Question

Classifying Costs Assume you are going to become an entrepreneur and start your own business. Think about your talents and interests and come up with an idea for a small business venture that provides a unique product or service to local customers.

Pool Building Company

a) What would the major costs of your business be? Try to classify the costs into the areas of direct materials; direct labor; manufacturing overhead; and selling, general, and administrative expenses. (Hint: Not all businesses will have all of these cost classifications.)

b) Why would you need to determine the cost of providing your product or service to individual customers? In other words, what types of decisions would you expect to make based on job order cost information?

c) In general, would you expect your company’s indirect (overhead) costs to be less or more than the direct costs (direct labor and materials)? What allocation base do you think you would use to charge overhead costs to individual customers? How much do you think the overhead rate would need to be?

Answer 1