In manufacturing, raw material is transformed with the help of labor and machinery. In a merchandising firm, only one type of inventory is maintained, and only few costs are added to the purchase price of goods to arrive at cost of goods sold. In a manufacturing firm, many and different types of costs are incurred:
- direct material,
- direct labor, and
- factory or manufacturing overhead.
These costs are accumulated in three inventories:
- work in process, and
- finished goods.