following is an example of a relevant cost based on cost classification?

Differential cost Signup and view all the answers

What is the concept of opportunity cost mainly focused on?

Income generated from an alternative choice Signup and view all the answers

Why are shutdown costs considered fixed costs?

Because they are incurred in all situations when production stops Signup and view all the answers

What is the implication of shutdown costs being unavoidable fixed costs?

They do not affect the decision-making process Signup and view all the answers

In the context of joint costs, what is the significance of the split-off point?

It is the stage where different products become identifiable Signup and view all the answers

How do joint costs differ from other types of costs in terms of cost allocation?

They are not allocated until the split-off point Signup and view all the answers

What is the implication of product costs on decision-making, according to the text?

Product costs are irrelevant and should be ignored in decision-making. Signup and view all the answers

How are relevant costs defined in the context of decision-making?

Relevant costs are future costs that are affected by the decision at hand. Signup and view all the answers

What is the primary characteristic of differential costs in decision-making?

Differential costs are those that differ between alternatives being considered. Signup and view all the answers

How should opportunity costs be treated in decision-making, based on the text?

Opportunity costs should always be included as relevant costs in decision-making. Signup and view all the answers

Study Notes

Cost Classification

Materials used for maintenance and repair of machinery, which do not form a part of the finished product, are classified as indirect materials.
Costs that can be easily traced to individual units of product and involve workers directly engaged in the production process are classified as direct labor.

Indirect Labor and Costs

Indirect labor in a manufacturing setting is exemplified by factory maintenance staff.
Costs that cannot be economically traced to specific units of production, such as factory maintenance staff wages, are classified as indirect costs.
The process of assigning indirect costs to a cost object is called cost allocation.
Factory maintenance is an example of an indirect cost.

Direct Materials and Labor

Direct materials are categorized as costs that can be easily traced to individual units of product, such as steel and tires in the context of a car manufacturing company.
Direct manufacturing labor includes costs of workers directly engaged in the production process, such as assembly line workers.

Cost Drivers and Overhead

Machine hours can be a potential cost driver for manufacturing overhead.
Lease cost without a separate lease agreement for the space used to make a product is classified as an indirect cost.

Cost Implications

Treating costs as expenses in the period they are incurred implies that costs are matched with revenues.
In job-order costing firms, the nature of the firm has the greatest impact on determining which costs should be included in product costs.

Relevant Costs and Decision-Making

Relevant costs are costs that differ between alternatives in a decision.
Opportunity costs focus on the value of the next best alternative that is given up when a choice is made.
Shutdown costs are considered unavoidable fixed costs, implying that they are not affected by the level of production.
Joint costs differ from other costs in that they are allocated to multiple products, and the split-off point is significant in this allocation.
Product costs can have a significant impact on decision-making, as they affect profit margins and pricing decisions.
Differential costs are costs that differ between alternatives in a decision, and should be treated as relevant costs in decision-making.

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