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fi2 - Cost Classification Direct costsMaterials Labor...

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Cost Classification Direct costs—Materials & Labor Materials (if not highly perishable) are generally inventoried until put into production Direct labor can not be inventoried, but may be controllable by scheduling to meet production as required Accurate and timely scheduling is needed to minimize costs of idle inventories or wasted labor (motivation behind JIT and bottleneck management) Only those costs directly traceable to production
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Cost Classification (cont.) Indirect costs—overhead Will include indirect materials & labor (not specifically identified with production, such as general supplies, manager’s salary, janitorial services, etc.) Since these costs are not directly traceable, major problem is how to allocate overhead costs to production
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Overhead Cost Allocation Identify cost pools—examples Engineering, supervision, facility costs, maintenance/janitorial, etc. Needed for production but not directly part of the finished product. Many of these costs are not “value-added” Estimate costs (budgeting process) Establish an allocation base This will be a “cost driver” for the pool (machine hours for machine-intensive production, labor hours for labor-intensive production, etc.)
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Overhead Cost Allocation (cont.) Estimate quantity for allocation base How many labor hours budgeted, etc. Calculate cost allocation rate: Budgeted cost (pool) ------------------------ = Overhead Allocation Rate Budgeted Quantity
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Overhead cost illustration Factory Manager Salary $ 60,000
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