Costs may be classified as manufacturing costs and non-manufacturing costs. This classification is usually used by manufacturing companies.
Manufacturing costs can be further divided into the following categories:
- Direct materials
- Direct labor
- Manufacturing overhead
The above three categories of manufacturing costs are briefly explained below:
Resources that become a fundamental portion of the finished product and that can be easily traced into it are called primary materials. For example wood is usually a direct material for that manufacturers of household furniture. Lime stone is usually direct material for that manufacturers of bare cement. Direct materials usually includes a significant portion regarding total manufacturing charge. Direct material is usually sometime called raw material.
The finished product of a company may become raw material of another company. For example, cement is a finished product for manufacturers of cement and raw materials for companies involved in construction business.
The labor cost which might be physically and conveniently traced to your unit of finished product is known as direct labor price or touch labor cost. Examples of one on one labor cost include labor cost regarding machine operators and painters within a manufacturing company. Similar to direct materials, it contains a significant portion of total manufacturing price.
The sum of direct materials cost and direct labor cost is known as prime cost.
Formula of prime cost:
Prime cost = Direct materials cost + Direct labor cost
The sum of direct materials cost, direct labor cost and manufacturing overhead cost is known as manufacturing cost.
Formula of manufacturing cost:
Manufacturing cost = Direct materials cost + Direct labor cost + Manufacturing overhead cost
Non-manufacturing costs are further divided into the following categories:
- Marketing and selling costs
- Administrative costs
Examples of marketing and selling costs include advertising costs, order taking costs and salaries of sales persons etc. Examples of administrative costs include salaries of executives, accounting costs, and general administration costs etc.