Question

1. Describe direct materials, direct labor, and factory overhead.

2. Describe the process on how to compute cash received from customers under the direct method.

Answer 1

Question 1

Direct Materials refers to the various raw materials used to manufacture a product. Normally all the direct materials are traced to a product and there is proper ascertainity to allocate them. For Example - Using wood in the manufacture of furniture is an example of direct costs for the finished product.

Direct Labour refers to the labour directly involved in the manufacture process for the manufacture of finished product. For Example - Labour involved in cutting and assembling various raw materials to form furniture is an example of direct labour.

Factory Overheads ate the various indirect material, labour and other costs incurred during a manufacturing process which is not directly allocable to a product but they are incurred as a whole for the organization and their division or allocation is based upon their usage level.For Ex- Rent, Electricity, Indirect Materials Costs and various other costs.

Question 2

The amount of cash received from customer is calculated by adjusting the sales in the income statement with the movement in the balance of the accounts receivables.

Cash Collection from Customer = Sales + Opening Balance of Accounts Receivables - Closing Balance of Accounts Receivables