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Problem: Cost Classification & Behavior - SMA
A portion of the costs incurred by business organizations is designated as direct labor cost. Asused in practice, the term 'direct labor cost' has a wide variety of meanings. Unless the meaningintended 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 thenumbers may occur and could result in poor management decisions.The National Association of Accountants has issued Statement on ManagementAccounting (SMA) Number 4C, 'Definition and Measurement of Direct Labor Cost,' to assistmanagement accountants in dealing with problems that may arise in interpreting andunderstanding direct labor costs. Along with providing a conceptual definition of direct labor cost, this Statement describes how direct labor costs should be measured. Measurement of directlabor costs involves two aspects: (1) the quantity of labor effort that is to be included, that is, thetypes of hours or other units of time that are to be counted; and (2) the unit price by which eachof these quantities is multiplied to arrive at a monetary cost.
Required:
a. Distinguish between direct labor and indirect labor.
b. Explain why some nonproductive labor (e.g., coffee breaks, personal time) is treated asdirect labor while other nonproductive labor (e.g., downtime, training) is treated asindirect labor.
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