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$College of Marin Study Guide for Math 95 A,B - Pearson Learning ...$

• Managers’, department heads’, and supervisors’ salaries • Payroll fringe costs, for example, health care premiums and pension costs (explained later) All manufacturing labor compensation other than for direct manufacturing labor, managers’ salaries, department heads’ salaries, and supervisors’ salaries is usually classified as indirect labor costs, a major component of manufacturing overhead. The indirect labor costs are commonly divided into many subclassifications to retain information on different categories of indirect labor. For example, the wages of forklift truck operators generally are not commingled with janitors’ wages, although both are regarded as indirect labor costs. Managers’ salaries usually are not classified as indirect labor costs. Instead, the compensation of supervisors, department heads, and all others who are regarded as manufacturing management is placed in a separate classification of manufacturing overhead. Overtime Premium and Idle Time The purpose of classifying costs in detail is to associate an individual cost with a specific cause or reason for why it was incurred. Two classes of indirect labor—overtime premium and idle time—need special mention. Overtime premium is the wage rate paid to workers (for both direct labor and indirect labor) in excess of their straight-time wage rates. Overtime premium is usually considered to be a part of indirect costs or overhead. Consider an example from the service sector. George Flexner does home repairs for Sears Appliance Services. He is paid $20 per hour for straight-time and $30 per hour (time and a half) for overtime. His overtime premium is $10 per overtime hour. If he works 44 hours, including 4 overtime hours, in one week, his gross compensation would be classified as follows: Direct service labor: 44 hours × $20 per hour $880 Overtime premium: 4 hours × $10 per hour 40 Total compensation for 44 hours $920 ISBN: 0-536-53243-5 In this example, why is the overtime premium of direct labor usually considered an overhead cost rather than a direct cost? After all, it can be traced to specific repair jobs. Overtime premium is generally not considered a direct charge because the scheduling of repair jobs is usually either random or in accordance with minimizing overall travel time. For example, assume that jobs 1 through 5 are scheduled to be completed on a specific workday of 10 hours, including 2 overtime hours. Each job (service call) requires 2 hours. Should the job scheduled during hours 9 and 10 be assigned the overtime premium? Or should the premium be prorated over all five jobs? Prorating the overtime premium does not “penalize”—add to the cost of—a particular batch of work solely because it happened to be worked on during the overtime hours. Instead, the overtime premium is considered to be attributable to the heavy overall volume of work. Its cost is regarded as part of service overhead, which is borne by all repair jobs. Sometimes overtime is not random. For example, a customer demanding a “rush job” may clearly be the sole source of overtime. In such instances, the overtime premium is regarded as a direct cost of that job. Another subclassification of indirect labor is the idle time of both direct and indirect manufacturing or service labor. Idle time is wages paid for unproductive time caused by lack of orders, machine breakdowns, material shortages, poor scheduling, and the like. For example, if the Sears repair truck broke down for 3 hours, Flexner’s earnings would be classified as follows: Direct service labor: 41 hours × $20/hour $820 Idle time (service overhead): 3 hours × $20/hour 60 Overtime premium (service overhead): 4 hours × $10/hour 40 Total earnings for 44 hours $920 Clearly, the idle time is not related to a particular job, nor, as we have already discussed, is the overtime premium. Both overtime premium and idle time are considered overhead costs. An Introduction to Cost Terms and Purposes 43 Cost Accounting: A Managerial Emphasis, Twelfth Edition, by Charles T. Horngren, Srikant M. Datar, and George Foster. Copyright © 2006 by Pearson Education, Inc. Published by Prentice Hall.
Benefits of Defining Accounting Terms Managers, accountants, suppliers, and others will avoid many problems if they thoroughly understand and agree on the classifications and meanings of the cost terms introduced in this chapter and later in this book. Consider the classification of manufacturing labor payroll fringe costs (for example, employer payments for employee benefits such as Social Security, life insurance, health insurance, and pensions). Some companies classify these costs as manufacturing overhead costs. In other companies, the fringe benefits related to direct manufacturing labor are treated as an additional direct manufacturing labor cost. Consider, for example, a direct laborer, such as a lathe operator, whose gross wages are computed on the basis of a stated wage rate of $20 an hour and fringe benefits totaling, say, $5 per hour. Some companies classify the $20 as direct manufacturing labor cost and the $5 as manufacturing overhead cost. Other companies classify the entire $25 as direct manufacturing labor cost. The latter approach is preferable because the stated wage and the fringe benefit costs together are a fundamental part of acquiring direct manufacturing labor services. Caution: In every situation, pinpoint clearly what direct manufacturing labor includes and what direct manufacturing labor excludes. Achieving clarity may prevent disputes regarding cost-reimbursement contracts, income tax payments, and labor union matters. Consider that some countries such as Costa Rica and Mauritius offer substantial income tax savings to companies that locate plants within their borders. In some cases, to qualify for the tax benefits, the direct manufacturing labor costs of the plant must at least equal a specified percentage of the total manufacturing costs. Disputes have arisen regarding how to calculate the direct manufacturing labor percentage for qualifying for such tax benefits. For instance, are payroll fringe benefits on direct manufacturing labor part of direct manufacturing labor costs, or are they part of manufacturing overhead? Depending on how companies classify costs, you can see how they may show direct manufacturing labor as different percentages of total manufacturing costs. Consider a company with $5 million of payroll fringe costs (figures are assumed, in millions): Classification A Classification B Costs Percentage Costs Percentage Direct materials $ 40 40% Direct materials $ 40 40% Direct manufacturing labor 20 20 Direct manufacturing labor 25 25 Manufacturing overhead 40 40 Manufacturing overhead 35 35 Total manufacturing costs $100 100% Total manufacturing costs $100 100% Classification A assumes payroll fringe costs are part of manufacturing overhead costs. In contrast, classification B assumes payroll fringe costs are part of direct manufacturing labor costs. If a country set the minimum percentage of direct labor costs at 25%, the company would receive a tax break using classification B, but no tax break using classification A. In addition to fringe benefits, other debated items are compensation for training time, idle time, vacations, sick leave, and overtime premium. To prevent disputes, contracts and laws should be as specific as possible regarding definitions and measurements. CHAPTER 2 44 8 Explain why product costs are computed in different ways for different purposes . . . examples are pricing and product-mix decisions, government contracts, and financial statements Different Meanings of Product Costs Many cost terms found in practice have ambiguous meanings. Consider the term product cost. A product cost is the sum of the costs assigned to a product for a specific purpose. Different purposes can result in different measures of product cost, as the brackets on the value chain in Exhibit 2-10 illustrate: ■ Pricing and product-mix decisions. For the purposes of making decisions about pricing and which products provide the most profits, the manager is interested in the overall (total) profitability of different products and, consequently, assigns costs incurred in all business functions of the value chain to the different products. ISBN: 0-536-53243-5 Cost Accounting: A Managerial Emphasis, Twelfth Edition, by Charles T. Horngren, Srikant M. Datar, and George Foster. Copyright © 2006 by Pearson Education, Inc. Published by Prentice Hall.
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Page 3 and 4: EXHIBIT 2-1 Examples of Cost Object
Page 5 and 6: ect cost if the cost object is a pr
Page 7 and 8: Again examine the table. It is prec
Page 9 and 10: EXHIBIT 2-4 $160,000 Fixed-Cost Beh
Page 11 and 12: Study Tip: Practice is helpful if y
Page 13 and 14: EXHIBIT 2-6 Assignment of Costs to
Page 15 and 16: Step 3: Cost of goods manufactured
Page 17: Prime Costs and Conversion Costs Tw
Page 21 and 22: 9 Describe a framework for cost acc
Page 23 and 24: SOLUTION 1. Foxwood Company Income
Page 25 and 26: direct materials inventory (p. 37)
Page 27 and 28: . Variable or fixed (V or F) costs
Page 29 and 30: Required 1. What is the unit cost t
Page 31 and 32: 2-33 Income statement and schedule
Page 33 and 34: Required 2-38 Cost analysis, litiga

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