![]() Let’s look at an example for a construction company. And as stated before, these expenses are deducted after the gross profit is calculated, to arrive at the net profit or income. Other items like electricity to run the machines and those employees who are not directly connected to providing the service are usually included as part of selling, general, and administrative expenses. ![]() The selling, general, and administrative expense and other indirect expenses are deducted from gross profit to derive the net income or loss.Ĭost of goods sold in the service industry refers to the cost of the employees or machines directly involved in providing the service. Normally these expenses are part of the selling, general, and administrative expense account. And in manufacturing, companies’ monetary outlays for those employees not involved in making the product are considered period expenses. In accounting, therefore, the employees directly involved in making a product contribute toward the achievement of the gross profit of an organization. Both of these account categories become a part of the cost of goods sold cost.įor manufacturing companies, the gross profit is calculated by subtracting cost of goods sold from the revenue. All the specific compensation elements are lumped together by the accounting process into two accounts, normally called direct labor or indirect labor. ![]() In cost accounting, manufacturing overhead is absorbed into unit product costs through various mechanisms, such as job order costing and process costing. A commonly used term for this category is indirect labor. Those employees who are involved in the manufacturing process but are involved in a supporting activity (such as the manufacturing manager or the janitor who cleans the factory floor) are included in manufacturing overhead. Touch labor refers to those people required to touch the product during the manufacturing process. Another common identifier for this grouping is touch labor. If an employee’s job entails directly producing a product (as part of a manufacturing operation), accounting systems classify that employee as direct labor. Now that you know the commonly used terms in compensation and benefits, let’s explore how these compensation and benefits cost elements are reflected in accounting systems. ![]() Learn More Buy The Current Accounting for Compensation and Benefit Cost Elements Compensation and Benefit Design: Applying Finance and Accounting Principles to Global Human Resource Management Systems ![]()
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