Business decision case ACompanies 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).

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.

1.Classify each of these items as direct materials, direct labor, or overhead.

2.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?