Before a product reaches a shelf, it has already run up a bill. Manufacturing cost is the total of every resource used in making it, and accountants sort that total into three groups: direct materials, direct labour and manufacturing overhead. The figure also feeds into a product’s total delivery cost.
Direct materials
These are the raw materials that end up inside the finished product. Factories add value to them through a chain of operations such as welding, cutting and painting. Accountants keep them apart from indirect materials, which sit in a different column.
Direct labour
This is the pay of workers who can be tied straight to a unit of production. The assembly workers on a line are the standard example. For their families it is the weekly wage. On the ledger it is a cost attached to a person rather than a machine.
Manufacturing overhead
Overhead takes in every manufacturing expense that is not direct materials or direct labour, so it covers the costs that support production. It splits three ways.
Indirect labour is the pay of people such as supervisors and the material handling team, who are not directly involved in making the goods. Indirect materials are consumables like lubricants, grease and water that are not used as raw materials.
The third group is a catch-all: machine depreciation, land rent, property insurance, electricity, freight and transportation, or any other expense that keeps the factory operating.
