Question

1. Describe the main difference between direct materials and indirect materials that are used in any given production process.

2. The Cheepencheerful Bakery Company produces muffins that it sells to hotel chains in the city. It generally breaks even at the end of the year but not always. It only knows this when the company’s external accountants prepare financial statements that are used by the bank and to file tax returns. The company does its best to keep its costs down and as a result does not pay its employees very much.

When the president’s wife, who is the bookkeeper, decided to retire, the president advertised for her replacement. He felt he could find someone who would work for slightly more than minimum wage. This would be in line with his desire to keep costs down.

Comment on the president’s desire to keep his costs down by hiring a poorly paid accountant for his organization.

Answer 1

(1). Difference between direct materials and indirect materials;

	Direct materials	Indirect materials
1	Direct materials are easily identifiable with production cost.	Indirect materials are not easily identifiable with production cost.
2	Direct materials are conveniently measurable.	Indirect materials are not conveniently measurable because these costs are common to the whole produced units.
3	Direct materials are part of the finished products.	These are part of overhead cost.
4	Direct materials are part of the prime cost.	These are part of factory cost.

(2).

President’s desire to keep his costs down by hiring a poorly paid accountant for his organization is not correct decision because by hiring a poorly paid accountant president is compromising with the quality of the service of an accountant.

As we know that an accountant has to perform various types of legal formalities such preparation of financial statements as per accounting standards, filling tax returns, filling legal accounting report to the top management, making simple accounting financial analysis etc. Thus these functions can be performed by an expert accountant so president should not hire a poorly paid accountant becaue this will hammer on the quality of the accounting service. Sometime low efficient accountant may create some overburden of costs hence a well trained accountant will be a good option.