Define The Following Terms: Direct Materials, Indirect ✓ Solved

Define The Following Terms1 Direct Materials2 Indirect

1. Define the following terms: 1. Direct Materials 2. Indirect Materials 3. Direct Labor 4. Indirect Labor 5. Manufacturing Overhead

2. What is meant by the contribution margin ratio? How is this ratio useful in planning business operations?

3. Classifying Manufacturing Costs: Your Boat, Inc. assembles custom sailboats from components supplied by various manufacturers. The company is small and its assembly shop and retail sales store are housed in a Gig Harbor, Washington, boathouse. Below are listed some of the costs that are incurred at the company. For each cost, indicate whether it would most likely be classified as direct labor, direct materials, manufacturing overhead, selling, or an administrative cost. 1. The wages of employees who build the sailboats. 2. The cost of advertising in the local newspapers. 3. The cost of an aluminum mast installed in a sailboat. 4. The wages of the assembly shop’s supervisor 5. Rent on the boathouse 6. The wages of the company’s bookkeeper. 7. Sales commissions paid to the company’s salespeople. 8. Depreciation on power towels.

4. Fixed and variable cost behavior: Koffee Express operates several espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand is $1,100 and the variable cost per cup of coffee served is $.26. Fill in the following table with your estimates of total costs and average costs per cup of coffee at the indicated levels of activity for a coffee stand. Does the average cost per cup served increase, decrease, or remain the same as the number of cups of coffee served in a week increases?

Cups of Coffee Served in a Week: 1,800, 1,900, 2,000. Fixed Cost: ?, Variable costs: ?, Total cost: ?, Average cost per cup of coffee served: ?

5. Preparing a Contribution Format Income Statement: Wheeler Corporation’s most recent income statement follows. Total Per Unit Sales (8,000 units) $208,000 $26.00 Variable expenses $244,000 Contribution margin $64,000 $8.00 Fixed expenses $56,000 Net Operating income $8,000. Prepare a new Contribution format income statement under each of the following conditions: 1. The sales volume increases by 50 units 2. The sales volume declines by 50 units. 3. The sales volume is 7,000 units.

6. Computing Job Costs: Weaver Company’s predetermined overhead rate is $18.00 per direct labor-hour and its direct labor wage rate is $12.00 per hour. The following information pertains to Job A-200. Direct Materials ………………………………. $200 Direct Labor …………………………………….. $. What is the total manufacturing cost assigned to Job A-200? If Job A-200 consists of 50 units, what is the average cost assigned to each unit included in the job?

7. What is the basic difference between absorption costing and variable costing?

8. What is a segment of an organization? Give 3 examples of segments.

9. What are unit-level, batch-level, product-level, customer-level, and organizational-level sustaining activities?

10. Why are there two stages of allocation in activity-based costing?

Paper For Above Instructions

In today's corporate environment, an understanding of manufacturing costs, contribution margin, and their implications for business operations is crucial. This paper will define critical terms such as direct materials, indirect materials, direct labor, indirect labor, and manufacturing overhead. Furthermore, it will explore the concept of contribution margin ratio, classify manufacturing costs using a case study, and analyze cost behavior in relation to fixed and variable costs.

Definitions of Key Terms

1. Direct Materials: Direct materials are the raw materials used in the production of a product. These materials can be directly traced to the finished product and form a significant part of its total cost. For example, in boat manufacturing, the aluminum used for the mast is classified as a direct material.

2. Indirect Materials: Indirect materials are materials that are used in the production process but cannot be directly traced to specific units of output. These materials include items such as glue, screws, and cleaning supplies, which are essential for production but do not form the bulk of the finished product.

3. Direct Labor: Direct labor refers to the labor costs associated with the workers who are directly involved in the production of goods. This includes wages paid to those who assemble products, such as the workers building sailboats at Your Boat, Inc.

4. Indirect Labor: Indirect labor costs are those associated with employees who are not directly involved in production but support the production process. This includes salaries of supervisors, maintenance workers, and quality control inspectors.

5. Manufacturing Overhead: This encompasses all manufacturing costs that are not direct materials or direct labor. Manufacturing overhead includes indirect materials and labor, as well as other costs such as depreciation on equipment, rent, and utilities related to the manufacturing facility.

Contribution Margin Ratio

The contribution margin ratio calculates the portion of sales revenue that exceeds total variable costs. This ratio is invaluable for businesses as it aids in determining the impact of variable costs on net income. It can guide pricing strategies, product line decisions, and overall business operations. A higher contribution margin ratio indicates that a company retains more profit per dollar of sales, crucial for covering fixed costs and generating profits.

Classifying Manufacturing Costs

To illustrate the categorization of various costs at Your Boat, Inc., here is a breakdown:

  • The wages of employees who build the sailboats: Direct Labor
  • The cost of advertising in the local newspapers: Selling Expense
  • The cost of an aluminum mast installed in a sailboat: Direct Materials
  • The wages of the assembly shop’s supervisor: Indirect Labor
  • Rent on the boathouse: Manufacturing Overhead
  • The wages of the company’s bookkeeper: Administrative Cost
  • Sales commissions paid to the company’s salespeople: Selling Expense
  • Depreciation on power tools: Manufacturing Overhead

Fixed and Variable Cost Behavior

At Koffee Express, fixed and variable costs interact to define the overall cost structure of a business. Fixed costs, such as the $1,100 weekly expense, remain constant regardless of the volume of coffee served, whereas variable costs fluctuate with production levels. For instance, as the number of cups of coffee served increases from 1,800 to 2,000 per week, the average cost per cup typically decreases due to the spreading of fixed costs over more units, improving margin efficiency.

Contribution Format Income Statement

When preparing a contribution format income statement, it is essential to reflect changes in sales volume accurately. For Wheeler Corporation, we can prepare statements under different scenarios (e.g., a sales increase or decrease by 50 units or adjusting for 7,000 total units sold) to evaluate how these fluctuations affect the company’s contribution margin and net operating income.

Computing Job Costs

In job costing scenarios like that of Weaver Company, understanding predetermined overhead rates and direct labor costs is paramount. For Job A-200, with direct materials of $200 and a direct labor component, we calculate the total manufacturing cost by adding the applied overhead based on the direct labor hours worked. This process provides insight into cost allocation and pricing strategies.

Absorption vs. Variable Costing

Absorption costing includes all manufacturing costs in product costs (direct materials, direct labor, and both variable and fixed overhead), while variable costing only includes variable costs. This distinction affects income statement presentations and can influence managerial decisions regarding product pricing and profitability analysis.

Segments of an Organization

Segments in an organization can include various divisions based on product lines, geographical locations, or customer demographics. For instance, a company may have segments for domestic products, international sales, and e-commerce operations.

Sustaining Activities

Understanding unit-level, batch-level, product-level, customer-level, and organizational-level sustaining activities is vital for effective management. Each category reflects different drivers of cost and resource allocation, displaying how operational activities support overall business objectives.

Activity-Based Costing

Activity-based costing (ABC) involves two stages of allocation to accurately distribute overhead costs based on activities that drive costs, rather than allocating them uniformly. This nuanced approach allows for more accurate product costing and enhances strategic decision-making.

Conclusion

In conclusion, understanding these concepts is essential for effective financial management, operational efficiency, and strategic planning in any manufacturing or service-oriented organization.

References

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