A Portion of the Costs Incurred by Business Organizations Is

Essay

A portion of the costs incurred by business organizations is designated as direct labor cost. As used in practice, the term direct labor cost has a wide variety of meanings. Unless the meaning intended in a given context is clear, misunderstanding and confusion are likely to ensue. If a user does not understand the elements included in direct labor cost, erroneous interpretations of the numbers might occur and could result in poor management decisions. Measurement of direct labor costs has two aspects: (1) the quantity of labor effort that is to be included, that is, the types of hours or other units of time that are to be counted; and (2) the unit price by which each of these quantities is multiplied to arrive at a monetary cost.
Required:
1) Distinguish between direct labor and indirect labor.
2) Presented below are labor cost elements that a company has been classified as direct labor, factory overhead, or either direct labor or factory overhead depending upon the situation.
Direct labor-Included in the company's direct labor are cost production efficiency bonuses and certain benefits for direct labor workers such as FICA (employer's portion), group life insurance, vacation pay, and workers' compensation insurance.
Factory overhead-The company's calculation of manufacturing overhead includes the cost of the following: wage continuation plans, the company sponsored cafeteria, the personnel department, and recreational facilities.
Direct labor or factory overhead-The costs that the company includes in this category are maintenance expense, overtime premiums, and shift premiums.
Explain the reasoning used by the company in classifying the cost elements in each of the three categories.