Precise Definitions:
One of the things that makes
accounting tricky is that many
common everyday words have very
precise definitions in accounting.
"Depreciation" is one good
example. "Overhead" is another. They are common words that
everyone understands. But in
accounting, the words have special
meaning. In order to get your
homework correct, you need to
have a clear understanding of the precise definitions.
Direct Labor:
The definition of direct labor is
pretty easy. Direct labor represents
the people who do the core work of
the business. For example, if the
business is a construction company,
direct labor would be the people actually constructing the building.
They would be the people with
hammers and saws in their hands.
In a retail store, direct labor would
be the people helping on the sales
floor doing the basic work that takes place serving the customers. In a
grocery bag factory, direct labor are
the people running the machines
actually making the bags. I think of
direct labor as the people who
make or build the product.
The Tricky Thing About Direct Labor
Determining if a person should be
classified as direct labor can be
tricky at times. This is especially so
if the company operates on a "job
order" basis. Job order businesses
are common. Almost any time a product is customized for a
customer, the company will operate
on a "job order" basis. Some
examples would include an auto
mechanic shop, a construction
company building custom homes, and the grocery bag factory. The
grocery bag factory was always
doing special orders for Safeway
and other stores. Here is the trick
with direct labor and job order
companies.
The labor must clearly be associated with a particular job, in order for the labor to be called "direct labor."
Here is an example. A secretary in
a large, custom home construction
company will usually do a variety of
things, but it is almost impossible to
keep track of how or when the
secretary benefits a certain custom home project when their are several
projects going at the same time.
Since the secretary's time cannot
be assigned conveniently to any
certain custom home, the secretary
would not be considered direct labor.
Another example would be the
inspector at the grocery bag
factory. The inspector would go
from machine to machine
inspecting grocery bags to make
sure their were not any defects in the bags. Although the inspector
did an important job, it was
impossible to assign the inspector's
time to any particular customer's
order. As a result, the inspector's
labor was not considered direct labor.
One last thought... If a person's
labor cannot be easily linked to a
specific customer's order or the
person does not directly build the
product, the person's labor is called
"indirect labor."
Direct Materials:
All of the materials that go into
making a product are called "Raw
Materials." Raw materials come in
two flavors: Direct Materials and Indirect Materials.
Direct materials are the raw
materials that become part of the
product. For example, bricks,
shingles, and bath tubs would be
the direct materials when building a
house. Paper would be a direct material when making grocery
bags. Seems easy, but there is a
catch.
The Catch with Direct Materials
In order for a raw material to be
classified as a direct material, the
amount of raw material must be
easily counted or kept track of.
Here is an example. When making
grocery bags, it is pretty easy to keep track of the amount of paper
being used for each bag, but it is
very difficult to know exactly how
much glue is being used to hold the
paper bag together. Of course, if a
person got a magnifying glass and really examined the bags, maybe
the amount of glue could be
determined. But would it be worth
all of the time and effort?
Compared to the paper, the glue is
pretty inexpensive. Other than holding the bag together, the glue
is rather insignificant. Sooooo.....
The glue is not tracked on a
product or job basis. It is just not
worth the effort. Since the glue is
not tracked on a product or job basis, the glue is not considered a
direct material even though the
glue is part of the product.
In a nutshell, direct materials are those materials that become part of the finished product... providing it is possible and worth the effort to keep track of those materials on a per product basis.
So what are raw materials called
that are either not worth keeping
close track of or are difficult to know
exactly how much raw material is
going into each product? Indirect materials. Indirect materials also include other materials used in the
production process such as oil for
machines, welding rods for repairs,
sand paper for making tables, and
any other small miscellaneous
materials.
Overhead:
The definition for overhead is easy.
Here it is......
If a cost is not direct labor or direct materials, the cost is overhead.
In other words, overhead is a
multitude of different costs including
indirect labor and indirect
materials. Here are a few of many
examples: electricity, property
taxes, advertising, accounting, janitors, cleaning supplies,
distribution costs, legal fees,
interest, inspectors, human
resources department, etc, etc, etc.
Life would be too easy if it were just
that simple. There is one wrinkle.
There is a distinction between
between overhead and
manufacturing overhead.
Overhead's Wrinkle:
The generic term "overhead" can
refer to all the costs in a company
that are not direct labor or direct
materials.
Manufacturing overhead means the
same thing.... all costs except direct
labor and direct materials. The
difference is that manufacturing
overhead refers to those costs
closely related to the factory or production process. So here is a
definition for manufacturing
overhead:
Manufacturing overhead is everything (all costs) except direct labor, direct materials, administrative costs, and marketing costs.
So, manufacturing overhead does
not include the president's salary,
accountants, lawyers, interest
expense, advertising, marketing,
secretarial staff, distribution costs,
income taxes, etc, and any other costs related to a company's
administration. By the way, manufacturing overhead is what goes on the "Cost of Goods
Manufactured Statement."
sumber: academic.regis.edu/dbush/Accounting/Accounting%20Help/DL%20DM%20OH/acc_dl_dm_o.htm
