Manufacturing costs
Manufacturing costs are costs that are incurred within the factory area. Describe the three components of manufacturing costs. Identify the costs that might be incurred in the manufacture of a Levi Strauss shirt.

Manufacturing costs are usually divided into three categories: direct material, direct labour and manufacturing overhead (or indirect manufacturing costs).
DIRECT MATERIAL
Raw material that is consumed in the manufacturing process, is physically incorporated into the finished product and can be traced to products in an economic manner is called direct material. Examples include the cost of shirt material, buttons, cotton thread, bindings and trimmings used in manufacturing the shirt.
DIRECT LABOUR
The cost of salaries and wages and labour on-costs for personnel who work directly on the manufactured product is usually classified as direct labour. Examples include the wages of personnel who cut the fabric, sew the shirt and sew buttons, bindings and trimmings.
Labour on-costs are the additional labour-related costs that businesses have to incur to employ personnel, such as payroll tax, workers' compensation insurance and the employer's superannuation contributions. Where labour on-costs relate to direct labour employees, they should be classified as part of direct labour costs, as they are as much a part of the cost of labour as are employees' wages.
Sometimes contractual arrangements and union agreements mean that labour is a committed cost that does not vary with the level of production. In this situation, it may not always be possible to trace labour costs directly to specific products, in which case these costs will be classified as indirect product costs.
MANUFACTURING OVERHEAD
All other costs of manufacturing are classified as manufacturing overhead, sometimes called indirect manufacturing costs or factory burden costs. Manufacturing overhead covers all manufacturing costs other than direct material and direct labour costs. It includes the cost of indirect materials and indirect labour, which covers any material and labour used in production that is not classified as direct. Manufacturing overhead also includes the costs of depreciation and insurance of the factory and manufacturing equipment, utilities such as electricity, as well as the costs of manufacturing support departments. Support departments (or service departments) are departments that do not work directly on producing products but are necessary for the manufacturing process to occur. Examples include cutting machine and sewing machine maintenance, depreciation on machines and/or equipment, electricity and production scheduling departments.