What are Manufacturing Costs?

Manufacturing costs are the costs incurred during the production of a product. These costs include the costs of direct material, direct labor, and manufacturing overhead. An entity incurs these costs during the production process. Manufacturing overhead costs are applied to units of production based on a variety of possible allocation systems, such as by direct labor hours or machine hours incurred.

Manufacturing costs can be more specifically broken down into the following areas:

Direct materials. This includes all materials used in the construction of a product. Here are several examples of direct materials:
- Raw materials, such as wood for furniture products or metal for machinery products.
- Components, such as screws, bolts, and electronic circuits.
- Subassemblies or prefabricated parts.
- Packaging materials, such as wrappers or boxes.
Direct labor. This is that portion of the labor cost of the production process that is assigned to a unit of production. Here are several examples of direct labor:
- Hourly wages for production line workers.
- Salaries for assembly line staff.
- Benefits for these workers, such as medical insurance and life insurance.
Manufacturing overhead. This includes all indirect costs required to produce a product that cannot be directly traced to a specific item. Here are several examples of manufacturing overhead:
- Indirect materials, such as lubricants, adhesives, and cleaning supplies used in production.
- Electricity, water, and gas used in the production process.
- Depreciation on production machinery and the production facility.
- Insurance coverage for the factory equipment and production facility.
- Property taxes for the manufacturing facilities.

When accounting for inventory, include all manufacturing costs in the costs of work-in-process and finished goods inventory.

Presentation of Manufacturing Costs

Manufacturing costs are typically presented in the income statement as separate line items, within the cost of goods sold section. These costs will only include the manufacturing costs associated with goods that have been sold; all other manufacturing costs are capitalized into unsold inventory, which is reported in the inventory line item in the balance sheet.