Manufacturing Costs
Three components make up all manufacturing (product) costs:
| Component | Definition | Examples |
|---|---|---|
| Direct Materials | Raw materials traceable to specific units | Batteries in EVs, seats in trains, components in amplifiers |
| Direct Labor | Labor costs traceable to specific units | Assembly-line workers, welders |
| Manufacturing Overhead | All other manufacturing costs | Indirect materials, indirect labor, factory utilities, depreciation |
Direct Materials
Raw materials that become an integral part of the finished product AND can be easily traced to it.
Not all raw materials are direct materials. Solder in electronics = indirect (not worth tracing). Steel frame = direct (easily traced).
Direct Labor
Labor costs that can be easily traced to individual units.
| Direct Labor | Indirect Labor |
|---|---|
| Assembly workers | Factory janitors |
| Welders | Production supervisors |
| Machine operators | Materials handlers |
Indirect labor goes into manufacturing overhead.
Manufacturing Overhead
Everything in the factory that isn't direct materials or direct labor:
- Indirect materials
- Indirect labor
- Factory utilities
- Factory depreciation
- Factory insurance
- Equipment maintenance
Only costs incurred in the factory go into manufacturing overhead. Selling and administrative costs are period costs—they never touch inventory.
Cost Groupings
| Term | Components |
|---|---|
| Prime Cost | Direct Materials + Direct Labor |
| Conversion Cost | Direct Labor + Manufacturing Overhead |
Prime = the two direct costs
Conversion = what it takes to convert materials into finished goods
North: Where this comes from
- Product vs Period Costs (manufacturing costs are product costs)
- Cost Classification Framework (organizing costs by purpose)
East: What opposes this?
- Selling and Administrative Costs (non-manufacturing, period costs)
- Service Company Costs (no inventory to flow through)
South: Where this leads
- Inventory Flow in Manufacturing (how these costs move through accounts)
- Cost of Goods Manufactured (summing up manufacturing costs)
- Total Manufacturing Costs (DM + DL + MOH for a period)
West: What's similar?
- Bill of Materials (lists direct materials for a product)
- Labor Routing (lists direct labor operations)