5. The Acme Corporation was in the process of getting a Government contract whic

Question

5. The Acme Corporation was in the process of getting a Government contract which required the filing of a Disclosure Statement (DS). They had filled out the statement, and it was being reviewed by the Defense Contract Audit Agency (DCAA) office for adequacy. In that process, the company ran into a very aggressive auditor. The product of this contract required extensive machining and processing. The company had determined that machine operators were direct labor, because the machined part went directly into the finished product and was easily identified with the product. In the Disclosure Statement (DS) they had identified machine operators making parts included in the final product to be direct labor. In the DS, they declared that the personnel who maintained the machines were indirect labor (overhead). Fred, the aggressive DCAA auditor disagreed with treating the machine maintenance personnel as overhead, and insisted that the company accounting procedures as reflected in the DS be changed and machine maintenance be classified as direct labor. The company resisted Fred’s demands, and the issue was taken to Fred’s boss, the DCAA Resident Auditor. What are the issues involved, and what would be the likely result of the review by the Resident Auditor?

Explanation / Answer

The issue involved is in the classification of labor into direct and indirect category .

Maintenance labor are indirect in nature as the same is not directly related to production . They are people who take care of the repair and maintenance jobs and hence classified as indirect. The final outcome would be the classification as indirect labor

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