Decoding Product Costs: Understanding Materials, Labour, and Overheads

When we talk about the costs involved in manufacturing a product, it's common to break these down into three main categories: materials, labour, and overheads. This traditional method helps simplify how we think about and manage the costs in a manufacturing setup.

Materials: The Building Blocks

Materials typically split into two types: raw materials and purchased parts.

• Raw Materials: These are the bulk items like steel coils, plastic pellets, or metal billets used for casting. These materials are processed into components, which are then assembled into the final product. While the procurement and storage costs for these materials can vary, the cost per part tends to be relatively low because the bulk material is used to create many pieces.

• Purchased Parts: These costs can vary more significantly. Routine items like nuts and bolts require less effort to purchase and store than specialized engineered parts that need precise measurements and quality checks. The support costs required for handling purchased parts are usually higher than those for bulk materials.

Labour: More Than Just Manpower

Labour costs aren't just about the people directly involved in creating a product. They encompass all the human effort required in the process, including:

• Operational Labour: The manpower for running machines and assembling products.
• Support Staff: Employees who assist in the operations but aren't directly manufacturing products, such as maintenance crews and supervisors.
• Infrastructure: The costs associated with maintaining factory buildings, including utilities and services necessary to keep the factory operational.

Grouping all these under the single category of 'Labour' can oversimplify things and obscure understanding of what really drives costs.

Overheads: The Hidden Extras

The term 'overheads' can be a bit nebulous. Essentially, overheads are all the additional costs that aren't directly tied to the production but are necessary to support the overall operations of a business. These are often applied as a percentage on top of the material and labour costs to determine the total cost of production.

• SGA Costs: Also known as Sales, General, and Administrative costs, this includes expenses related to non-production activities such as office rent, administrative salaries, marketing, legal services, HR, and IT support.

By having a clearer understanding of these categories—materials, labour, and overheads—you can get a better grip on what it really costs to produce your products. This knowledge is crucial for pricing your products correctly and ensuring that your business remains profitable.