Categories of product cost
- All product cost can be categorized into 3 sub groups, direct material (DM), direct labor (DL), and manufacturing / factory overhead (MOH/FOH). If you see abbreviation MOH as manufacturing overhead, if you see abbreviation FOH as factory overhead, both means the same thing, it depends on your factory you are working.
- Let’s think about a little bit more detail about each component of the product cost. There are a couple of sample item here that I have tried to highlight in terms of what make up or what is the feature or what is the quality of DM, DL and FOH.
Direct material can be directly traced to the cost object. Direct material makes up of significant (important) quantity of the final product. The value of direct material that is used is quite high in relation to the value of final product cost.
Next we look at the direct labor component. Direct labor also follow the same pattern, that is to say, direct labor can be directly traced to the products manufactured table. Direct labor is significant quantity of the product. The value is largely high in relation to the final product cost.
- Next we get the third component, manufacturing overhead. One way to make sense of this components is to break out factory manufacturing overhead into 3 additional sub components. One sub component would be indirect material. Another one is indirect labor. And third one would be other MOH category.
- Before we get this specifics, let’s look at some of the components or some of the items that make up manufacturing factory overhead. They are not traceable to the product.
- Next MOH cost is in insignificant quantities.
- Third the value of manufacturing overhead item maybe small or low in relation to the all of the product cost.
- And finally every manufacturing overhead item is directly related to the factory. Please keep these point in mind as you look into some specific component that make up MOH.
- One component of MOH is indirect material. Let’s assume you need a couple of nail to hold the wood together that makes up to the table. The cost of nail is small in relation to the all of the table cost.
- From the accounting standpoint it’s not cost effective to keep a track of 10 nails or 12 nails that are going to the table. Although the nails go directly into the table, from the cost standpoint we try to calculate the cost of nails as indirect cost rather than calculate this by individual nail basis.
- Example of indirect labor is supervisors salary. Supervisor is not making table directly for himself or herself. What does the supervisor do? Typically he or she will be walking on the shop floor supervising and monitoring his or her employee. Supervisor’s salary cannot be directly traced to a specific table unlike carpenter’s wages.