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.

Direct material is the materials used in the construction of a product. Direct labor is that portion of the labor cost of the production process that is assigned to a unit of production. 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. Examples of the types of costs that can be included in manufacturing overhead include:

Salaries and wages for quality assurance, industrial engineering, materials handling, factory management, and equipment maintenance personnel
Equipment repair parts and supplies
Factory utilities
Depreciation on factory assets
Factory-related insurance and property taxes

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.