Direct Labor vs. Indirect Labor LO2, 3 Jim Wilson is a typical manufacturing emp

Question

Direct Labor vs. Indirect Labor LO2, 3 Jim Wilson is a typical manufacturing employee who commonly works 40 hours per week and is paid $14 per hour. During the last pay period, Jim performed the following activities: Assembling products 29.5 hours Cleaning his work area Attending a workplace safety meeting 5.0 2.5 Talking with a supervisor about football 1.0 Giving a tour of the plant to schoolchildren 2.0 Required Jim’s employer uses job costing to measure and track production costs. The company is very concerned with maintaining accurate cost data. Determine the amount of labor costs that should be allocated to direct labor and indirect labor as manufacturing overhead.

Explanation / Answer

Normally indirect costs i.e. overheads are not incurred for any specific job or work order. Hence they cannot be determined accurately. However, each job should be charged with a suitable amount of overhead incurred to ascertain the total cost. Conventionally, the basis of estimating Overheads are

Manufacturing overheads - using labour hour rate or as a percentage of direct labour cost.

Determination of the Direct Labour and Indirect Labour to be allocated as manufacturing overhead

Earning is $ 14 per hour. Therefore the Direct labour hours 34.50 hours multiply 34.50 x 14 = $ 483

Indirect Labour hours 5.50 x 14 = $ 77

Therefore the amount of labour costs allocated to direct labour is $ 483 and for indirect labour is $ 77

PARTICULARS HOURS Direct Labour Assembling products 29.50 Cleaning of work area 5.00 Total Direct Labour Hours 34.50 Indirect Labour Workplace safety meeting 2.50 Tour of the plant to children 2.00 Talking with supervisor 1.00 Total Indirect Labour Hours 5.50

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