Question

Mr. Profit is the owner of a metal fabrication company. They order bulk metal, fabricate and construct metal rails for steps and safety applications.

Mr. Profit has just returned from a meeting with his banker, Mr. Money. He was denied a loan to purchase new fabrication equipment for the business.

Required:

As the new managerial accountant, Mr. Profit does not understand the differences between Direct Materials and Manufacturing Overhead.

Explain these to Mr. Profit.

You are to write a word memo to explain the differences.

What types of Direct Materials would be used in this business and give examples.

What are examples of the Manufacturing Overhead for this business and give examples.

Give 2-3 aspects of Job Order Costing reports that would be useful for the business.

Answer 1

Direct Materials is the costs incurred for the production of a unit produced. Direct materials directly can be tracked on the product. Eg: the materials used for production. these materials are used for every unit produced, like the metal used for production.

whereas manufacturing overhead is not directly associated with the production or it can't be tracked directly on the product.

Eg: The supervisor's salary, which is treated as an overhead expense. Overhead expenses are allocated to products based on the budgeted allocation.

Direct materils: Steel, copper, silver, alumnium etc..

Overhead expenses: Supervisor's salary, electricity, rent, utilities, depreciation etc..

Job order costing reports are prepared when the production of units different from each other. Job order costing required separate cost record for each separate item produced.