Page 146 - Finance for Non-Financial Managers

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Cost Accounting
facturing overhead costs
that belong to that depart-
raw materials that go
ment and that process. Direct materials Those 127
directly into making the
Dividing the total costs product.The direct materials to man-
charged to that manufac- ufacture a chair, for example, would
turing department by the include wood, fabric, screws, and glue.
(For ease of accounting, some minor
total number of units the
costs may not be assigned directly but
department’s efforts pro-
rather may be grouped into manufac-
duced gives us the unit
turing overhead.)
cost of all units produced
during the period being
measured. The final unit cost is equivalent to the unit cost
arrived at in a job costing environment. The difference is that a
continuous process does not permit the individual collection of
costs by unit during the process, a factor that somewhat limits
the analysis potential later on.
Conversion cost The sum of all the direct labor and man-
ufacturing overhead costs that belong to that department
and that process.
Direct labor The cost of wages paid to workers who are directly
employed in manufacturing products or in providing the services for
customers. On the shop floor, it’s the labor of the machinist or the
welder. In a consulting firm, it’s the time of the consultant who’s work-
ing with the client. In a distribution firm, there may be little or no
direct labor, as products are generally purchased in finished form.
Manufacturing overhead All the costs necessary to operate the
business that are not classified as direct labor or direct materials.
Often referred to as indirect costs, these may include rent and insur-
ance, utilities, the janitorial service, and the supervisors who oversee
the direct labor workers but who do not work on jobs directly them-
selves.All these indirect costs are necessary for the manufacturing
process, but they are not charged directly to specific jobs. Instead,
they’re grouped together and then allocated to all the jobs or prod-
ucts in some manageable way.Allocation is most often based on a fac-
tor directly related to the work produced, such as direct labor hours
worked on the job or direct labor dollars charged to the job.