Companies often do work on a cost-reimbursement basis. That is, Company B reimburses Company A for the cost of doing work for Company B. Suppose your company has a contract that calls for reimbursement of direct materials and direct labor, but not overhead. Following are costs that various organizations incur; they fall into three categories: direct materials (DM), direct labor (DL), or overhead (OH). Classify each of these items as direct materials, direct labor, or overhead.

Cost

Category

Glue used to attach labels to bottles containing a patented medicine.

Compressed air used in operating paint sprayers for Student Painters, a company that paints houses and apartments.

Insurance on a factory building and equipment.

A production department supervisor’s salary.

Rent on factory machinery.

Iron ore in a steel mill.

Oil, gasoline, and grease for forklift trucks in a manufacturing company’s warehouse.

Services of painters in building construction.

Cutting oils used in machining operations.

Cost of paper towels in a factory employees’ washroom.

Payroll taxes and fringe benefits related to direct labor.

The plant electricians’ salaries.

Crude oil to an oil refinery.

Copy editor’s salary in a book publishing company.

Part 2
(9 points)

Assume your classifications could be challenged in a court case. Indicate to your attorneys which of your answers for part a might be successfully disputed by the opposing attorneys. In which answers are you completely confident?

Accounting Principles: A Business Perspective. Authored by: James Don Edwards, University of Georgia & Roger H. Hermanson, Georgia State University. Provided by: Endeavour International Corporation. Project: The Global Text Project. License: CC BY Attribution