Which of the following statements is correct:
A. Manufacturing overhead includes 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 non-manufacturing costs
The correct answer and explanation is:
The correct answer is D. Selling and Administrative costs are non-manufacturing costs.
Explanation:
Manufacturing costs can be classified into three broad categories: direct materials, direct labor, and manufacturing overhead. Direct materials are the raw materials that are used directly in the production process. Direct labor refers to the wages of workers directly involved in production, like assembly line workers. Manufacturing overhead, on the other hand, includes indirect costs related to the production process but not directly traceable to the product, such as factory rent, utilities, and maintenance of machinery.
Now, selling and administrative costs are different from manufacturing costs. These costs are considered non-manufacturing costs because they are not directly involved in the production of goods. Selling costs include expenses related to marketing and selling the product, such as advertising, sales commissions, and distribution costs. Administrative costs are those incurred to manage the business, like salaries of executives, office supplies, and accounting services.
The key difference here is that manufacturing costs are directly tied to the production of goods, while selling and administrative costs support the operation of the business but are not part of the production process. For example, the cost of a salesperson’s salary is a selling cost, and the cost of office supplies for the finance department is an administrative cost. These are categorized separately from manufacturing overhead.
To clarify the other options:
- A is incorrect because manufacturing overhead does not include direct materials or direct labor; these are separate categories.
- B is incorrect because manufacturing overhead is part of manufacturing costs.
- C is incorrect because selling and administrative costs can indeed be either direct or indirect, depending on how they relate to a specific product or department.