Manufacturing companies usually list their production costs in three categories: direct materials, direct labor and overhead. Direct materials are the raw materials used to make a product, such as the cloth, plastic and steel used to produce a car. Direct labor is the cost of the workers who physically assemble the product. Overhead, broadly speaking, is whatever doesn't fall into the previous two categories, although it can be subdivided into manufacturing and non-manufacturing overhead.
Manufacturing overhead costs are the expenses a business incurs to manufacture a product that don't fall into the direct material, direct labor, marketing or administrative categories. They can include the cost of the warehouse building and production machinery, the cost of utilities and upkeep for the factory, maintenance and repair costs for production machinery and the cost of indirect labor, such as custodial, warehouse or security employees who work in the factory but don't actually assemble the product.
Non-manufacturing overhead, according to the Accounting Help website, is the expense of sales, administration and executive staff, legal and tax expenses, and other expenses not directly tied to manufacturing yet essential to the operation of the business. Such expenses can include rent and utility expenses for non-warehouse offices, the cost of office supplies, product distribution, advertising and accounting expenses.
Direct Labor Costs
Direct labor costs are the costs of the gross wages of the workforce who directly assemble the product being produced. In auto manufacturing, for example, they would be the assembly line workers who put the vehicles together and touch the parts with their hands -- hence the nickname, "touch labor." They are distinguished from indirect labor, which is defined broadly as all other employees in the company who do not directly assemble products.
How They Are Used
A company must factor overhead, direct labor and the other costs of manufacturing into the price of its products in order to make a profit, stresses the Missouri Small Business & Technology Development Centers. The cost categories of direct labor and overhead are also used by accountants to calculate the relative cost and/or profitability of certain aspect of production, and they are reported in financial statements to provide a detailed picture of the company's overall financial health.
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