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Advantages And Disadvantages Of Direct Material Cost

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The advantages and disadvantages of percentage of direct material cost are listed in the following table:
Advantages Disadvantages
It is simple and easy to understand and calculate overheads. In most cases, material price is not stable; therefore, the method becomes unstable.
Since the overhead cost is related to material cost, this method is widely applied. Most of the factory overheads are related to time and not to material.
Price and quality of material are stable. The method does not recognise differences between manual and mechanical labours and the output produced by them.

Percentage of Direct Labour Cost
In this method, overhead rate is obtained by dividing production overheads by labour cost during the period. The method is applied where labour forms a major part of cost of production.
Mathematically,
Percentage of Direct Labour Cost= (Total production overheads of the deaprtment)/(Sum total of direct labour cost of all products produced in the department) x 100
Let us understand this with the help of an example.
Illustration: Consider the following data for the production department of ABC Ltd.
Direct materials consumed Rs. 37,500
Direct wages Rs. 12,500
Production overheads Rs. 75,000
Labour hours 15,000 hours
Machine hours 6,250 hours

For one of the orders carried out in the department, the relevant data are as follows:
Direct material consumed Rs. 7,000
Direct wages Rs. 5,500
Machine hours worked 2,500 hours
Labour hours worked 3,500 hours

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