Page 106 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 5: Basic Cost Concepts

2. Labour Notes
Labour can be categorised as:
(a) Direct labour: The work of factory employees that can be physically and directly
associated with converting raw materials into finished goods is considered direct
labour.
(b) Indirect labour: In contrast, the wages of maintenance people, time-keepers, and
supervisors are usually identified as indirect labour. Their efforts have no physical
association with the finished product, or it is impractical to trace the costs to the
goods produced. Like indirect materials, indirect labour is also treated as
manufacturing overhead.
3. Expenses
Expenses include the following:
(a) Direct Expenses: Apart from material and labour, many a times there is need to insert
some specific expenses such as production royalties to be paid to the holders of
manufacturing/patent rights, hire/purchase of certain special machine tools for
one-time jobs, etc. This category of cost is termed as direct expenses.
(b) Indirect expenses: Indirect expenses consist of costs that are indirectly associated with
the manufacture of the finished product. These costs may also be manufacturing
costs that cannot be classified as direct materials or direct labour. Indirect expenses
include indirect materials, indirect labour, depreciation on factory assets, etc.
4. Overhead
The term overhead includes indirect material, indirect labor and indirect expenses. Thus,
all indirect costs are overheads.
A manufacturing organization can broadly be divided into the following three divisions:

(a) Factory or works, where production is done.
(b) Office and administration, where routine as well as policy matters are decided.
(c) Selling and distribution, where products are sold and finally dispatched to customers.
Overheads may be incurred in a factory or office or selling and distribution divisions.
Thus, overheads may be of three types:

(a) Factory Overheads
They include the following things:
(i) Indirect material used in a factory such as lubricants, oil, consumable stores,
etc.
(ii) Indirect labor such as gatekeeper, timekeeper, works manager’s salary, etc.

(iii) Indirect expenses such as factory rent, factory insurance, factory lighting, etc.
(b) Office and Administration Overheads
They include the following things:
(i) Indirect materials used in an office such as printing and stationery material,
brooms and dusters, etc.

(ii) Indirect labor such as salaries payable to office manager, office accountant,
clerks, etc.
(iii) Indirect expenses such as rent, insurance, lighting of the office.

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