Question

Identify and describe the three categories of manufacturing costs. Distinguish between (a) factory overhead and (b) selling and administrative overhead.

Answer 1

In a company, costs are considered as a financial measure of the utilization of resources for achieving a predefined objective. Manufacturing costs are divided into direct material cost, direct labour cost and manufacturing overhead.

1. Direct Labour cost - One of the manufacturing expenses is payment of wages to employees. In order to evaluate the cost made to production, constant supervision needs to be done. After finding out the cost, it is divided amongst employees and no. of days in a month to get the labour cost per hour per day.

2. Direct Material cost - Another type of manufacturing cost is the cost of raw material used in a manufacturing process. The process of ascertainment of material cost involves getting materials at the lowest cost and also to keep as much minimum inventory in hand as possible by reviewing the ordering methods.

3. Manufacturing overhead - There are also manufacturing expenses which are incurred even if there are no manufacturing operations performed. Such costs are said to be fixed costs such as utilities, rent, depreciation of machinery. Sufficient and close supervision can lower such costs.

In addition to the above costs there are also incidental expenses which are incurred during the process of production. There may be costs leading to defective quality of goods or in supplies such as tape, gear,lubricants.

There is a thin line of difference between factory overhead and selling and administrative overhead. The term factory overhead is generally used in a manufacturing company to denote overhead cost. Overhead is considered to be a part and parcel of developing the product or providing the service. However selling and administrative overhead is incurred from sales and administrative activity costs which occurs from running the business.

In general, overhead costs includes those costs which are incurred in development of a product or giving away a service. These costs, unlike direct labour and direct material costs, cannot to be directly related to units of production. Such costs may be depreciation of equipment, utility and maintenance costs of machines. Whereas selling and administrative costs are incurred as per requirement of customer inorder to get the finished product delivered to customer. These are incurred after production is completed. Hence cost of storing materials are considered part of manufacturing overhead costs and cost of storing finished goods are known as part of selling costs and are incurred after production is completed. Administrative costs are part of non-manufacturing costs that includes costs of running administrative functions and various departments of staff.