Direct Costs
The assignment of direct labour and materials to cost objects merely involves the
implementation of suitable clerical/computer procedures to identify the quantity and
prices of the resources consumed. Indirect labour and material costs are classified as
overheads and the costs are assigned to overhead accounts classified by the type and
location of expense. For example, where workers are unoccupied for short periods
of time it will be recommended that the costs should be charged to an idle time overhead
account for each department. In some situations, indirect labour and materials
costs may not be easily identifiable with a particular department and the costs will be
assigned to an appropriate overhead account for the business unit as a whole. For
example, you will see that materials handling expenses are charged to a material handling
expenses overhead account for the whole business unit since it is not possible
to identify the costs with a particular department.
The emphasis throughout this learning note is on how labour and materials costs
that have already been incurred should be accumulated for allocating costs between
costs of goods sold and inventories for internal and external profit reporting purposes.
For decision-making the emphasis is on using future costs rather than past
costs, so the accumulation of past costs is generally not relevant for decision-making.
For example, many companies obtain customers’ orders by submitting bids or quotations,
which, if accepted become the agreed selling prices. The assignment of actual
costs incurred may provide useful feedback information on the accuracy of the bids,
and help to improve the accuracy of future bids, but past costs are normally not
directly used for decision-making. Exceptions do exist, however, such as garages that
charge for repairs on the basis of...
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