Question

define manufacturing cost?
define direct materials?
define direct labour?
define manufacturing overhead?

required : Write very briefly

Answer 1

1) Manufacturing Cost

Manufacturing cost are the costs that incurred for the manufacturing or production of a product in a factory. Manufacturing cost includes all expenditures incurred from the procurement of materials to the completion of finished product.The cost are typically presented in the income statement as separate line items. An entity incurs these costs during the production process. Manufacturing costs are also known as Product Cost. Examples of manufacturing cost are i) Salaries and wages for quality assurance, industrial engineering, materials handling, factory management, and equipment maintenance personnel. ii) Equipment repair parts and supplies. iii) Factory utilities. iv) Depreciation on factory assets. Manufacturing Cost is the sum of costs of all resources consumed in the process of making a product. The manufacturing cost is classified into three categories :- i) Direct materials cost : - Direct material cost is the cost of raw material that becomes a part of finished goods. ii) Direct labour cost : - Direct labour cost is the cost of the workers who can be easily identified with the unit of production. iii) Manufacturing overhead or factory overhead : - Manufacturing or factory overheads includes indirect labour cost, indirect material cost, other indirect manufacturing or factory cost.

Calculation of manufacturing cost : - a) Total manufacturing cost = total direct materials cost + total labour cost + total manufacturing or factory overhead (addition of costs that have been incurred during the period to determine the total manufacturing cost).

b) Manufacturing cost per unit : - Total manufacturing cost (incurred during the period) ÷ Total number of units(products) produced. Say, for example the total manufacturing cost = $70,000 and total units produced = 35,000. Manufacturing cost per unit = total manufacturing cost ÷ total units produced = $70,000 ÷ 35,000 = $2 per unit.

2) Direct material cost

Direct material cost is the cost of the raw materials and components used to create a finished product. The materials must be easily identifiable with the resulting product (otherwise they are considered to be joint costs). The direct materials cost is one of the few variable costs involved in the production process as such, it is used in the derivation of throughout from production processes. Throughput is sales minus all totally variable expenses.

Examples of direct materials are : -

i) The timber used to construct a house. ii) The steel included in an automobile. iii) The circuit board included in a radio. iv) The fabric used to assemble clothing. To determine the amount of direct materials cost in a product, work with the engineering staff to create a bill of materials, which specifies the quantity of each raw material item and component included in a product. Then assign a standard cost to each item, based on recent prices paid for them and add a reasonable allowance for scrap and spoilage. The total is the direct material cost of the product.

The following are the main components in the direct materials cost are : - a) Indirect tax : - like sales tax, excise duty. b) Transport, storage and delivery charges : - if these charges are included in the invoice price, it will form part of direct materials cost. c) Quantity discounts : - offered by sellers to encourage bulk orders. d) Trade discount : - offered by supplier for increasing sales. e) Cash discount : - offered by the supplier for early payment of debt.

3) Direct labour cost : -

Direct labour cost is wages that are incurred in order to produce specific goods or provide specific service to customers. The total amount of direct labour cost are most commonly associated with products in a job costing environment, where the production staff is expected to record the time they spend working on various jobs. This can be a substantial chore if employees work on a multitude of different products. In a process costing environment, where the same product is created in very large quantities, Direct labour cost is included in a general pool of conversion costs, which are then allocated equally to all the products manufactured.

Calculation of direct labour : Cost of goods manufactured minus direct materials cost minus manufacturing overheads equals to direct labour cost.

4)Manufacturing overheads or factory overheads

Manufacturing overheads or factory overheads refers to indirect factory-related costs that are incurred when a product is manufactured. Along with costs such as direct materials and direct labour the cost of manufacturing overheads must be assigned to each unit produced. Manufacturing overhead includes such things as the i) Electricity used to operate the factory equipment ii) Depreciation on factory equipment and building, iii) factory supplies iv) factory personnel. Generally manufacturing overheads form a substantial portion of the total overheads. It is important that such overheads should be properly absorbed over the cost of production. The following procedures may be adopted in this regard. i) Estimation and collection of manufacturing overheads. ii) Cost allocation. iii) Cost apportionment. iv) Re-apportionment of cost from service department to production department. v) Absorption. vi) Treatment of under or over absorbtion.