Question

A manufacturing company makes the products that it sells. Briefly identify and define the 3 product cost elements that are incurred in making a product, in the spaces provided below.

Answer 1

Product costs are costs that are incurred to create a product that is intended for sale to customers. Product costs include direct material (DM), direct labor (DL) and manufacturing overhead (MOH).

Recall that product costs include direct material, direct labor, and manufacturing overhead. The three are detailed below:

1. Direct material

Direct material costs are raw materials purchased that go directly into producing the products. For example, if Company A is a toy manufacturer, an example of a direct material cost would be the plastic used to make the toys.

2. Direct labor

Direct labor costs are the wages, benefits, and insurance that are paid to employees who are directly involved in manufacturing and producing the goods. For example, workers on the assembly line or those who use the machinery to make the products.

3. Manufacturing overhead

Manufacturing overhead costs are indirect factory-related costs that are incurred when producing a product. Manufacturing overhead costs include:

• Indirect material: Indirect materials are materials used in the production process but are not directly traceable to the product. For example, glue, oil, tape, cleaning supplies, etc. are classified as indirect materials because it would not be possible (or not cost-effective) to determine the exact cost of the materials that go into the production of a product.
• Indirect labor: Indirect labor is the labor of those who are not directly involved in the production of the products. An example would be security guards, supervisors, and quality assurance workers in the factory. Their wages and benefits would be classified as indirect labor costs.
• Other costs such as factory utilities, lease, and insurance.