What is costing for a manufacturing business?
Manufacturing involves the conversion of raw materials into finished goods.
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.
In management accounting costs are classified into three elements;
- Direct materials (direct costs)
- Direct labour (direct cost)
- Overhead cost (indirect cost)
Direct labour or direct materials are labour and materials directly identified to a product.
Indirect costs are overheads that are shared with all jobs. This might be the shared costs for administration staff working in a building company.
Direct Materials are raw materials used in production. An example is timber used to make a table.
Direct Labour is labour used directly to produce a product or provide a service.
Overhead costs are those costs that are essential to production or service delivery but cannot be isolated and solely attributable to a particular job or service. Examples are reception or administration staff supporting professionals like lawyers or doctors who are dealing with clients or jobs, rent or rates.
The total cost of producing a product, doing a job or performing a service is all of the direct and indirect costs.
|Direct or Indirect
|Salesperson’s travel expenses
|Indirect as not a direct cost of our product or service
|Organisation’s accounting costs
|Customer service staff salary costs
|Air conditioning costs for the administration office