Accounting For Dummies®, 4th Edition

11.4. Assembling the Product Cost of Manufacturers

Businesses that manufacture products have several additional cost problems to deal with, compared with retailers and distributors. I use the term manufacture in the broadest sense: Automobile makers assemble cars, beer companies brew beer, automobile gasoline companies refine oil, DuPont makes products through chemical synthesis, and so on. Retailers (also called merchandisers) and distributors, on the other hand, buy products in a condition ready for resale to the end consumer. For example, Levi Strauss manufactures clothing, and Macy's is a retailer that buys from Levi Strauss and sells the clothes to the public. The following sections describe costs unique to manufacturers.

11.4.1. Minding manufacturing costs

Manufacturing costs consist of four basic types:

• Raw materials (also called direct materials): What a manufacturer buys from other companies to use in the production of its own products. For example, General Motors buys tires from Goodyear (or other tire manufacturers) that then become part of GM's cars.

• Direct labor: The employees who work on the production line.

• Variable overhead: Indirect production costs that increase or decrease as the quantity produced increases or decreases. An example is the cost of electricity that runs the production equipment: You pay for the electricity for the whole plant, not machine by machine, so you can't attach this cost to one particular part of the process. But if you increase or decrease ...