COSTS- CONCEPTS AND CLASSIFICATION

Direct Materials
Direct materials are raw materials that become part of a finished
product and can be conveniently and economically traced to specific
product.

Examples:
 Steel sheet used for automobiles
 Flour used for bread
 Leather uppers, rubber and plastic soles, and laces used for shoes
 Plastic used to make toys
 Wood used to make tables
 Glass used to make windows

Indirect Materials
Indirect materials are materials and other production supplies that
cannot be conveniently or economically traced to specific products.

Examples are glue, thread, nails, rivets, lubricants and small tools.
Direct Labor
Direct labor costs include all labor costs for specific work performed
on products that can be conveniently and economically traced to
products.

It is the compensation of employees or workers who physically convert

raw materials into finished goods.

Indirect Labor
Indirect labor costs are labor costs for production related activities
that cannot be conveniently and economically traced to products.
Examples are salaries of machine helpers, plant supervisors and
managers, forklift operators, maintenance labor, engineering labor and
other support personnel.

Manufacturing overhead/Factory overhead

Manufacturing overhead or Factory overhead includes all manufacturing
costs that cannot be classified as direct materials or direct labor.

Examples:
 Indirect materials and  Property insurance
supplies, indirect labor costs  Depreciation of plant and
 Building maintenance costs equipment
 Machinery maintenance  Rent expense
 Property taxes  Utility expense