Question: much of what we comment on in this publication relates to carriers that to produce products, such as Nike and Apple, and also terminology is a crucial component of bookkeeping for production companies. The difficulty is in classifying prices correctly because that items together as production materials, production labor, marketing department labor, rental for production facilities, and rent because that the administrative services facilities. These prices must be classified accurately so that they appear correctly in agency financial reports. The beginning point because that learning exactly how to classify prices correctly is in knowledge two vast categories of costs. What space the two large terms provided to categorize price information in a manufacturing setting?


Answer: The two vast categories of expenses are manufacturing costs and also nonmanufacturing costs. Each category is described in information as follows.

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Manufacturing Costs

All costs related to the manufacturing of items are called manufacturing costsAll expenses related to the production of goods; likewise called product costs.; lock are also referred to as product costsAll costs related come the production of goods; also called manufacturing costs.. A manufacturer purchase materials, employs workers who use the products to assemble the goods, offers a structure where the products are stored and goods are assembled, and sells the goods. We classify the costs linked with these activities into three categories: direct materials, direct labor, and manufacturing overhead.

To aid clarify which costs are included in these 3 categories, stop look at a furniture firm that specializes in structure custom lumber tables referred to as Custom Furniture Company. Every table is unique and built to client specifications for usage in houses (coffee tables and dining room tables) and also offices (boardroom and meeting room tables). The sales price of each table different significantly, from $1,000 to more than $30,000. Figure 1.4 "Direct Materials, direct Labor, and also Manufacturing Overhead at practice Furniture Company" shows instances of production tasks at tradition Furniture firm for each of the 3 categories (we continue using this company as an instance in thing 2 "How Is project Costing offered to Track production Costs?").

Direct Materials

Question: Raw materials used in the production procedure that are conveniently traced to the product are dubbed direct materialsRaw products used in the production process that are conveniently traced to the product.. What materials used in the production process at tradition Furniture would be divide as direct materials?


Answer: The wood provided to construct tables and the hardware offered to connect table legs would certainly be thought about direct materials. Small, cheap items like glue, nails, and also masking ice cream are typically not consisted of in straight materials due to the fact that the price of tracing this items to the product outweighs the benefit of having accurate expense data. This minor species of materials, often referred to as supplies or indirect materials, are consisted of in production overhead, which we define later.

Direct Labor

Question: workers who convert materials into a perfect product and whose time is conveniently traced to the product are dubbed direct laborLabor performed by workers who transform materials right into a finished product and whose time is quickly traced come the product.. Who represents straight labor at custom Furniture?


Answer: straight labor would encompass the employees who usage the wood, hardware, glue, lacquer, and other materials to construct tables.

Manufacturing Overhead

Question: all costs associated with the production process other than direct material costs and direct labor costs are dubbed manufacturing overheadAll costs associated with the production process other than direct material costs and direct job costs.. Terms associated with manufacturing overhead incorporate factory overhead, manufacturing facility burden, and also overhead. What item are had in production overhead?


Answer: production overhead is composed of the following:

Other manufacturing costs. These space all other costs for items connected with the factory, including tools maintenance, insurance, utilities, and depreciation.

Table 1.2 "Manufacturing expenses at tradition Furniture Company" provides several instances of manufacturing costs at tradition Furniture agency by category.

Table 1.2 Manufacturing prices at practice Furniture Company

Direct Materials
Wood: cherry, maple, oak, and also mahogany Hardware: drawer handles
Direct Labor
Workers that cut, plane, and also glue wood Workers that fill and also sand tables Workers who stain and finish tables
Manufacturing Overhead
Indirect materials: glue, screws, nails, sandpaper, stain, and also lacquer Indirect labor: factory supervisors Other manufacturing costs: tools maintenance, equipment depreciation, manufacturing facility utilities, factory insurance, factory building depreciation, and factory residential or commercial property taxes

Note 1.43 "Business in activity 1.5" details the materials, labor, and also manufacturing overhead in ~ a agency that has been creating boats due to the fact that 1968.

Business in action 1.5


Photo courtesy that Brian Miller,

Manufacturing expenses at MasterCraft

MasterCraft produces boats for water skiers and wake boarders. Each watercraft produced incurs far-ranging manufacturing costs. MasterCraft records these manufacturing costs as perform on the balance sheet till the watercrafts are sold, at which time the costs are transferred to price of goods sold top top the income statement.

Examples of direct materials because that each boat include the hull, engine, transmission, carpet, gauges, seats, windshield, and also swim platform. Examples of indirect materials (part of production overhead) incorporate glue, paint, and screws. Straight labor includes the manufacturing workers who assemble the boats and also test them before they space shipped out. Indirect labor (part of production overhead) includes the manufacturing supervisors that oversee manufacturing for several different boats and also product lines.

Manufacturing overhead contains the indirect materials and indirect labor mentioned previously. Other production overhead items are factory structure rent, maintenance and also depreciation for manufacturing equipment, manufacturing facility utilities, and quality control testing.

Source: MasterCraft, “Home Page,”

Nonmanufacturing Costs

Costs that room not related to the production of goods are referred to as nonmanufacturing costsCosts that are not concerned the production of goods; likewise called period costs.; they are likewise referred come as duration costsCosts that room not concerned the production of goods; additionally called nonmanufacturing costs.. These prices have two components—selling costs and also general and administrative costs—which are explained next. Instances of nonmanufacturing costs appear in number 1.5 "Examples that Nonmanufacturing expenses at custom Furniture Company".

Selling Costs

Question: costs incurred to achieve customer assignment and carry out customers v a finished product are dubbed selling costsCosts occurs to obtain customer orders and carry out customers through a perfect product.. (They are also often called marketing expenses or selling and also advertising costs.) What activities would it is in classified together selling expenses at tradition Furniture?


Answer: examples of selling prices include advertising, sales commissions, incomes for marketing and also advertising personnel, office room for marketing and advertising personnel, finished products storage costs, and also shipping costs paid by the seller for commodities shipped to customers.

General and Administrative Costs

Question: costs related to the as whole management of an company are called general and administrative costsCosts regarded the as whole management of one organization.. What tasks would be classified as general and administrative prices at tradition Furniture?


Answer: Examples incorporate personnel and also support employee in the adhering to areas: accounting, human being resources, legal, executive, and also information technology. Depreciation that office equipment and also buildings linked with these locations would also be contained as general and administrative costs. General and also administrative prices are frequently simply referred to as administrative costs.

Figure 1.5 examples of Nonmanufacturing expenses at custom Furniture Company

Although selling costs and general and administrative costs are taken into consideration nonmanufacturing costs, managers frequently want come assign several of these prices to assets for decision-making purposes. For example, sales commissions and shipping prices for a particular product might be assigned come the product. This does not comply through U.S. GAAP because, under U.S. GAAP, only product expenses can it is in assigned to products. However, as we detailed earlier, managerial accountancy information is tailored to fulfill the requirements of the users and also need no follow U.S. GAAP.

Distinguishing between manufacturing and nonmanufacturing prices is not always simple. For example, if legitimate staff functions on an issue associated with production personnel and also if human resources employee hires assembly heat workers, room the costs associated manufacturing or nonmanufacturing costs? it is up to each company to determine just how to manage such costs for product costing purposes. The benefit of managerial bookkeeping over financial accounting is that costs can be organized in any type of manner the helps managers make decisions. However, in this chapter, to stop ambiguity, us follow the definitions detailed by U.S. GAAP.

Presentation of Manufacturing and also Nonmanufacturing costs in jae won Statements

Question: at this point, you should be able to distinguish in between manufacturing costs and also nonmanufacturing costs. Why is it essential to do this distinction?


Answer: Distinguishing in between the 2 categories is crucial because the group determines wherein a price will appear in the jae won statements. All manufacturing costs (direct materials, direct labor, and also manufacturing overhead) space attached come inventory together an asset on the balance sheet until the goods are sold, in ~ which suggest the expenses are moved to expense of items sold top top the income statement together an expense. Together we indicated earlier, nonmanufacturing expenses are also called period costs; the is since they are expensed ~ above the revenue statement in the time period in which they space incurred.

Table 1.3 "Manufacturing matches Nonmanufacturing Costs" clarifies the relationship between manufacturing and nonmanufacturing costs. It additionally describes the allude at i beg your pardon these expenses are recorded as prices on the earnings statement. (Remember that the terms manufacturing cost and also product cost space interchangeable, as room the state nonmanufacturing cost and also period cost.)

Table 1.3 manufacturing Versus Nonmanufacturing Costs

Manufacturing costs (Also dubbed Product Costs) Nonmanufacturing prices (Also Called period Costs)
straight materials straight labor manufacturing overhead marketing General and administrative
Timing the expense: costs are expensed when products are sold. Timing that expense: expenses are expensed throughout the time duration incurred.

Note 1.48 "Business in action 1.6" provides examples of nonmanufacturing expenses at PepsiCo, Inc.

Business in activity 1.6


Source: picture courtesy of JeffBedord,

Nonmanufacturing expenses at PepsiCo

PepsiCo, Inc., produces more than 500 assets under several various brand names, including Frito-Lay, Pepsi-Cola, Gatorade, Tropicana, and also Quaker. Net sales for 2010 totaled $57,800,000,000, resulting in operating profits of $6,300,000,000. Cost of sales represented the highest expense on the income statement at $26,600,000,000. The 2nd highest cost on the income statement—selling and also general and administrative expenses—totaled $22,800,000,000. These costs are duration costs, meaning they have to be expensed in the duration in i beg your pardon they room incurred.

Examples the selling costs for PepsiCo include television declaring (probably the greatest piece that the $22,800,000,000), promotion coupons, costs of shipping commodities to customers, and also salaries that marketing and also advertising personnel.

Examples that general and administrative costs include salaries and also bonuses of optimal executives and also the costs of administrative departments, including personnel, accounting, legal, and also information technology.

Source: PepsiCo, “PepsiCo 2010 annual Report,”

Key Takeaway

all manufacturing expenses that are easily traceable to a product space classified together either direct materials or direct labor. All various other manufacturing prices are divide as production overhead. All nonmanufacturing costs are not related to production and are classified together either selling costs or general and administrative costs.

Review trouble 1.6

The adhering to manufacturing items are for a construction firm working on number of custom homes. Determine whether every item have to be categorized as straight materials, straight labor, or production overhead.

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Nails timber Drywall Workers building the house framework Supervisor responsible for three homes Light bulbs cabinets Depreciation of building equipment

Identify whether every item in the following should it is in categorized together a product (manufacturing) price or as duration (nonmanufacturing) cost. Additionally indicate whether the cost should be taped as an price when the price is incurred or together an cost when the goods are sold.

heralding Shipping expenses for raw materials coming native a caterer Shipping prices for items shipped come a client Chief executive officer’s salary production supervisor’s value Depreciation top top production devices Raw products used in production paper used through the accountancy staff Commissions payment to salespeople Janitorial services listed for production facility Supplies supplied by human being resources personnel Utility costs for retail keep Insurance expenses for manufacturing facility Assembly line workers Clerical support for chief executive officer maintain of production devices identify whether each item detailed in item 2 should be categorized as straight materials, direct labor, manufacturing overhead, marketing cost, or general and also administrative cost.

Solution to Review difficulty 1.6


production overhead straight materials straight materials direct labor production overhead production overhead (You might call this a direct material, however the benefit of tracking this item as a direct material more than likely does no outweigh the cost.) direct materials manufacturing overhead


period cost, expensed once incurred Product cost, expensed when products are sold duration cost, expensed once incurred duration cost, expensed once incurred Product cost, expensed when goods are offered Product cost, expensed when products are offered Product cost, expensed when items are sold duration cost, expensed when incurred duration cost, expensed when incurred Product cost, expensed when goods are sold duration cost, expensed as soon as incurred duration cost, expensed once incurred Product cost, expensed when goods are sold Product cost, expensed when items are sold duration cost, expensed when incurred Product cost, expensed when products are marketed


Selling straight materials or production overhead, depending on if the products are quickly traced come the product (direct) or not (indirect manufacturing overhead) offering General and also administrative production overhead production overhead straight materials or manufacturing overhead, relying on if the materials are easily traced to the product (direct) or not (indirect production overhead) General and administrative Selling manufacturing overhead General and administrative Selling production overhead straight labor General and also administrative production overhead