Chapter 2 Cost Terms, Concepts, and Classifications

Chapter 2 Cost Terms, Concepts, and Classifications -...

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Chapter 2: Cost Terms, Concepts, and Classifications February-08-16 2:51 PM General Cost Classifications Manufacturing Costs Most manufacturing companies divide this cost class into three parts: direct materials, direct labour, and manufacturing overhead. Direct Materials: The materials that go into the final product are called raw materials. This term is somewhat misleading since it seems to imply unprocessed natural resources like wood pulp or iron ore. Actually, raw materials refer to any materials that are used in the final product, and the finished product of one company can become the raw materials of another company. Direct Labour: consists of labour costs that can be easily traced to individual units of production. The labour costs of assembly line workers are direct labour costs, as are the labour costs of welders and equipment operators. Labour costs that cannot be physically traced to the creation of products or that can be traced only at great cost and inconvenience, are termed indirect labour and treated as part of manufacturing overhead. Manufacturing Overhead: the third element of manufacturing costs, includes items such as indirect materials, and indirect labour. Manufacturing overhead includes items such as indirect materials, indirect labour, maintenance and repairs on production equipment, heat and light, property taxes, depreciation, and insurance.
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