CLASSIFICATIONS OF MANUFACTURING COSTS
A typical manufacturing company purchases raw materials and converts these materials into finished goods through the process of production. The costs of converting raw materials into finished goods, specifically the direct labor and overhead costs, are called conversion costs. In contrast, the direct materials and direct labor that are consumed in production are referred to as prime costs. Thus, direct labor is both a prime cost and a conversion cost. These cost classifications are illustrated in Exhibit 16-3 and described below.
The manufacturing costs are often divided into three broad categories:
1. Direct materials -the raw materials and component parts used in production whose costs are directly traceable to the products manufactured.
2. Direct labor -wages and other payroll costs of employees whose efforts are directly traceable to the products they manufacture.
3. Manufacturing overhead -a catchall classification, which includes all manufacturing costs other than the costs of direct materials and direct labor. Examples include factory utilities, supervisor salaries, equipment repairs, and depreciation on production machinery.