What is Costing for a Manufacturing Business?
Manufacturing involves the conversion of raw materials into finished goods.
For example, making wooden table and chairs
This manufacturing involves the use of labour, materials and equipment or machinery to turn the raw materials into the finished goods.
For example, a fertiliser company might buy certain raw materials (rock) and process this into agricultural fertiliser.
To understand this you need to remember the difference between direct and indirect costs.
In management accounting costs are classified into three elements;
- Direct materials (direct costs)
- Direct labour (direct cost)
- Overhead cost (indirect cost)
A manufacturer must prepare sales and production forecasts to work out the purchase requirements of the raw materials that go into the production process.
To be able to fully cost a job, the overhead for a job must be calculated.
As the overhead cost is an indirect cost, the item is costed to the product by ‘allocating the overhead‘.
