Manufacturing companies receive a variety of materials to use in the production process. The production staff uses some materials directly in the production of the final product. These materials are considered direct materials. The production staff uses other materials to ease the manufacturing process, either by maintaining the production facility, by maintaining the production equipment or by being used in minute quantities in the production process. The managerial accountant collaborates with the production staff to identify which materials are direct and which are indirect.

Direct labor is all labor expended in altering the construction, composition, confirmation or condition of the product. In simple words, it is that labor which can be conveniently identified or attributed wholly to a particular job, product or process or expended in converting raw materials into finished goods. Wages of such labor are known as direct wages. Thus, it includes payment made to the following groups of labor:

Direct allocation is a form of cost allocation in accounting. Cost allocation involves assigning the cost of goods or services to specific units within an organization. For example, even though every department in a company uses water, the cost of the water bill is allocated or split up among the different departments. Instead of just one department’s budget bearing the full burden of the monthly water bill, the cost is spread out among several departments.