Direct Materials and Labor
The cost of a product is split among direct materials and labor, overhead, distribution, and general and administrative costs. All of these costs can contribute a significant amount to the total cost of a product, but direct materials and labor traditionally have been the largest cost elements for most products. Thus, the controller should be mindful of any control systems that will allow tight monitoring of these costs.
Controlling direct materials and labor costs is the subject of this chapter. In addition, there are many references in the text to the impact of just-in-time (JIT) systems on cost controls, which call into question the need for some traditional (and extensive!) control systems, such as those used for direct labor tracking. This chapter also includes a discussion of the deleterious effects on production results of several traditional variance reports, and why these results occur.
A manufacturing cost accounting system is an integral part of the total management information system. In analyzing costing systems, the controller must recognize the purpose of the manufacturing cost accounting system and relate it to production or operating management problems. The objectives must be clearly defined if the system is to be utilized effectively. Fundamental purposes of a cost system may vary in importance from one organization to another; however, they may be summarized in this way:
- For control of costs. Control of costs ...