Elements of a product costs / Manufacturing costs:
The cost elements of a product are direct materials, direct labor and factory overhead.
Materials are the principal substances used in production that are transformed into finished goods by the addition of direct labor and factory overhead. Material costs may be divided into direct and indirect materials as follows:
(i) Direct materials
Direct materials are those materials, which can be identified with the production of a finished product, which can be easily traced to the product. For example-cloth in dress making, bricks in building a house.
(ii) Indirect materials
Indirect materials are those, which are not directly related to the production or manufacture.
Labor is the physical or mental effort expended in the production of a product.
Direct labors are reserved for those labor costs that can be physically and conveniently traced to individual units of product. For example-cost of machine operators
Indirect labors are those labor costs that can not be physically and conveniently traced to individual units of product. For example-night security guards
Factory overhead includes all costs of manufacturing except direct materials and direct labors. Such as indirect material, indirect labor, heat & light, property tax, depreciation.