There are three components of the total cost of manufacturing finished products: direct materials, direct labor, and factory overhead. Direct materials represent the cost of the material that is directly used in manufacturing a product. Direct labor represents the wages of employees who worked to convert the raw material into the finished products. Factory overhead includes all the remaining costs of operating the factory, including power, heat, lights, taxes, insurance, depreciation on the equipment, maintenance related to the factory and equipment, supplies, and support and supervision wages.
The costs associated with factory overhead are those costs that are necessary to support the manufacturing process but cannot be directly attributed to a single job. Even though factory overhead cannot be specifically identified with individual jobs, it is as much a part of the manufacturing costs as direct materials and labor. In many cases, factory overhead can be the largest cost of manufacturing.
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