Final answer:
Davey Products uses a job-costing system with two direct-cost categories: direct materials and direct labor. Total costs are generated by adding fixed and variable costs. Additionally, costs can be categorized into explicit costs, which are actual payments, and implicit costs, which represent opportunity costs and resource depreciation.
Step-by-step explanation:
Davey Products uses a job-costing system with two direct-cost categories: direct materials and direct labor. Direct materials are the raw materials that become part of the finished product and can be easily traced back to the product. Direct labor comprises the costs of paying employees who physically convert materials into the product.
Total costs within a company are the sum of fixed costs plus variable costs. Fixed costs, such as rent for factory space or equipment, do not change with the level of production. On the other hand, variable costs, like wages paid to workers, can vary depending on the output or production level. For instance, if Davey Products hired additional workers, the variable costs would increase, leading to an increase in the total cost as the sum of fixed and additional variable costs.
Alongside these costs, it is also essential to understand the explicit costs and implicit costs. Explicit costs are out-of-pocket expenses like wages and rent, whereas implicit costs are opportunity costs associated with the use of resources the firm owns, including the depreciation of equipment and materials.