In some industries labor cost forms a significant portion of total costs The

In some industries labor cost forms a significant

This preview shows page 11 - 13 out of 197 pages.

finished good or service. In some industries labor cost forms a significant portion of total costs. The labor which cannot be traced to a product is considered to be the indirect labor. The indirect labor forms part of factory overhead. In the above example, the cost of the workers who directly expend their energy on making the furniture with the help of tools and machines is considered to be the direct labor. The salary paid to a supervisor, who oversees the activities of a team of workers is considered as indirect labor. Overheads: Those elements of costs necessary in the production of an article or the performance of a service which are of such a nature that the amount applicable to the product or service cannot be determined accurately or readily. Usually they relate to those objects of expenditures which do not become an integral part of the finished product or service such as rent, heat, light, supplies, management, supervision, etc. In other words, overheads consist of indirect materials, indirect labor and other indirect expenses. The overheads can be classified into factory overheads, office and administration overheads and selling and distribution overheads. Continuing with the above example, cost of
Image of page 11
11 factory lighting, rent of the factory, rent of administrative building, salary of administrative staff and managers, depreciation of machinery etc. constitute overheads. 2. By Functions It leads to grouping of costs according to the broad divisions of functions of a business undertaking or basic managerial activities, i.e. production, administration, selling and distribution. According to this classification costs are divided as follows: Manufacturing and Production Costs This category includes the total of costs incurred in manufacture, construction and fabrication of units of production. The manufacturing and production costs comprise of direct materials, direct labor and factory overheads. Administrative Costs This category includes costs incurred on account of planning, directing, controlling and operating a company. For example, salaries paid to managers and other administrative staff. Selling and Distribution Costs Selling costs and distribution costs are most often confused to be one and the same. However, there is a distinction between the two. Selling costs are defined as ―the cost of seeking to create and stimulate demand and of securing ord ers‖. Example of selling costs are advertisement, salesman salaries, etc. Whereas, distribution costs are defined as ―the cost of sequence of operations which begin with making the packed product available for dispatch and ends with making the reconditioned, returned empty packages, if any available for re-use. For example, insurance on goods in transit, warehousing etc. are distribution costs.
Image of page 12
Image of page 13

You've reached the end of your free preview.

Want to read all 197 pages?

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes