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Manufacturing Costs
Manufacturing costs are the costs related to the purchasing of raw materials, and to the activities that convert the raw materials into finished goods.
All manufacturing costs are classified as:
- Direct materials
- Direct labor
- Manufacturing overhead
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Direct Material
Raw Materials
- All material used in production
- Purchased from suppliers
- Kept in inventory until used
- When raw materials are used, they are classified as direct or indirect materials
Direct Materials
- Materials that end up in the final product and can be directly associated to the product.
- Significant elements of the final product
Indirect Materials
- Materials that do not end up in the final product
- Materials that end up in the final product but cannot be direct or accurately traced to that product.
- Not a significant element of the final product
- Accounted for as part of manufacturing overhead
Examples of direct and indirect materials in the production of cars
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Direct Labor
Direct Labor
- Salaries and benefits of workers that physically and directly work on the product.
- Jobs that directly convert materials into finished goods
Indirect Labor
- Salaries and benefits of workers that do not physically work on the product.
- Cannot be accurately assigned to a product
- Accounted for as part of manufacturing overhead
Examples of direct and indirect labor in the production of cars
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Manufacturing Overhead
Manufacturing overhead consists of all indirect costs related to production, these are the costs incurred in the production facility that cannot be classified as direct materials or direct labor.
Examples
- Indirect materials
- Indirect labor
- Factory depreciation
- Factory utilities
- Factory insurance
- Factory rent
Practice: Manufacturing Costs
Select the best answer(s) for the following questions
Which of the following is most likely to be considered a direct material in the production of a wooden table?