Which of the following statements is correct:
A Manufacturing overhead includes all manufacturing costs except Direct Materials and Direct Labor.
B. Manufacturing overhead does not include manufacturing costs.
C. Selling and Administrative costs cannot be direct or indirect costs.
D. Selling and Administrative costs are manufacturing costs.
The correct answer and explanation is:
The correct answer is A. Manufacturing overhead includes all manufacturing costs except Direct Materials and Direct Labor.
Explanation:
Manufacturing costs can be classified into three broad categories: direct materials, direct labor, and manufacturing overhead.
- Direct Materials: These are raw materials that are used in the production of goods and are easily traceable to the product. For example, the steel used in manufacturing cars.
- Direct Labor: This refers to the wages of workers who are directly involved in the production process. For example, the workers who assemble products on the production line.
- Manufacturing Overhead: This category includes all the indirect costs associated with production. It encompasses all costs that are necessary for production but cannot be directly traced to specific products. These indirect costs include things like:
- Indirect materials: Materials that are used in the production process but are not directly traceable to a product, such as lubricants, cleaning supplies, or small tools.
- Indirect labor: Wages of workers who are not directly involved in the production of goods but are necessary for the production process, such as maintenance staff or supervisors.
- Other factory-related expenses: This includes utilities (electricity, water), depreciation of equipment, factory rent, insurance, and other expenses related to running the manufacturing plant.
Why the other answers are incorrect:
- B. Manufacturing overhead does not include manufacturing costs: This is incorrect because manufacturing overhead is part of manufacturing costs. Manufacturing costs include direct materials, direct labor, and manufacturing overhead.
- C. Selling and Administrative costs cannot be direct or indirect costs: This is incorrect because selling and administrative costs are typically considered period costs and are not included in manufacturing costs. However, they can still be classified as indirect costs when they are related to general business operations.
- D. Selling and Administrative costs are manufacturing costs: This is incorrect because selling and administrative costs are not part of manufacturing costs. These costs are incurred outside of the manufacturing process and are related to the activities of selling the product and running the business.
Thus, A is the correct statement as it accurately reflects the classification of costs in manufacturing.