Remember that these three inventory accounts are classified as assets and reported as current assets on the balance sheet. On the other hand, notice in the illustration above that nonmanufacturing costs are known as period costs. Nonmanufacturing costs are known as period costs because these costs are reported on the income statement in the period they occurr. Nonmanufacturing costs are classified as expenses on the income statement. Costs that are classified as manufacturing costs are then classified as direct material, direct labor or manufacturing overhead.
Direct labor is labor whose cost can be traced directly to a specific unit of product.
Manufacturing overhead represents all manufacturing costs that are not classified as direct material or direct labor. Examples of manufacturing overhead include indirect materials such as glue, fastners, nails, screws and string. Manufacturing overhead also includes indirect labor such as factory superivors' salaries, material handlers' wages, and factory security guards' wages. Additionally, manufacturing overhead includes costs such as factory utilities, factory insurance, factory property taxes, factory depreciation, and factory maintenance and repairs. All manufacturing overhead costs are indirect costs.