“Indirect labor” includes costs for labor that is used in manufacturing but which cannot be directly traced to a specific cost object. costs that can be easily and conveniently traced to a specific product are called Supervisors for a plant (who oversee production for all of the company’s products) would be categorized as indirect labor.
The allocation base is the “link” that is used to attach overhead costs to the cost object. In a manufacturing setting, the simplest allocation base is the number https://business-accounting.net/ of units produced. For example, if the factory makes 15,000 units, the accounting system can simply “spread” the overhead costs evenly over all 15,000 units.
What Are Traceable Costs?
These managers want to know the unit cost for product pricing, product sourcing, and performance evaluation purposes. They do not want to talk about the cost of making 620 units, even if that is the batch size. However, in most batch processes, there would be very little benefit and enormous additional expense costs that can be easily and conveniently traced to a specific product are called in determining the cost of each unit of product individually. Rather, the accounting system treats the batch as the cost object, and to derive a unit cost, we divide the cost of the batch by the number of units in the batch. Although direct costs are typically variable costs, they can also include fixed costs.
There is a common convention that can be confusing. We often talk about the cost object as one unit of product, because factory managers and product managers speak in terms of unit costs.
Direct Costs And Indirect Costs
The cleaning crew that cleans the plant would also be indirect labor, as would the maintenance crew that handles repairs for the plant. Whatever cost allocation base is chosen, it must be a “common denominator” retained earnings balance sheet across all cost objects. For example, a furniture factory could allocate overhead costs across all products using direct labor hours, because direct labor is incurred by all products made at the factory.
Examples of direct labor cost include labor cost of machine operators and painters in a manufacturing company. Like direct materials, it comprises of a significant portion of total manufacturing cost. A cost that is easily traceable to a particular cost object is known as direct cost. The use of the term “direct cost” is not limited to direct materials and direct labor. Every cost that can be easily and conveniently traced to a particular product, customer, branch, plant or any other cost object is a direct cost. For example, if Bata shoes company wants to assign costs to all the branches in Pakistan, then the salary of the manager of Islamabad branch would be a direct cost of that branch.
Rent for a factory, for example, could be tied directly to the production facility. However, companies can sometimes tie fixed costs to the units produced in a particular facility. A direct retained earnings cost is a price that can be directly tied to the production of specific goods or services. A direct cost can be traced to the cost object, which can be a service, product, or department.
Manufacturing costs other than direct materials and direct labor are categorized as manufacturing overhead cost . It usually includes indirect materials, indirect labor, salary of supervisor, lighting, heat and insurance cost of factory etc. Usually, prepaid expenses manufacturing overhead costs cannot be easily traced to individual units of finished products. The labor cost that can be physically and conveniently traced to a unit of finished product is called direct labor cost or touch labor cost.