Knowing what the cost of raw materials, labor and factory overhead is very important for those of you who are in the business world.
This is because the world of business and accounting cannot be separated from financial problems, including financing the production of goods or services.
So, these three types of costs are the basic things that you should know about in the world of the manufacturing industry.
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This article will specifically discuss what production costs are in the business world and their types.
Definition of Production Costs
Before understanding what raw material costs are, first know the meaning of production costs.
Production cost is a type of cost that the company incurs in the management process which aims to produce finished products.
So, production costs or production costs are calculated starting from the initial product processing process until it becomes semi-finished goods or finished goods, which will be accumulated into one and charged to the company.
Furthermore, the production costs will be calculated for each unit of product which aims to make it easier for companies to calculate and take advantage of product sales.
Production costs are also what will create the cost of a product at the end of the accounting period.
You need to know that production costs also have different characteristics from the company’s operational costs .
Operational costs are costs used to support a company’s managerial system.
Meanwhile, production costs are the costs required to manage ready-to-sell goods in the market.
Well, production costs are further divided into 3 elements or types, namely raw material costs, labor costs, and factory overhead costs.
The following provides a complete explanation of what costs are for materials, labor, and overhead.
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Definition and Examples of Raw Material Costs
Before knowing the meaning of raw material costs and examples of raw material costs, first know what raw materials are.
Raw materials are basically the materials you need to make or produce a product.
For example, wood and nails are the raw materials used by entrepreneurs to make tables and chairs.
So, from the definition of raw materials, it can be concluded that raw material costs are costs that you need to pay to get raw materials to produce goods, including operational costs, transportation costs, storage costs, and so on.
Usually, raw materials are the cost that has the largest amount in the production of mature products.
Well, then where can you get raw materials?
You can get raw materials from buying local or imported producers.
You can also make raw materials by managing them yourself.
Clothing materials can also be grouped into two types, namely direct raw materials and indirect raw materials.
Therefore, costs for clothing materials are also divided into two types, namely costs for direct types of raw materials and costs for indirect raw materials.
Costs for direct raw materials are costs incurred by businesses to obtain the types of raw materials that form an integral and indispensable existence to become finished goods.
Meanwhile, the definition of indirect material costs is all the costs you incur to buy materials that can complete a product.
Usually, the purchase scale is smaller when compared to direct raw materials.
Therefore, it is difficult to determine the amount of costs for raw materials if only using a unit per product scale.
Therefore, there are several things that you need to consider in determining the amount of expenditure for the cost of buying product raw materials.
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This includes the cost of storing raw materials in a warehouse which is usually managed using a warehouse application . After the raw materials are processed and become a product, the company will also need a storage area for its product stock.
Definition and Examples of Labor Costs
Now, after you understand what raw material costs are, there are other types of costs that you also need to know, namely labor costs.
Why do you also have to understand labor costs?
This is because labor costs also affect the production process of a finished product.
Before knowing what work costs are, you need to first understand what labor is in a company.
Labor is a physical or mental effort that companies use for business or production activities.
So, if it is concluded from this definition, labor costs can be interpreted as costs incurred by the company for workers who directly handle the production process.
In addition to these definitions, there are also other definitions of labor costs.
Labor costs, namely the value of labor or human resource services in the form of currency unit values.
So, the form of labor costs is the salary that the company gives to its employees.
In the industrial world, labor is divided into several types or classes.
The group is divided based on the value and main function of each employee.
For example, there are employees who work in marketing, production, administration, and other divisions.
Thus, the salary or labor costs that must be incurred by the company also vary depending on the class of employee.
Besides being grouped based on value and main function, costs for labor are also grouped based on the relationship between labor and products.
The point is whether the workforce is directly related to the product or not.
Direct labor, namely labor that is directly related to the production process of a product.
For example, carpenters are examples of direct labor in a furniture industry.
On the other hand, examples of indirect labor are employees who are related to the product but are not directly involved in making the product, such as quality control, production supervisors, and so on.
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Definition and Examples of Overhead Costs
Apart from raw material costs and labor costs, there are other types of costs that you should also consider in the business world, namely factory overhead costs.
So, what are overhead costs ?
Overhead costs are all costs incurred by the company, except for direct labor costs and costs for raw materials.
However, indirect labor costs fall under the category of overhead costs.
In general, overhead costs are a type of cost that is unexpected or cannot be predicted by a company.
Even though it cannot be predicted directly, companies still have to calculate overhead costs so that the company does not experience losses.
So, from the explanation above, the cost of raw materials can be concluded as the costs incurred by the company to obtain raw materials ready for sale, including transportation, operational and storage costs.
In addition, you cannot equate overhead costs with labor costs because their goals, functions and meanings are different.
However, regardless of differences in raw material costs, labor costs, and overhead costs, companies must manage and plan the budget properly.
Budget planning can be done using online accounting software so that the results are more accurate and completed quickly.