Question

Determine whether each of the following costs should be classified as direct materials, direct labor, or manufacturing overhead.

(a)		Direct MaterialsDirect LaborManufacturing Overhead		Frames and tires used in manufacturing bicycles.
(b)		Direct MaterialsDirect LaborManufacturing Overhead		Wages paid to production workers.
(c)		Direct MaterialsDirect LaborManufacturing Overhead		Insurance on factory equipment and machinery.
(d)		Direct MaterialsDirect LaborManufacturing Overhead		Depreciation on factory equipment.

Answer 1

Answer a)

Frames and Tires used in manufacturing of bicycles: It is a direct material cost as these materials are used in manufacture of bicycle and can be directly identifiable with the finished product (i.e. Bicycle)

Answer b)

Wages paid to production workers: It is a direct Labor cost as workers are directly engaged in manufacture of product.

Answer c)

Insurance on factory equipment and machinery: It is a Manufacturing overhead as factory equipment and machinery is used in manufacture of products and its insurance will form part of cost of production. It is not directly identifiable with the units products and is thus a part of manufacturing overhead

Answer d)

Depreciation on factory equipment: It is a Manufacturing overhead as factory equipment is used in manufacture of products and its depreciation cost on account of usage will form part of cost of production. It is not directly identifiable with the units products and is thus a part of manufacturing overhead