Lessons · Accounting · direct materials and direct labour
Direct materials and direct labour
A direct cost is one you can trace to a particular unit without estimating. Everything else in the factory is overhead, however obviously it belongs to production.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
The line is about traceability, not importance. A factory manager's salary is essential to every unit and traceable to none of them, so it is overhead. Getting this line wrong is what makes the rest of a costing exercise arbitrary.
How to think about it
Ask whether you could say, without estimating, how much of this cost went into one specific unit. If yes it is direct. If you would have to allocate it by some rule, it is overhead.
Worked example
Timber in a table: 3 metres at 4.00Traceable to the table. Direct material.
The carpenter's hours on that table: 2 at 18.00Traceable. Direct labour.
Glue, screws and sandpaperTraceable in principle and not worth the counting. Treated as overhead.
The factory manager's salary and the rentNot traceable to any unit at all. Overhead.
Your turn
Name what a cost must be for it to count as direct.
A direct cost can be to one unit without estimating
Solve one, graded on the server
The trap
Deciding by how obviously a cost belongs to production. Every cost in the factory belongs to production; the question is only whether it can be traced to a unit, and most of them cannot.