Question

What is an activity? Give some examples of activities within a manufacturing firm.

What is a direct cost? An indirect cost?

Answer 1

• An activity, when used in relation with a manufacturing firm, means a sub-process, distinct on its own, that is required in the production process, without which the products cannot be produced.

Hence, an activity:
> is a part of manufacturing production process,
> is a distinct activity and has its own unique features.
> is an important process element without which the production process would be incomplete.

• Examples of activities within a manufacturing firm:
  > Manufacturing activity [overall production]
  > Processing activities [converting raw material to WIP and WIP into Finished inventory]
  > Batch Processing activities
  > Assembling activities
• Direct Costs are those costs:
  > that are directly related to production of the products.
  > that become part of the product when its finished.
  > that are very essential and without them there will be no production.

Example of Direct cost: Cost of Raw material, Wages paid to labors, Freight charges on purchases, etc.

• Indirect Costs are those costs:
  > that are not directly related to the production of products.
  > that are ‘indirectly’ involved in production process.
  > that are also known as “Overheads”

Examples include: Factory Rent, Electricity expenses, Cost of Spare parts consumed, etc.