Direct Manufacturing Costs are expenses that are necessary to specifically produce or manufacture a product. These expenses can consist of, but not limited to: supplies needed to operate equipment, equipment maintenance and repairs expenses, equipment asset depreciation, equipment leases, and a portion of building occupancy costs needed for the production area.
Direct Labor Costs are the annual cost of each production operator or helper directly associated with manufacturing products. This would include their wages, company paid benefits (health insurance, retirement, bonuses) and company paid payroll taxes. Production supervisors can also be designated as direct labor.
Chargeable Production Hours are the time the equipment or service is producing billable product or work. This typically includes makeready or setup, running, and washup or cleanup. Equipment downtime for repairs or maintenance is NOT considered chargeable production time. Most Management Information Systems include a report of Chargeable Production Hours in the Job Costing or Shop Floor Data Collection application.
The Direct Manufacturing Hourly Cost Rate is the annual Direct Manufacturing Costs divided by the annual budgeted chargeable hours.
| $40,000 | Annual equipment Repairs and maintenance costs | |
| + | $100,000 | Annual equipment depreciation or lease costs |
| + | $80,000 | Annual equipment labor costs (including employer paid benefits, insurance, and taxes) |
| $220,000 | Annual Total Direct Manufacturing Costs | |
| / | 2,020 | Annual Chargeable Production Hours (1 shift) |
| $108.84 | Direct Manufacturing Hourly Cost Rate | |
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