Costs and Revenues - question?

taraskyn

Hi All!:001_smile:
Can anyone explain me why in textbook in question 4.8 - salary of office assistant and salesperson's salary is classified as indirect expenses. It doesn't make any sense. In answers they explain this by saying that they both don't work on the factory. Yes I know - that's why it is NON-Production Indirect Labour.
You obviously cannot classify them as Production Indirect Labour because they don't work at the factory. I KNOW THAT!
And they later in the same question they ask you to classify them all into production and non-production overheads. And those two labour cost I mentioned above are then put into NON PRODUCTION. So why they treated as expenses and not labour????????????????????????????????????????????
Please anyone? I am going mental......:confused1::confused1::confused1:

Thanks!

Jo Clark

Hello Taraskyn

Which text book are you looking at?

Can you post the exact wording of the question?


JC

taraskyn

It's Costs and Revenues Textbook - Chapter 4 exercise 4.8.

Eveshore Pottery Ltd manufactures a range of souvenir mugs, cups and saucers, plates, etc. which sell well to visitors from abroad who are seeking a memento of Old Britain. A number of different costs incurred during the last month, and you are asked to classify them into: direct-indirect materials, direct-indirect labour, direct-indirect expenses.

Jo Clark

Yes, of course it is Costs and Revenues, I meant which publisher/training provider, BPP, Kaplan, Osborne etc. I should have made myself clearer.

taraskyn

Sorry!:laugh:
It's Osborne.

Laineybubble

Hi Taraskyn

I think they are classifying the salary of the office assistant as an indirect expense (rather than indirect labour) because the office assistant is nothing to do with the production of the goods. So, a factory worker moulding the clay into pots would be direct labour, a supervisor overseeing the factory worker (but not actually making the pots) would be indirect labour and the office assisant is an indirect expense as totally outside of the production process. They are not saying that they are not non-production costs, but are checking your understanding of the nature (Indirect/Direct) and element (Labour, Materials, Expense) of the various costs. Hope this helps :-)

taraskyn

I still think it's not right. There are ONLY two types of indirect overheads for each element of cost: it's production and non-production.

So we have 6 way split:

1.Production Indirect Materials
2.Production Indirect Labour
3.Production Indirect Expenses

4.Non-production Indirect Materials
5.Non-production Indirect Labour (all this labour has nothing to do with production! So what? Let's treat it all as expenses? why do we need with category then????????)
6.Non-production Indirect Expenses

Non-production overheads are also classified as:

Selling and distribution overheads
Administration overheads
Finance overheads

All labour for above three categories should be treated as non-production indirect labour.

The Labour has its own category. Why for the love of God would you put it into expenses?

taraskyn

I can understand that in real working environment there will be some exceptions -, only in very rare occasions some special labour, maybe contractors' labour or unexpected urgent labour costs can be treated as expenses. I can make my peace with that. But in textbooks they should be very careful with such statements.

SandyHood

Dear taraskyn

You have already decided that your book is wrong. And with a category "non-production indirect labour" I agree with you.

Let me ask you a question as a cost accountant.
When would you use this level of detail in your information?
4.Non-production Indirect Materials
5.Non-production Indirect Labour (all this labour has nothing to do with production! So what? Let's treat it all as expenses? why do we need with category then????????)
6.Non-production Indirect Expenses

I have broken down selling costs into promotional materials, labour costs, labour commissions, and expenses.
I don't recall using detailed administrative cost breakdowns in any firm. (I'm sure someone reading this will have an example)

So if I was working for a small manufacturing organisation, such as a pottery I would have my direct cost categories for all the costs that are part of the pottery products being made.
I'd have a production overhead account for each department of the pottery and would charge all the indirect materials, labour and expenses incurred in each department into the production overhead account.
I'd have Administration Expenses account (all the non-production overhead relating to admin would be charged here)
I'd have a Selling and Distribution Costs account (all the non-production overhead relating to sales and distribution would be charged here)

I would not break Admin expenses down into materials, labour and expenses
I would not break S & D down either
- I just wouldn't have time to analyse the information. Comparing the total with a budget would be enough.

So fair enough. A question has been written in a way that you don't agree with. But don't fall into the trap of being a student, you are a future accountant. Think about the issue like an accountant. It hopefully makes some sense even if your book has an answer which doesn't.

I

taraskyn

Thanks Sandy!
I agree with you 100%.
They mention somewhere that in manufacturing business the non-production cost is significantly lower than production cost so it is treated as expenses and never categorized. And as you said there would be no time to do that.
I have to think more like an accountant. It is hard to imagine the scenario when you're not actually there doing it.
It looks like it is easier than by the book.
Thanks again. I appreciate you help.