There are two types of costs in the process of production and distribution of goods. Therefore, manufacturing costs are those closely linked with the putting out of certain goods. Beside these there is also a category of costs connected with the distribution of goods and other necessary activities, termed non-manufacturing costs.
In their turn the above mentioned manufacturing costs are broken into direct costs and indirect costs or overheads. Direct costs vary directly with production. If an additional unit of production is made there is a measurable increase in direct costs. Conversely, one unit of production less means a correspondent decrease in the same type of cost. Direct costs include direct materials and direct labour. The former refers to commodities or
raw materials that go into the making of a product. Raw materials are not restricted to basic natural resources. For instance tyres are raw materials for a car manufacturer, although a finished product for a rubber manufacturer. Small items such as nails, screws, glue are not charged directly to the product hence they are not included into direct costs. The latter element of the above mentioned direct costs includes only wages and salaries of those directly involved in the production of a certain product, especially where remuneration is based on piece work.
All expenses for materials and labour other than direct materials and direct labour are indirect costs or overheads. Here we can mention the cost of heating, light, insurance costs for equipment, maintenance of machinery and factory buildings. As for indirect labour costs let us mention the retribution of foremen, janitors, cleaners whose role is important in a factory, but whose labour cannot be measured in terms of the product. Non-manufacturing costs include distribution costs such as marketing, advertising; administrative costs comprise salaries for executives and clerks, accounting costs.
An important category of non-manufacturing costs in a modern company is represented by research and development costs. Costs accountants have to pay attention to the calculation of all types of cost so as to provide managers with information for decisions regarding the keeping of costs as low as possible.
Cost Accounting written by Cristina Nuta for FamousWhy.com
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by Cristina Nuta -