Final answer:
The three categories of manufacturing costs are direct materials, direct labor, and manufacturing overhead. These encompass all raw materials, labor tied directly to product creation, and all indirect production costs respectively. Managing these costs is key to manufacturing profitability.
Step-by-step explanation:
The three categories of manufacturing costs included in the cost of finished goods and the cost of work in process are direct materials, direct labor, and manufacturing overhead. Direct materials are the raw materials that become an integral part of the finished product and that can be conveniently traced directly to it.
Direct labor involves the work of employees that can be directly associated with converting the raw materials into finished products. Lastly, manufacturing overhead refers to all of the costs associated with the production process that cannot be directly traced to the creation of the products.
Manufacturing overhead includes items such as indirect materials, indirect labor, maintenance and repairs on production equipment, and utility costs.
These costs are essential components in determining the total production costs for goods.
Particularly, understanding and managing these costs is critical for setting prices, controlling expenses, and ensuring profitability in the manufacturing process. For example, if the cost of direct labor increases, a company may opt for more automation, thereby reducing labor costs and increasing reliance on machinery.