In manufacturing accounting, the costs incurred in production are the most important cost elements. These costs, known as product costs, are realized when a product is manufactured and include the direct material, manufacturing overhead in addition to the direct labor (Kimmel et al., 2019) . The three costs are showcased in the income statement as distinct line items. The three costs are assigned to the units produced by the entity.
The direct materials are the costs incurred during the creation of a product. They are the expenses of raw materials or parts that go directly into product creation. Suppliers provide the entity with these materials and supplies that are used in product manufacture. In this case, the cost of acquiring such products determines the direct material costs. The costs do not entail the costs for materials that are utilized as a part of the general overhead of the entity (Kimmel et al., 2019) . The direct material costs are easily traceable to a specific product. For instance, in the manufacture of vehicles, steel is one of the main raw materials. The cost associated with the steel can be considered as direct material costs. Direct material costs are incorporated in the contribution margin, which assesses the contribution of a particular product. Such costs are also vital in throughput analysis, and, in such a case, the throughput is the earnings generated by the specific product minus all its variable expenses.
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Direct labor costs are the expenses that are incurred by the workers when the entity produces final products. The workers are responsible for converting the raw materials and supplies into finished products. They need to be compensated by the company given their input. Direct labor costs are the labor expenses that are clearly attributable to the final product (Weygandt & Kimmel, 2021). In this sense, the costs must be incurred by workers directly associated with the creation of the finished good. The main types of direct labor expenses include wages, salaries, payroll taxes linked to the wages, medical insurance paid by the entity, life insurance, entity-matched pension contributions, and workers' compensation insurance. Wages and salaries are typically the most costs that must be paid by the entity to ensure that the production staff is working on their tasks. In addition to regular time, direct costs also entail costs paid by the entity for overtime hours worked. Direct labor expenses are typically linked with products in the job costing environment in which the production staff is required to record the time they use in working on various tasks.
The manufacturing overhead entails all the costs of making the finished goods except those categorized as direct materials and direct labor. These expenses must be incurred by the entity but cannot be traced directly to primary units produced. In this sense, a key type of manufacturing overhead is indirect material costs. These costs are derived from the materials that cannot be attributed to a specific final product. Another vital type of manufacturing overhead is indirect labor which entails the cost incurred by laborers not associated with the manufacture of a product. Depreciation is another essential manufacturing overhead (Weygandt & Kimmel, 2021). Machinery and production equipment undergo wear and tear, which is accounted for by the depreciation cost. Another key manufacturing overhead is the maintenance cost. Production equipment is likely to break down due to the presence of many complex and interrelated parts. The equipment must be inspected and the old parts replaced with new parts to ensure production runs smoothly. The replacement of parts and servicing of equipment incur an additional cost for the entity. Another vital type of manufacturing overhead is factory utility costs.
References
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2019). Accounting: Tools for business decision making . Hoboken, NJ: John Wiley & Sons.
Weygandt, J. J., & Kimmel, P. D. (2021). Managerial accounting: Tools for business decision making . Hoboken, NJ: Wiley.
