Module 2

Cost concepts and classification

Exercises;
1. Define the following costs:
a. direct materials
- this are raw materials that become part of finished product and can be
conveniently and economically traced to specific product units which is identifiable and
chargeable directly to it.

b. Indirect materials
- minor materials and other production supplies that cannot be
conveniently or economically traced to specific products are accounted for as indirect
materials. Indirect material costs are part of factory overhead costs.

c. Direct labor
- the amount paid as wages to those working directly on the product.
Direct labor costs include all labor costs for specific work performed on products that
can be conveniently and economically traced to end product.

d. Indirect labor
-labor costs for production related activities that cannot be conveniently
and economically traced to end products.

e. Factory overhead
-are a varied collection of production-related costs that cannot be
practically or conveniently traced directly to end products.

Problem 1
1. Presented below is a list of costs and expenses usually incurred by Ram Corporation,
a manufacturer of furniture, in its factory.

Classify the above items into the following categories (a) direct materials, (b) direct
labor and (c) manufacturing
overhead.
Direct materials Direct labor Manufacturing overhead
 a. Metal used in d. Wages paid to machine h. Sandpaper, bolts and
manufacturing tables operators nails

c. Leather used in i. Property taxes on factory

manufacturing furniture building

g. Wood used in f. Salaries of factory

manufacturing furniture supervisors
b. Insurance on factory

e. Depreciation of factory
machinery
j. Rent of factory building

Reflection:
1. In what way does a typical manufacturing business differ from a merchandising
concern? In what way are they similar?
Manufacturing begins the process of designing and creating goods while
merchandising completes the task by taking products and getting them into the hands of
consumers. The most significant difference between a manufacturing company and a
merchandising business is that a manufacturer makes goods to sell and a merchandiser
buys or acquires goods for resale. they are similar due to the fact that they both sell the
product for more than it cost them to buy or product.