ACCOUNTING SUMMARY OF MANUFACTURING ‘Manufacturing Every manufactured item we buy has been made by someone — either an individual or a business. Costs and controlling costs play an important role in the manufacturing process. ‘The more you spend in the manufacturing process, the more you have to charge for the finished product to make a profit. Before we look at the different costs concepts, we should distinguish between a cost objective and a cost object. The cost objective is the purpose for which we measure costs. Examples are finding the cost of baking one loaf of bread or manufacturing one motorcar. The bread we bake or the motorcar we manufacture is called the cost object. Direct costs are the cost that we can allocate directly to a specific product — such as raw ‘materials and labour costs. Raw materials are used in producing a finished product, for example the wool of a sheep that is woven into a blanket. We distinguish between direct ‘materials and indirect materials. Direet materials become an integral part of a finished product and can be allocated directly to the final product, such as the wool in the blanket, the paper in this book or the water in the cool drink. Finished products also contain small amounts of a variety of materials that are so insignificant that it is almost impossible to allocate thei cost to a product, for example the glue used to assemble a wooden chair. These are called indirect materials and are included in manufacturing overheads (or indirect costs) Direct labour refers to all labour costs that are spent on producing the finished product and can be easily traced to the product. The cost to the business of the person operating the ‘machine on an assembly line that produces motorcars or the cost of the carpenter who ‘manufactures tables would be called direct labour costs. Labour costs that cannot be physically traced to finished product, such as the cost of the cleaning staff and the people who prepare refreshments in a factory, are called indirect labour cost and are included in ‘manufacturing overheads (or indirect costs) Indirect costs (or manufacturing overheads) are costs that the manufacturer ineurs during ‘manufacturing, but that can’t be identified as part of the cost of the finished product — such as rates and water and electricity.