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Concept introduction:
Manufacturing costs can be divided into two categories based on its allocation; direct costs, indirect costs. Direct costs are directly traceable to a unit of production such as direct material cost and direct labor cost. Indirect costs are directly traceable to a unit of production such as indirect material cost and indirect labor cost. Indirect costs are also known as overhead costs.
To indicate: The manufacturing overhead costs are not traced to jobs such as direct material and direct labor costs.
Explanation of Solution
Direct costs are directly traceable to a unit of production such as direct material cost and direct labor cost. Indirect costs are directly traceable to a unit of production such as indirect material cost and indirect labor cost. Indirect costs are also known as overhead costs.
The manufacturing overhead costs are not traced to jobs such as direct material and direct labor cost because manufacturing overhead is not traceable to each unit of production. For example, the cost of a utility bill of the factory can be traced to each unit of product.
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