Manufacturing costs are classified into three main categories: direct materials, direct labor, and manufacturing overhead. These categories help organizations determine product costs, pricing strategies, and financial reporting.
Why Option B (Overhead costs, direct labor, direct materials) is Correct:
Direct materials: Raw materials used directly in production (e.g., wood for furniture).
Direct labor: Labor costs directly tied to production (e.g., factory workers assembling a product).
Manufacturing overhead: Indirect costs related to production (e.g., depreciation, factory utilities, maintenance).
These categories align with GAAP, IFRS, and cost accounting standards.
Why Other Options Are Incorrect:
Option A (Direct materials, indirect materials, raw materials):
"Indirect materials" and "raw materials" are part of manufacturing overhead and direct materials, respectively, but do not form a primary cost classification.
Option C (Direct materials, direct labor, depreciation on factory buildings):
Depreciation on factory buildings is an overhead cost, not a separate category.
Option D (Raw materials, factory employees' wages, production selling expenses):
Selling expenses are not part of manufacturing costs; they are part of operating expenses.
IIA Practice Guide – Auditing Cost Management: Defines manufacturing cost classifications.
IFRS & GAAP Cost Accounting Standards: Outline manufacturing cost components.
COSO Framework – Cost Control Guidelines: Emphasizes accurate cost allocation in financial reporting.
IIA References:
