üThree items of cost are:

üDirect materials consist of all of the materials that become an integral part of the finished product. Direct materials should include the actual cost of the materials, as well as freight in, import duties, purchasing costs, receiving costs, storage costs and other directly attributable costs of acquiring the materials. Direct materials should be recorded net of any trade, quantity or cash discounts attributed to the materials.

ü

üDirect labor consists of all of the personnel costs required to manufacture the finished product. Direct labor should include wages, payroll taxes, and benefits associated with personnel who are integral to manufacturing the finished product.

ü

Factory overhead consists of all of the other costs required to manufacture the finished product that do not fit into the direct material or direct labor elements. They consist mainly of indirect material, indirect labor, depreciation, utilities, rent, repairs and maintenance and insurance.