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is the sum of costs of all resources consumed in the process of making a product. The manufacturing cost is classified into three categories: direct materials cost
Direct materials cost is the cost of direct materials which can be easily identified with the unit of production. For example, the cost of glass is a direct materials cost in light bulb manufacturing....
, direct labor cost and manufacturing overhead.
Direct materials cost
Direct materials are the raw material
A raw material or feedstock is the basic material from which a product is manufactured or made, frequently used with an extended meaning. For example, the term is used to denote material that came from nature and is in an unprocessed or minimally processed state. Latex, iron ore, logs, and crude...
s that become a part of the finished product. Manufacturing adds value to raw materials by applying a chain of operations to maintain a deliverable product. There are many operations that can be applied to raw materials such as welding
Welding is a fabrication or sculptural process that joins materials, usually metals or thermoplastics, by causing coalescence. This is often done by melting the workpieces and adding a filler material to form a pool of molten material that cools to become a strong joint, with pressure sometimes...
, cutting and painting
Painting is the practice of applying paint, pigment, color or other medium to a surface . The application of the medium is commonly applied to the base with a brush but other objects can be used. In art, the term painting describes both the act and the result of the action. However, painting is...
. It is important to differentiate between the direct materials and indirect materials.
Direct labor cost
The direct labor cost is the cost of workers who can be easily identified with the unit of production. Types of labor who are considered to be part of the direct labor cost are the assembly workers on an assembly line
An assembly line is a manufacturing process in which parts are added to a product in a sequential manner using optimally planned logistics to create a finished product much faster than with handcrafting-type methods...
Manufacturing overhead is any manufacturing cost that is neither direct materials cost nor direct labor cost. Manufacturing overhead includes all charges that provide support to manufacturing.
Manufacturing overhead includes
- Indirect labor cost: The indirect labor cost is the cost associated with workers, such as supervisors and material handling
-Material Handling Industry:Material Handling is the movement, storage, control and protection of materials, goods and products throughout the process of manufacturing, distribution, consumption and disposal. The focus is on the methods, mechanical equipment, systems and related controls used to...
team, who are not directly involved in the production.
- Indirect materials cost: Indirect materials cost is the cost of associated with consumables, such as lubricants, grease
The term grease is used to describe semisolid lubricants. Although the word grease is also used to describe rendered fat of animals, in the context of lubrication, grease typically applies to a material consisting of a soap emulsified with mineral or vegetable oil...
, and water
Water is a chemical substance with the chemical formula H2O. A water molecule contains one oxygen and two hydrogen atoms connected by covalent bonds. Water is a liquid at ambient conditions, but it often co-exists on Earth with its solid state, ice, and gaseous state . Water also exists in a...
, that are not used as raw materials.
- Other indirect manufacturing cost: Other indirect manufacturing costs include machine depreciation, land rent, property insurance
Property insurance provides protection against most risks to property, such as fire, theft and some weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance or boiler insurance. Property is insured in two main...
Electricity is a general term encompassing a variety of phenomena resulting from the presence and flow of electric charge. These include many easily recognizable phenomena, such as lightning, static electricity, and the flow of electrical current in an electrical wire...
or any expenses that keep the factory
A factory or manufacturing plant is an industrial building where laborers manufacture goods or supervise machines processing one product into another. Most modern factories have large warehouses or warehouse-like facilities that contain heavy equipment used for assembly line production...
- Lanen, W. N., Anderson, S., Maher, M. W. (2008). Fundamentals of cost accounting, MaGraw Hill, ISBN 9780073526720