Product Costs

The cost accounting procedure for attaching or charging the production costs accumulated by the financial accounting system to individual products depends on the extent to which particular costs can be directly associated with a particular product (direct costs) or whether they indirectly contribute to the support of the production facility (indirect or overhead costs).

Direct Materials

The use of most raw materials can be directly associated with units of production. Thus the value of raw materials required for a particular product can be transferred from the raw materials account into the work in progress account as materials are drawn from stores for use in a particular product as required, and when the product is finished the total raw materials cost is charged to the finished goods account.

Direct Labour

In traditional labour-intensive manufacturing environments it was often possible to charge labour costs in a similar way as the number of hours worked on a particular product could be recorded and used to directly charged the labour costs to the product concerned. However, care has to be taken when considering the economic implications of such a charging procedure. Few workers are now employed on 'piece rates' or by the hour by which they are paid in direct proportion to the work they do. Most workers are employed on wage contracts, or increasingly on salaries, so that the direct association between production activity and labour costs has been broken.