Indirect materials costs Accounting Help

a. Factory supplies that do not become an integral part of finished goods, such as oil used to lubricate the cutting machities and solvents used to clean the painting machines.

b. Materials that become an integral part of finished goods but whose cost would require great effort to actually trace to finished goods. These items include grease used in each bike’s bearing assembly and the nuts and bolts used to attach shift levers and other component parts.
2. Indirect labor costs
a. Supervisors’ salaries
b. Salaries of factory maintenance workers, forklift drivers, receiving clerks in the materials warehouse, and factory security personnel
3. Plant occupancy costs
a. Depreciation of the factory and the materials warehouse
b. Insurance and property taxes on land and buildings
c. Maintenance and repairs on buildings
d. Utilities and .telephone costs
4. Machinery and equipment costs
a. Depreciation of machinery
b. Maintenance of machinery
5. Cost of regulatory compliance
a. Meeting factory safety requirements

b. Disposal of waste materials such as empty paint canisters
c. Control over factory emissions (meeting clean air standards)

Selling expenses and general and administrative expenses do not relate to the manufacturing process and are not included in manufacturing overhead. Certain costs, such as insurance, property taxes, and utilities, sometimes apply in part to manufacturing operations and in part to administrative and selling functions. In such cases, these costs are apportioned among manufacturing overhead, general and administrative expenses, and selling expensiveness Costs The Manufacturing Overhead account is debited to record any cost classified as overhead. Examples of costs debited to this account include the payment of indirect labor payrolls, the payment of factory utilities. the recording of depreciation on factory assets, and the purchase of indirect materials.

” The account credited will vary depending on the nature of the overhead cost. For example, in recording. the purchase of indirect materials. the account credited is usually Accounts Payable. In .recording depreciation on machinery. however, the account credited is Accumulated Depreciation, As the items included in total overhead costs are consumed by production activities. the related costs are transferred from the Manufacturing Overhead account into the Work in Process Inventory account (debit Work in Process Inventory, credit Manufacturing Overhead). In the course of the year, at! the overhead costs incurred should be assigned to units of product manufactured, Thus, at year-end, the Manufacturing Overhead account should have a zero balance. Direct and Indirect.

Manufacturing Costs The costs of direct materials and direct labor may be traced conveniently and directly to . specific units of product. At Conquest, for example. it is relatively easy predeterminer cost of the metal tubing Lind the cost of the direct labor that go into making II particular bicycle. For this reason. accountants call these items direct manufacturing costs.

Overhead, however, ill an indirect manufacturing cost. Consider. for example. the types of costs that Conquest Classifies as overhead. These costs include property tuxes on the factory. depreciation.on tools and equipment, supervisors’ salaries. and repairs to equipment. How much of these’ indirect costs should be assigned to each bicycle? There is no easy answer to this question. By definition, indirect costs cannot be traced easily and directly to specific units of production. While these costs arc often easier to
view as a whole than on a.per-unit basis, we will see· that both financial and management accountants require unit cost. information. Therefore. manufacturing companies must develop methods of allocating an appropriate portion or total manufacturing overhead to each product manufactured .. The allocation of overhead costs to production IS accomplished through t~e use of overhead application rates.

Overhead Application Rates There are two reasons manufacturing overhead isn’t applied to products by simply dividing the company’s annual. overhead cost by the number of units produced during the
year. First. total overhead costs and total units produced are not known uritil the end of the period, Second. not all products consume an equal amount of overhead cost. Thus overhead application rates arc used to assign manufacturing overhead costs to specific units of production as those units are being produced throughout the accounting period. The rate expresses an expected relationship between manufacturing overhead costs and some activity base related to the production process (direct labor hours. machine
hours, and so forth).

Overhead is then assigned to products ill proportion to this activity base. For example company using direct labor hours as an activity base would allocate the greatest proportion of its overhead costs to those products requiring the most’ direct labor hours.

The overhead application rate is determined at the beginning of the period and is based on estimated amounts. The rate is typically computed us follows: “Some companies record the purchase of implicit numerical in the Material Inventory account or in rate inventory account. Our approach is commonly used when the quantity of indirect materials purchased does not differ significantly from the quantity of indirect materials used during each period.

The mechanics of computing and using an overhead application rate are quite simple. The challenging problems for accountants are (I) selecting an appropriate activity base and

(2) making reliable estimates at the beginning of the accounting period regarding the total of the overhead costs to be incurred and the total units in the activity base that will be required’ We will examine the easy topic first-the mechanics underlying the computation any use of overhead application test.

Posted on November 23, 2015 in Management Accounting: A Business Partner

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