Costs, when categorized according to function, can be classified into:
- manufacturing costs and
- non-manufacturing costs.
Manufacturing costs refer to those that are spent to transform materials into finished goods. Manufacturing costs include direct materials, direct labor, and factory overhead.
Direct materials - cost of items that form an integral part of the finished product. They refer to the major parts or ingredients. Examples include wood in furniture, steel in automobile, water in bottled drink, fabric in shirt, etc.
Direct labor - cost of labor expended directly upon the materials to transform them into finished goods. Direct labor refers to salaries and wages of employees who work to convert the raw materials to finished goods.
Factory overhead - also called manufacturing overhead, refers to all costs other than direct materials and direct labor spent in the production of finished goods. Factory overhead includes indirect materials such as cost of nails, thread, glue, etc.; indirect labor such as salary of the supervisor; and factory expenses such as rent of the factory space, depreciation of factory equipment, utilities expense of the factory, factory supplies, etc.
Manufacturing costs are also known as factory costs or production costs.
Non-manufacturing costs refer to those incurred outside the factory or production department. These are costs are not needed in transforming materials into finished goods. Non-manufacturing costs include: selling expenses and general expenses.
Selling Expenses - also called Selling and Distribution Expenses. Examples include advertising costs, salaries and commission of sales personnel, storage costs, shipping and delivery, and customer service.
General Expenses - also called General and Administrative Expenses. Examples are: executive salaries, salaries of administrative staff, accounting expenses, legal expenses, research and development, and other costs related to general administration of the organization.
Classify the following costs as either M: manufacturing (DM: direct materials, DL: direct labor, FOH: factory overhead) or N: non-manufacturing (SE: selling expense, GE: general expense).
- Factory supplies
- Salary of production supervisor
- Legal expense
- Freight-out (delivery expense)
- Marketing samples
- Glue used in production
- Wood in producing furniture
- Salary of the company president
- Administrative office rent
- Salary of factory workers
- Depreciation of factory building
- Depreciation of office equipment
- Depreciation of display racks inside the store
Answers: (1) M-FOH; (2) M-FOH; (3) N-GE; (4) N-SE; (5) N-SE; (6) M-FOH; (7) M-DM; (8) N-GE; (9) N-SE; (10) N-GE; (11) M-DL; (12) M-FOH; (13) N-GE; (14) N-SE; (15) M-DM