• Post category:Finance

What is Manufacturing Cost

Manufacturing costs is the cost that happened in a production process. The manufacturing costs are classified into three categores which include: direct material, direct labor, and manufacturing overhead. The total manufacturing cost is the sum of these three costs that consumed in the manufacturing process.


Key Points

  • Manufacturing costs is the cost that occured in a production process, classified into 3 categores: direct material, direct labor, and manufacturing overhead.
  • Direct materials is the component parts that consumed in the production process and become a part of the finished products and can be traced conveniently at the product.
  • Direct labor is the wage of direct workers that direct involvement in the production process.
  • Manufacturing overhead is all other costs of manufacturing which is not direct material and direct labor.

What is Direct Materials

Direct materials is the raw material and component parts that consumed in the manufacturing process and become a part of the finished products and can be traced conveniently and directly at the products manufactured.

The terms direct materials and finished goods can be defined by the view of an individual manufacturing company. For instance, for cloth manufacturing company, a bolt of cloth is a finished goods. For shirt manufacturing company, a bolth of cloth is a direct material.

For someone that confused between the raw material and direct material. There is a difference, before material is entered into the production process it is “raw material”, after it enter the production process it become direct material.


What is Direct Labor

Direct labor is the wage of direct workers that direct involvement in the production process. The direct labor are include the cost of salaries, wages, and other benefits for worker who work directly on the production.

For example, the wages and benefits of worker who assemble the automobile part in the automobile production company.

To be clear, direct labor are about the worker who direct involve in the production process. For the worker who do not work directly on the production process, these are account as manufacturing overhead.


What is Manufacturing Overhead

Manufacturing overhead is all other costs of manufacturing which is not direct material and direct labor. Manufacturing overhead also known as production overhead. The manufacturing overhead includes three types of costs: indirect material, indirect labor, and other manufacturing costs.

Indirect Materials are the cost of materials that are required for the production process but do not become an integral part of the finished product. For example, the cost of needles used in the cloth manufacturing company.

Indirect Labor are the costs and salaries of person who do not work directly on the finished product. For example, salaries of department manager and security guards.

Other Manufacturing Costs are all other costs, neither material or labor. These costs include various expenses of the plant. For example, electricity bill, plant insurance, and building’s depreciation.