Cost accounting Elements of a Product Product Cost

Cost accounting

Elements of a Product (Product Cost) The elements of a product are defined as follows:

Materials: These are the principal substances used in production that are transformed into finished goods by the addition of direct labor and factory over head. The cost of materials may be divided into direct and indirect materials as follows:

Direct materials: All materials that can be identified with the production of a finished product, that can be easily traced to the product, and that represent a major material cost of producing that product. An example of direct material is the lumber used to build a bunk bed. Indirect materials: All materials involved in the production of a product that are not direct materials. Indirect materials are included as part of factory overhead. An example of an indirect material is the glue used to build a bunk bed.

Labor: Labor is the physical or mental effort expended in the production of a product. Labor costs may be divided into direct and indirect labor as follows:

Direct labor: All labor directly involved in the production of a finished prod uct that can be easily traced to the product and that represents a major labor cost of producing that product. The work of machine operators in a manufacturing company would be considered direct labor. Indirect labor: All labor involved in the production of a product that is not considered direct labor. Indirect labor is included as part of factory over head. The work

Factory Overhead: This all inclusive cost pool is used to accumulate indirect materials, indirect labor, and all other indirect manufacturing costs which can not be directly identified with specific products. Examples of other factory over head costs, besides indirect materials and indirect labor, are rent, light, and heat for the factory, and depreciation of factory equipment. Factory overhead costs can be further classified as fixed, variable, and mixed.