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Companies which undertake the process of manufacturing face an expanded set of accounting issues. The manufacturer has to also deal with accounting concerns which are related to acquiring and processing raw materials in a finished product along with other administrative and selling activates. The cost accounting for manufacturing process also entails consideration of three major cost components. These contents are necessary for producing finished goods.

1. Direct materials- these are those elements whose physical presence can easily be traced to a finished product and also includes the cost of materials which are an integral part of a given finished product.

2. Indirect materials- materials like glue or screw, which do not get a visible presence in the finished product, but are used in the manufacturing process.

Hence the manufacturing costs can be classified as under:-

1. Direct labor

2. Direct material, and

3. Factory overhead

As per the guidelines of Generally Accepted Accounting Principles(GAAP), the manufacturing overhead must be included in the cost of work in process inventory and also in the finished goods inventory, on the balance sheet of the manufacturer and further in the income statement in the cost of goods selection. We can trace directly the direct material and direct labor costs to the manufactured goods. The factory related costs, also termed as the manufacturing overheads are to be divided and allocated to each individual unit produced. For an example, we can consider the property tax levied on a building which is a part of manufacturing overhead costs. The property tax does cover an entire year and is a large amount in the form of one tax bill. But GGAP requires that a portion of this amount must be assigned or allocated to each product which is manufactured during that particular year.

Some of the cost that are included in the manufacturing overhead cost include:-

1. The material handlers (forklift operators who move the materials and units during manufacturing).

2. The people who conduct the inspection of the products when they are being produced.

3. People who do the maintenance work on various equipments.

4. People who undertake the cleaning process of manufacturing area.

5. Persons performing record keeping of the manufacturing processes.

6. The factory management team.

7. The natural gas, electricity, sewer and water expenses which occur in the process for operating the manufacturing facilities and equipment.

8. Communication systems and computers cost used in the manufacturing and communication processes of manufacturing function.

9. Cost of the repair parts used in the manufacturing facilities and equipment.

10. Cost of the supplies used in the manufacturing process.

11. Cost of depreciation on the value of manufactured equipment and facilities.

12. Cost of insurance and other property taxes on the manufacturing facilities and equipments.

13. Environment and safety costs.

The non manufacturing expenses which occur during the accounting period are reported separately on the income statement. The costs and expenses which relate to a company’s administrative financial functions and administration are not considered to be a part of manufacturing overhead costs and thus are not reported as part of the cost of the final product on the financial statements.

Overhead absorbed are not the overheads which are incurred. The absorption of overheads is based on some predetermined rates for absorption of overheads and is no based on the overheads incurred.

The factory overheads include a number of expenses which are widely varied in nature and also in magnitude. They contain those costs which are incurred in the factory premises and are not capable of being appropriated directly. Some examples of these costs include indirect materials, factory rent, depreciation on machinery, heating, factory lightening, consumable stores, heating etc.

Cost means normal cost- in cost accounting, the cost implied includes normal costs only. The profits which are revealed by the accounts are the ones which are derived by taking into account the normal costs only. The abnormal natured costs and losses should not be able to influence profits,

The overheads are absorbed on a predetermined basis for making sure that only the normal costs are absorbed. Historical cost data provides the basis for the rates at which the overheads are to be absorbed.

Non availability of cost data- the overhead includes the indirect expense that is apportioned in the various products, services and cost centers. The actual overhead cost to be attributed to a product is obtained by apportioning and distributing the expenses involved in the overheads. Most of the information which is used for the apportioning of the overheads is obtained in the end of the accounting period that delays the process of the ascertainment of cost.

The overhead cost incurred is ascertained after the apportionment of all the overheads is completed. This often delays the process of accounting as the cost relating to a product pose difficulties in estimating the costs of various products.