What is Production Cost?
Product costs refer to the expenditures necessary for the development of a product intended for eventual sale to customers. These costs predominantly encompass three key components: direct material (DM), direct labor (DL), and manufacturing overhead (MOH).
Production Cost Explained
Product costs encircle the fundamental expenses that emerge directly from the manufacturing operations. These costs are primarily classified into three essential categories, each playing a crucial role in the production process.
Direct Material:
Direct material costs encapsulate the expenses related to the raw materials or components that are directly utilized in the production of goods. For instance, if we consider a company like Company A, engaged in the manufacturing of toys, the cost of the plastic used in the production process would be a pertinent example of a direct material cost.
Direct Labor:
Direct labor costs encompass the remuneration, along with associated benefits and insurances, paid to the employees who are directly engaged in the manufacturing and assembly of products. This often includes workers on the assembly line and those operating machinery to fabricate the goods.
Manufacturing Overhead:
Manufacturing overhead costs are a comprehensive amalgamation of direct factory-related expenses that are incurred during the manufacturing cycle. This category includes the cost of machinery, as well as the expenditure associated with the operation and maintenance of the machinery. Additionally, manufacturing overhead costs also encompass certain indirect expenses, such as those related to:
Indirect Materials: These comprise materials that are used during the production process but cannot be directly attributed to the final product. Examples include glue, oil, tape, and cleaning supplies, among others.
Indirect Labor: This refers to the labor of individuals who are not directly engaged in the physical production of goods. Examples could be the wages and benefits of security personnel, supervisors, and quality assurance workers within the manufacturing unit