Manufacturing costs can be classified into three broad categories:
1.Direct Materials: Raw materials that become an integral part of the product and that can be conveniently traced directly to it. For example: A radio installed in an automobile.
2.Direct Labor: Those labor costs that can be easily traced to individual units of product. For example: Wages paid to automobile assembly workers.
3.Manufacturing Overhead: Manufacturing costs that cannot be traced directly to specific units produced. For example: Indirect materials and indirect labor.
Indirect Materials: Materials used to support the production process. For example: lubricants and cleaning supplies used in the automobile assembly plant.
Indirect labor: Wages paid to employees who are not directly involved in production work. For example: maintenance workers, janitors and security guards.
Nonmanufacturing costs are often divided into two categories:
1.Selling Costs: Costs necessary to secure the order and deliver the product.
2.Administrative Costs: All executive, organizational, and clerical costs associated with the general management of the organization.