A portion of the costs incurred by business organizations is designated as direct labor cost. As used

Question:

A portion of the costs incurred by business organizations is designated as direct labor cost. As used in practice, the term direct labor cost has a wide variety of meanings. Unless the meaning intended in a given context is clear, misunderstanding and confusion are likely to ensue. If a user does not understand the elements included in direct labor cost, erroneous interpretations of the numbers can occur and can result in poor management decisions. In addition to understanding the conceptual definition of direct labor cost, management accountants must understand how direct labor cost should be measured. Discuss the following issues:
a. Distinguish between direct labor and indirect labor.
b. Discuss why some nonproductive labor time (such as coffee breaks and personal time) can be and often is treated as direct labor whereas other nonproductive time (such as downtime and training) is treated as indirect labor.
c. Following are labor cost elements that a company has classified as direct labor, manufacturing overhead, or either category depending on the situation.
• Direct labor: Included in the company’s direct labor are cost production efficiency bonuses and certain benefits for direct labor workers such as FICA (employer’s portion), group life insurance, vacation pay, and workers’ compensation insurance.
• Manufacturing overhead: Included in the company’s overhead are costs for wage continuation plans in the event of illness, the company-sponsored cafeteria, the personnel department, and recreational facilities.
• Direct labor or manufacturing overhead: Included in this category are maintenance expenses, overtime premiums, and shift premiums. Explain the rationale used by the company in classifying the cost elements in each of the three categories.
d. The two aspects of measuring direct labor costs are (1) the quantity of labor effort that is to be included, and (2) the unit price by which the labor quantity is multiplied to arrive at labor cost. Why are these considered separate and distinct aspects of measuring labor cost?