To control costs, the different types of costs are identified:
- direct materials: these make up the major component of and are easily traceable to a given finished product;
- direct labor: that portion of labor which is assignable to a specific product;
- factory overhead: all costs other than direct materials and direct labor; this includes fixed costs such as rent and depreciation, but also indirect materials and indirect labor.
Direct materials and direct labor are the prime costs. Direct labor and factory overhead are conversion costs. All the above costs are product costs, as opposed to period cost which are not part of the cost of products and are classified as expenses.