Micro Laser Systems (MLS) produces small electronics parts for other companies. MLS uses process costing because the items manufactured by the company are produced to customer specifications. Currently, MLS is having difficulty identifying the difference between direct and indirect material and labor. As a result, MLS is adding almost all labor and a large portion of material cost to overhead. The rationale of MLS’s production management is that the overhead eventually gets applied to the job anyway.
Required:
Write a memo to MLS’s management to explain problems that might be encountered by misclassifying things as overhead as opposed to direct material or labor.