What is Direct Labor?
Direct labor includes all labor that varies with production volume. This means the classification is generally limited to those people working on an assembly line or operating production machinery.
What is Indirect Labor?
Indirect labor is all types of support and supervisory labor, such as janitorial, maintenance, administrative, and management employees. Indirect labor is much less likely to change with production volume, since it represents the overhead of a business that is needed to support any level of operations.
Comparing Direct and Indirect Labor
The difference between direct labor and indirect labor is that only labor involved in the hands-on production of goods and services is considered to be direct labor. All other labor is, by default, classified as indirect labor. This distinction is important from an accounting perspective, since the two types of labor are treated differently. The accounting is noted below.
Accounting for Direct Labor
The cost of direct labor is charged to all units produced during the reporting period. The basis for charging the cost is the number of hours of labor actually used in the production process.
Accounting for Indirect Labor (Factory)
The cost of indirect factory labor is assigned to a cost pool, from which it is allocated to the units produced during the reporting period. Depending on the level of allocation sophistication, several cost pools may be used, each of which has a separate allocation methodology. For example, a cost pool for real estate costs could accumulate factory rent, and then be allocated out based on the amount of square footage used. Meanwhile, another cost pool for maintenance costs could accumulate maintenance labor and equipment costs, and be allocated based on machine hours used.
Accounting for Indirect Labor (Administrative)
The cost of indirect administrative labor is charged to expense in the period incurred. It never appears in the balance sheet as an asset.
Cost of oil used to lubricate factory machinery and equipment is an example of a direct materials cost.
True or False
False
Which of the following is most associated with financial accounting?
a. Can be prepared periodically, or as needed.
b. Can have both objective and subjective information.
c. Prepared in accordance with GAAP.
d. Can be prepared for the entity or segment.
c. Prepared in accordance with GAAP.
For an automotive repair shop, the wages of mechanics would be classified as direct labor cost.
True or False
True
The costs of materials and labor that do not enter directly into the finished product are classified as cost of goods sold.
True or False
False
Which of the following is an example of direct labor cost for an airplane manufacturer?
a. Salary of plant supervisor
b. Cost of oil lubricants for factory machinery
c. Cost of jet engines
d. Cost of wages of assembly worker
d. Cost of wages of assembly worker
Which of the following is an example of direct materials cost for an automobile manufacturer?
a. Cost of interior upholstery
b. Cost of oil lubricants for factory machinery
c. Cost of wages of assembly worker
d. Salary of production supervisor
a. Cost of interior upholstery
Managerial accounting
a. is prepared according to GAAP.
b. is prepared according to management needs.
c. is related to the entire business entity only.
d. is prepared periodically only.
b. is prepared according to management needs.
The cost of a manufactured product generally consists of direct materials cost, direct labor cost, and factory overhead cost.
True or False
True
A company manufactured 50,000 units of a product at a cost of $250,000. They sold 40,000 units for $10 each. What is Gross Margin?
a. $200,000
b. $150,000
c. $400,000
d. $250,000
b. $150,000
Compute conversion costs given the following data: Direct Materials, $383,487; Direct Labor, $266,943; Factory Overhead, $195,181.
a. $383,487
b. $578,668
c. $462,124
d. $845,611
c. $462,124
Accounting is an information system that provides essential data about the economic activities of an entity to various users to aid them in making informed judgments and decisions.
True or False
True
The following are all product costs except:
a. Direct labor
b. Direct materials
c. Sales and administrative expenses
d. Factory overhead
c. Sales and administrative expenses