BUS 630 Week 2 Assignment CASE 3A AUERBACH ENTERPRISES

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BUS 630 Week 2 DQ 1

Direct material direct labor and

manufacturing overhead

On financial statements, each product must include the

costs of the following:

1. Direct material

2. Direct labor

3. Manufacturing (or factory) overhead

Manufacturing overhead (also known as factory

overhead, factory burden, production overhead) involves

a company’s factory operations. It includes the costs

incurred in the factory other than the costs of direct

materials and direct labor. This is the reason that

manufacturing overhead is often classified as an indirect

product cost.

Generally accepted accounting principles require that

cost of direct material cost, direct labor, and

manufacturing overhead be considered as the cost of

products for valuing inventory and for determining the

cost of goods sold. (Expenses that are outside of the

factory, such as selling, general and administrative

expenses, are not product costs and are not

inventoriable. They are reported as expenses on the

income statement in the accounting period in which they

occur.)

Examples of manufacturing overhead include the

depreciation or the rent on the factory building,

depreciation on the factory equipment, supervisors in

the factory, the factory quality control department,

factory maintenance employees, electricity and gas for

the factory, indirect factory supplies, etc

According to generally accepted accounting principles

(GAAP), manufacturing overhead must be included in

the cost of Work in Process Inventory and Finished

Goods Inventory on a manufacturer’s balance sheet, as

well as in the Cost of Goods Sold on its income

statement.

As their names indicate, direct material and direct labor

costs are directly traceable to the products being

manufactured. Manufacturing overhead, however,

consists of indirect factory-related costs and as such

must be divided up and allocated to each unit produced.

For example, the property tax on a factory building is

part of manufacturing overhead.

Manufacturing overhead costs play a vital role in

determining final cost of the product. Manufacturing

overhead represents all the costs that the company

incurs indirectly and not related to the cost of direct

labor, direct materials or direct cost of machines

(Donald, 2010). In short, companies are not able to

trace these costs to individual items during the

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BUS 630 Week 2 DQ 1 Direct material direct labor and manufacturing overhead On financial statements, each product must include the costs of the following:? 1. Direct material? 2. Direct labor? 3. Manufacturing (or factory) overhead? Manufacturing overhead (also known as factory overhead, factory burden, production overhead) involves a company's factory operations. It includes the costs incurred in the factory other than the costs of direct materials and direct labor. This is the reason that manufacturing overhead is often classified as an indirect product cost. Generally accepted accounting principles require that cost of direct material cost, direct labor, and manufacturing overhead be considered as the cost of products for valuing inventory and for determining the cost of goods sold. (Expenses that are outside of the factory, such as selling, general and administrative expenses, are not product costs and are not inventoriable. They are reported as expenses on the income statement in the accounting period in which they occur.) Examples of manufacturing overhead include the depreciation or the rent on the factory building, depreciation on the factory equipment, supervisors in th ...
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