Project Management Accounting: Budgeting, Tracking, and Reporting Costs and Profitability, Second Edition

Manufacturing Industry

The manufacturing industry presents a more complex picture of cost. Most of that complexity is due to the introduction of the other subset of cost of goods: cost of manufacturing. Cost of manufacturing has a number of components that contribute to the final cost of an individual product:

• Direct Material Cost. The cost of purchasing the materials that are transformed into the final product.
• Direct Labor Cost. The cost of the people that perform the manufacturing process.
• Work in Progress (WIP). The cost of partially completed products at the end of an accounting period. Warren Manufacturing had a certain amount of unfinished goods in the pipeline at the end of 2010.
• Indirect Cost of Manufacturing. The overhead cost of manufacturing that can be directly attributed to the manufacturing process; for example, the maintenance cost of a machine that is used in the process can be attributed to the products that are manufactured with it.
• Finished Goods Cost. The total cost of producing units of the product.

The key to understanding cost and the manufacturing process is in the state of the material that is being transformed. During the manufacturing process, materials are transformed by labor to become finished goods. Often a product goes through more than one stage during the process. Work in process is any intermediary state between direct material and finished good.

WIP also implies that cost (value) has been added to a product along the way. Ken Milani,¹ professor ...