Question

The PC Works assembles custom computers from components supplied by various manufacturers. The company is very small and its assembly shop and retail sales store are housed in a single facility in a Redmond, Washington, industrial park. Listed below are some of the costs that are incurred at the company.

Required:

For each cost, indicate whether it would most likely be classified as direct materials, direct labor, manufacturing overhead, selling, or an administrative cost.

1. The cost of a hard drive installed in a computer.

• Direct labor cost

• Direct materials cost

• Manufacturing overhead cost

• Selling cost

• Administrative cost

2. The cost of advertising in the Puget Sound Computer User newspaper.

• Direct labor cost

• Direct materials cost

• Manufacturing overhead cost

• Selling cost

• Administrative cost

3. The wages of employees who assemble computers from components.

• Direct labor cost

• Direct materials cost

• Manufacturing overhead cost

• Selling cost

• Administrative cost

4. Sales commissions paid to the company’s salespeople.

• Direct labor cost

• Direct materials cost

• Manufacturing overhead cost

• Selling cost

• Administrative cost

5. The salary of the assembly shop’s supervisor.

• Direct labor cost

• Direct materials cost

• Manufacturing overhead cost

• Selling cost

• Administrative cost

6. The salary of the company’s accountant.

• Direct labor cost

• Direct materials cost

• Manufacturing overhead cost

• Selling cost

• Administrative cost

7. Depreciation on equipment used to test assembled computers before release to customers.

• Direct labor cost

• Direct materials cost

• Manufacturing overhead cost

• Selling cost

• Administrative cost

Answer 1

1. The cost of a hard drive installed in a computer would be classified as direct material cost as it can be easily identified with the unit of production.

2. The cost of advertising in the Puget Sound Computer User newspaper would be classified as selling cost as it relates to marketing and advertisement of product.

3. The wages of employees who assemble computers from components would be classified as direct labor cost as it is the cost of the work directly on manufacture product.

4. Sales commissions paid to the company’s salespeople would be classified as Selling cost as it is related directly to the sales activities of the product.

5. The salary of the assembly shop’s supervisor would be classified as Manufacturing overhead cost as it includes cost incurred in the manufacturing facilities other than for direct material and direct labor.

6. The salary of the company’s accountant would be classified as Administrative cost as it relates to activities of controlling and directing an organization and specific to any division.

7.  Depreciation on equipment used to test assembled computers before release to customers would be classified as Manufacturing overhead cost as it includes cost incurred in the manufacturing facilities other than for direct material and direct labor.