Question

Describe the four (4) product costs discussed in this chapter, i) Direct Materials, ii) Direct Labor, iii) Manufacturing Overhead and iv) Period Costs. Also, explain how the costs flow from and to along a job cost system and include debits and credits in your descriptions.

Answer 1

Direct material: direct material cost is the cost of raw material used for making a product. Example for making a toy the plastic used would be direct material cost.

Direct labor: direct labour cost is the cost of labors engaged in converting the raw material into finished product.

manufacturing overhead: It is the cost other than direct material and direct labor. This cost can not be identified individually with a product but is incurred in making a product. example: rent of factory, depreciation on the fixed assets used in production.

Periods costs: period costs are the costs which are shown for a particular period in Income statement, so these cost are not capitalised. example : selling and administrative expenses.

The flow of cost in job cost system starts by recording cost of material, labor and overheads.

direct material and labor costs are debited to work in process account. manufacturing overheads are debited to manufacturing overhead control then manufacturing overhed is applied to work in process by using predetermined rate, here work in process is debited and manufacturing overhead control is credited.

Then, cost of finished goods is debited to finished goods account and credited to work in process account

finally , when goods are sold then finished goods account is credited and cost of goods sold acccount is debited.

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