Indirect materials could include disposable gloves put on at the beginning of a shift. Re-usage applicators that you can use over the course of assembling several products. anti-static matting put on a bench at the beginning of a shift. Each of these items aren't directly tied to the production of a single unit.
Correct. James Ball - Thank you for correcting that. Glue for the mirror is direct materials. Rather than steel and rubber, he should be talking about steel panels and rubber tires - things that the car factory would have and use. Gloves, wipes, shelving to hold parts, computers to track inventory, etc are all indirect materials. Importantly, indirect labor is mfg management, quality assurance, shipping and receiving, data entry etc who do not actually assemble, configure, and test the car but work in the mfg side. Then administration costs include accounting, sales, marketing, non-mfg managment etc., which are not included in indirect costs.
Great question Steve! Corporate office staff such as H.R. or accountants would be classified as SG&A expense (selling, general, and administrative expense) which is a period expense. Period expenses are different from product expenses (such as direct labor and indirect labor) in that they do not attached themselves to the product. Thus, when you pay the corporate accountant, you expense his or her salary when you incur it (it does not become part of inventory or flow through cost of goods sold). Indirect labor is a product cost, not a period cost like SG&A, so it does attach itself to the product and flow through inventory and cost of goods sold. An example of indirect labor expense would be the salary of a janitor who sweeps the floor in the factory. This is contrasted with direct labor, in that direct labors typically touch or handle the product in some way (although not necessarily). Although a janitor is working in the factory, he or she isn't directly making the product so their salary is indirect labor. An example of direct labor would be a factory worker who assembles vehicles at an automotive manufacturing plant.
Im 2 years out of Post-secondary, I used to *have to* watch these types of videos for economics courses regularly. its interesting now being out in the real world, and being currently exposed to issues in pricing of goods at the Manufacturing company I work for. Now I am voluntarily coming back to watch the same videos I *had to* watch 3/4 years ago. This is interesting stuff, but more so now that I'm using it in the the workplace.
Accounting is like a lot of other things. It can start out really simple, and it can get a whole lot more complicated once you start adding on a bunch of layers.
Thank you for your great videos, I have been studying for a while now and your videos are the most interesting and comprehensive. You make very difficult concepts easy to understand. Thank you
What about excess factory capacity Costs (EFCC)? How are EFCC figured in calculating unit cost and also where should they be presented? I assume in the COS section but possibly there is guidance that they be placed in SG&A? Any thoughts would be appreciated.
Why do classify direct labor as product cost it is expensed as and when the period for example a labor working in factory for assembling his wages will expensed when the period ends not when the product is sold.... please clarify
Are employees in the Corporate Office (Accountants, HR, Finance, Executives, Project Managers, etc) considered to be Indirect Labours? Thus, they contribute to the Overheads? Cheers.
You could use the labels to determine if the cost is direct or indirect. So if it says manager of sales department, for example, that would only be direct if the cost object is 'sales'.
Yes, there is a fixed component of manufacturing overhead and a variable component of manufacturing overhead. When people simply say "manufacturing overhead" they typically mean both the fixed and variable component together (unless they state otherwise).
Direct Labor is also known as "touch" labor. The floor supervisor would not be considered direct labor because they aren't physically touching the products being produced and their labor can't be traced to an individual product being produced. Instead, the floor supervisor would be considered indirect labor, which is a part of Manufacturing Overhead. It's very similar to the example of the janitor in the video. Great question!
Will unit cost of machine used for the manufacturing be a direct cost? for example I need to use a drilling machine to drill a hole in the product and the cost of the drill machine is $ 2.00 per hour. So if I use the drill machine for half an hour, will $ 1.00 be included in the direct cost ?
Would glue still not be considered direct materials even if you could trace specific amounts to each car? Lubricant for a machine that makes parts seems a little closer to your description, since the lubricant wouldn't end up on the car, though you could still find a way to average the amount of lubricant you need for the machine per car and split it out that way if you wanted to. Maybe you'd have to go to something a bit less direct like the janitor's supplies to find an overhead that couldn't easily be attributed to specific cars. Maybe you'd have to decide at what point something becomes overhead somewhat arbitrarily, and this is an example of managerial accounting's flexibility.
Glue is an overhead because we estimate how much we would use its not exact and when you look at the final product you cant see the glue but its there used to attach the final product. That is how I understand it. An overhead is used in coordination with the final product.
here we are discussing product cost so for example if a machine is used to convert a good (which would be our final inventory ) the depreciation of the machine would be allocated as a depreciation cost (an overhead) on that specific job
You are correct. If it is part of the final product that goes out the door, then I'd consider it a direct material. Even though it isn't easy to trace the exact amount of paint used, the company could have a standard such as 1.5 gallons of paint is used per vehicle in order to track the costs per vehicle. More examples of indirect materials would be cleaning supplies for the factory and oil to lubricate the machines.
Indirect materials could include disposable gloves put on at the beginning of a shift. Re-usage applicators that you can use over the course of assembling several products. anti-static matting put on a bench at the beginning of a shift. Each of these items aren't directly tied to the production of a single unit.
Correct. James Ball - Thank you for correcting that. Glue for the mirror is direct materials. Rather than steel and rubber, he should be talking about steel panels and rubber tires - things that the car factory would have and use.
Gloves, wipes, shelving to hold parts, computers to track inventory, etc are all indirect materials.
Importantly, indirect labor is mfg management, quality assurance, shipping and receiving, data entry etc who do not actually assemble, configure, and test the car but work in the mfg side.
Then administration costs include accounting, sales, marketing, non-mfg managment etc., which are not included in indirect costs.
I owe you big time. These videos are helping me better than my CPA courses. GREAT CONTENT!
Great question Steve! Corporate office staff such as H.R. or accountants would be classified as SG&A expense (selling, general, and administrative expense) which is a period expense. Period expenses are different from product expenses (such as direct labor and indirect labor) in that they do not attached themselves to the product. Thus, when you pay the corporate accountant, you expense his or her salary when you incur it (it does not become part of inventory or flow through cost of goods sold). Indirect labor is a product cost, not a period cost like SG&A, so it does attach itself to the product and flow through inventory and cost of goods sold. An example of indirect labor expense would be the salary of a janitor who sweeps the floor in the factory. This is contrasted with direct labor, in that direct labors typically touch or handle the product in some way (although not necessarily). Although a janitor is working in the factory, he or she isn't directly making the product so their salary is indirect labor. An example of direct labor would be a factory worker who assembles vehicles at an automotive manufacturing plant.
+Education Unlocked So we don't include the wages paid to labors who are hired for certain period?
Im 2 years out of Post-secondary, I used to *have to* watch these types of videos for economics courses regularly. its interesting now being out in the real world, and being currently exposed to issues in pricing of goods at the Manufacturing company I work for. Now I am voluntarily coming back to watch the same videos I *had to* watch 3/4 years ago. This is interesting stuff, but more so now that I'm using it in the the workplace.
Glad to hear you're still finding it useful!
Thank you for this. I finally have a better understanding about the "Manufacturing Overhead." I needed this for our test. :)
You are actually a saviour!!!!!! Keep it up! So good!
Thank you so much for this video, it clearly answered a lot of questions I had on Manufacturing Costs.
Very well and simply explained.
Time to build machines to reduce labor costs :)
Accounting is like a lot of other things. It can start out really simple, and it can get a whole lot more complicated once you start adding on a bunch of layers.
Thank you so much!!
Great video! Thanks!
Glad you liked it, hope your course is going well!
Good explanation, thanks
No problem!
thanks a lot for the insight.
Thank you for your great videos, I have been studying for a while now and your videos are the most interesting and comprehensive. You make very difficult concepts easy to understand. Thank you
Please do not tie (or glue) the janitor to your car!
🤣😂 "You can't fire me, that's what they taught be in accounting"
this really helped! thanksss
+Ella G My pleasure!
Thanks a bunch....
What about excess factory capacity Costs (EFCC)? How are EFCC figured in calculating unit cost and also where should they be presented? I assume in the COS section but possibly there is guidance that they be placed in SG&A? Any thoughts would be appreciated.
Sometimes it would be in COS, this is a major issue that department heads will fight about. No one wants to pay for excess of idle capacity.
Thanks 😊
Hi
can you plz describe why the overhead cost behaviour is so complex and how it became the part of the product cost?
thanks this video is amazing
thanks pal!
Why do classify direct labor as product cost it is expensed as and when the period for example a labor working in factory for assembling his wages will expensed when the period ends not when the product is sold.... please clarify
Grinder used to cut the steel
When I calculate total manufacturing cost, do I include all of the indirect cost such as indirect materials, indirect labour and indirect overhead?
Tysm
Are employees in the Corporate Office (Accountants, HR, Finance, Executives, Project Managers, etc) considered to be Indirect Labours? Thus, they contribute to the Overheads? Cheers.
How do I calculate direct labor when the figures aren't presented and i need to complete a partially completed sheet?
I have the same question also.
You could use the labels to determine if the cost is direct or indirect. So if it says manager of sales department, for example, that would only be direct if the cost object is 'sales'.
so the manufacturing overhead --> is the indirect costs.
Is the manufacturing overhead the sum of fixed and variable overheads?
Yes, there is a fixed component of manufacturing overhead and a variable component of manufacturing overhead. When people simply say "manufacturing overhead" they typically mean both the fixed and variable component together (unless they state otherwise).
Wow, this helps. Thanks :-)
What category would a floor supervisor fall into?
Direct Labor is also known as "touch" labor. The floor supervisor would not be considered direct labor because they aren't physically touching the products being produced and their labor can't be traced to an individual product being produced. Instead, the floor supervisor would be considered indirect labor, which is a part of Manufacturing Overhead. It's very similar to the example of the janitor in the video. Great question!
Will unit cost of machine used for the manufacturing be a direct cost? for example I need to use a drilling machine to drill a hole in the product and the cost of the drill machine is $ 2.00 per hour. So if I use the drill machine for half an hour, will $ 1.00 be included in the direct cost ?
You figure it out yet?
I want to know how to calculate direct material rate per unit
so could you replace the word "Manufacturing Overhead" with Factory overhead?
Would glue still not be considered direct materials even if you could trace specific amounts to each car? Lubricant for a machine that makes parts seems a little closer to your description, since the lubricant wouldn't end up on the car, though you could still find a way to average the amount of lubricant you need for the machine per car and split it out that way if you wanted to. Maybe you'd have to go to something a bit less direct like the janitor's supplies to find an overhead that couldn't easily be attributed to specific cars.
Maybe you'd have to decide at what point something becomes overhead somewhat arbitrarily, and this is an example of managerial accounting's flexibility.
Glue is an overhead because we estimate how much we would use its not exact and when you look at the final product you cant see the glue but its there used to attach the final product. That is how I understand it. An overhead is used in coordination with the final product.
great
is property, plant equipment is it in manufacturing overhead? please help me
here we are discussing product cost so for example if a machine is used to convert a good (which would be our final inventory ) the depreciation of the machine would be allocated as a depreciation cost (an overhead) on that specific job
Would Manufacturing Overhead include period costs?
where would usage electricity goes into
Other Indirect materials... Welding rods to fix equipment when it breaks and anything mtce will use.
car paint is direct material right
You are correct. If it is part of the final product that goes out the door, then I'd consider it a direct material. Even though it isn't easy to trace the exact amount of paint used, the company could have a standard such as 1.5 gallons of paint is used per vehicle in order to track the costs per vehicle. More examples of indirect materials would be cleaning supplies for the factory and oil to lubricate the machines.
This guy when he figures out how Lotus frames are built 😳 (They're glued aluminum)
"we can tie them to the car"
Please do not tie (or glue) the janitor to your car!