Basic Manufacturing Cost Categories

816 Words Jul 3rd, 2013 4 Pages
3 Basic manufacturing cost categories:
Direct Materials Cost:
The materials that go into final product are called raw materials.
Direct Labor Cost:
The term direct labor is reserved for those labor costs that can be essentially traced to individual units of products. Direct labor is sometime called touch labor, since direct labor workers typically touch the product while it is being made.
Manufacturing Overhead Cost:
Manufacturing overhead, the third element of manufacturing cost, includes all costs of manufacturing except direct material and direct labor.

Enumerate and define the different classifications of costs
On the basis of Nature or Elements: One of the important classification cost is on the basis of nature or elements.
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Normal costs are those incurred normally within the target output or fixed plan.

5) On the basis of Controllability and Decision Making: Based on the managerial decision making and controllability the classifications are as follows: (a) Controllable Cost, (b) Uncontrollable Cost, (c) Sunk Cost, (d) Opportunity Cost, (e) Replacement Cost, (f) Conversion Cost.

a) Controllable Costs: Controllable Costs are the costs which can be influenced by the action of a specified number of an undertaking. Controllable Costs incurred in a particular responsibility centre which is influenced by the action of the executive heading. For example, direct materials and indirect materials.

b) Uncontrollable Costs: Uncontrollable Costs are those costs which cannot be influenced by the action of a specified number of an undertaking. In fact, no cost is controllable; it is only in relation to a particular individual that may specify a particular cost to either controllable or non-controllable. For example, rent and rates.

c) Sunk cost: These are historical costs which were incurred in the past and are not relevant to the particular decision making problem being considered. While considering the replacement of a plant, the depreciated book-value of the old asset is irrelevant as the amount is a sunk cost which is to be written-off at the time of replacement. Unlike incremental or
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