Question

The restaurant hired a number of chefs, waiters and a manager. All chefs and waiters are part-time employees. hualaishi weekly hire a janitor cleaning the room. The house, which is been used as restaurant, is rent from a real estate company, and basically is an empty house without any furniture or equipment. The manager is responsible for planning, business, advertising, counting the cash, and hire staff. The cost in December is as follows:

Meat £ 16,000

Lettuce 3,000

Tomatoes 2,500

Fruit and bread 3,000

Other ingredients: 200

chefs salary 25,500

The waiter wage 2,0320

Manager salary 20,000

Public facilities use fees 5,000

Depreciation:

Kitchen equipment, £ 3,000

Cash register 500

Advertisement 1,000

Rent 8,000

material cost of Housing management 500

Housing manager salary 1,200

Requirements:

(a) Classify the operating costs of hualaishi in December into the following categories: direct materials, direct labor, production overheads or selling and administration expenses.

(b) Give the explanation of your classification.

Answer 1

(a). Classification of Operating Costs of hualaishi in December is as follows:

1. Direct materials
   1. Meat £ 16,000
   2. Lettuce £ 3,000
   3. Tomatoes £ 2,500
   4. Fruit and bread                                      £ 3,000
2. Direct labor
   1. Chefs salary £ 25,500
3. Production overheads
   1. Other ingredients £ 200
   2. Depreciation: Kitchen equipment £ 3,000
   3. Rent £ 8,000
4. Selling and administration expenses
   1. The waiter wages £ 20,320
   2. Housing manager salary £ 1,200
   3. Material cost of Housing management    £ 500
   4. Manager salary £ 20,000
   5. Depreciation: Cash register   £ 500
   6. Public facilities use fees £ 5,000
   7. Advertisement £ 1,000

(b) Explanation for the classification done

The costs incurred are generally divided into two groups: Products Costs and Non-Products Costs (or Period Costs)

Product Costs being the costs incurred in producing a product which is intended to be sold to the consumer can be categorized into direct material (DM), direct labor (DL) and production or manufacturing overhead (MOH).

Direct material costs are costs of materials that directly go into producing a product

Direct labor costs are costs of labor who are directly related or involved in the process of producing a product

Both these Direct material and Direct Labor are directly traceable to the products being manufactured.

Production Overheads are indirect costs that are related to producing a product.

Period Costs are non-manufacturing costs that are expensed within the period incurred. These costs have to be incurred irrespective of whether or not production takes place. These commonly includes selling expenses, marketing costs and administration expenses.