Getting started about five minutes late. More time for me to finish my late dinner.Chapter 2: Cost Terms, Concepts, and Classifications
Manufacturing costs include direct materials, direct labor, and manufacturing overhead.
Direct materials is materials which become an integral part of the finished product; also called raw materials. Plastic is a direct material. Electricity used to operate machinery is not.
Direct labor is labor costs that can be directly traced to individual units of production. Labor of an assembly-line worker is direct labor. Work of a security guard is not.
Manufacturing Overhead is all costs which are not direct labor or direct materials.
The combination of direct labor costs and manufacturing overhead costs is sometimes called conversion costs, because those costs are incurred to convert materials into finished products. The combination of direct labor costs and direct materials costs are sometimes called prime costs.
Merchandisers are companies which buy finished goods from manufacturers and sell them to end-users. Manufacturers produce finished goods and sell them to end-users or merchandisers.
Costs incurred during idle time are normally treated as manufacturing overhead.
Overtime premiums for laborers are also treated as manufacturing overhead.
Fringe benefits for laborers have varying treatment from company to company. Some companies treat such benefits as a portion of labor wages, and thus as direct labor costs. Other campanies treat them as manufacturing overhead.
Quality cost information has limitations. Generally, reporting lags behind reality; attempts to correct quality problems may not show results immediately, and likewise worsening problems may not become obvious quickly.