• Explanation

There are three types of product costs: direct materials, direct labor, and manufacturing overhead. These manufacturing costs are charged to the work-in-process inventory and are not expensed until the product is sold. Costs not associated with manufacturing (eg, selling, general, administrative expenses) are period costs and are expensed in the period incurred (usually as operating expense).

Direct material and direct labor are an integral part of the product and are generally easy to quantify. They can be directly traced to a given product. Manufacturing overhead (MO) consists of several costs, including indirect material, indirect labor, and factory expenses such as maintenance, property taxes, and depreciation.

Overhead costs (eg, property taxes) cannot be clearly assigned to distinct units of inventory but rather relate to the manufacturing process itself. As a result, they are first charged (or accumulated) in the MO account (Choices A, B, and D). As production occurs, MO is then allocated to work-in-process inventory using a standard rate(s) such as machine hours incurred.

Things to remember:
Indirect costs (ie, all manufacturing costs other than direct material and direct labor) cannot be directly traced/allocated to specific products. They are first accumulated in the manufacturing overhead account and then applied to work-in-process units using a predetermined standard rate.