Manufacturing Costs

Manufacturing costs, or product costs, are all of the costs related to the manufacturing
process. These costs become part of the work in process inventory costs for a manufacturer
when they are added or incurred. They include the following:

● direct materials: Raw materials purchased by a manufacturer will become either direct
materials or indirect materials. Direct materials represent the cost of raw materials that
become part of the finished product; they include only the cost of raw materials used in
making a product that can be conveniently and economically traced to specific product
units. It is very important to understand the distinction between direct materials and
indirect materials. Indirect materials represent the cost of raw materials that cannot be
easily and conveniently traced to specific product units. Indirect materials become part of
factory overhead.
● direct labor: Direct labor represents the cost of the labor needed to make a product that
can be conveniently and economically traced to specific units of the product. An example
of direct labor would be the wages of production-line workers. It is very important to
understand the distinction between direct labor and indirect labor. Indirect labor
represents the cost of labor that supports the manufacturing process and cannot be
easily and conveniently traced to specific product units. Indirect labor becomes part of
factory overhead.
● factory overhead (manufacturing overhead): Factory overhead includes all of the
indirect costs incurred in the production of the product. This means that factory overhead
includes all of the costs incurred to produce a product except direct materials and direct
labor, including (but not limited to)
○ indirect materials,
○ indirect labor,
○ utilities,
○ maintenance costs,
○ depreciation of buildings and machinery, and
○ insurance.