What is a manufacturing cost? A manufacturing cost is any cost that is incurred during the production of an item. There are four general categories of costs: raw materials, manufacturing overhead, work in process, and finished goods. Opportunity costs are those that are not directly traceable to individual units, such as indirect materials, direct labor, lighting, heat, and insurance for a factory. Other costs are not quantifiable but are incurred based on business activity.
In a manufacturing process, the costs involved in making an item are the cost of direct materials and labor. There is also variable and fixed factory overhead. Indirect costs, on the other hand, include all other costs, such as sales commissions and administrative expenses. A manufacturing cost analysis is a comprehensive study of all costs associated with producing a product. Indirect costs are any costs that are not directly related the creation of a product. For example, sales commissions from auto manufacturers.
Overhead costs include all other costs that are associated with a production process, such as labor and raw materials. These include equipment and machinery that require frequent maintenance and repair. These expenses require funding. Construction of a new factory light or production line is another example of overhead costs. Regardless of how the manufacturing process is conducted, overhead costs are a significant portion of the overall cost of manufacturing.
These expenses are categorized by their relationship with the production of the goods. Some manufacturing costs are added to the inventory as an asset to the balance sheet. Others are transferred to the income statement at the cost of goods sold as an expense. Manufacturing costs can be broken down into three categories: indirect costs (labor), and capital expenditures (capital). Manufacturing costs are directly related to the production of the goods, while indirect costs are attributed to the cost of building and maintenance of the plant.
Direct labor costs are a type of overhead cost. These costs are essential for the production process but cannot be tied to a specific product. These overhead costs include electricity, warehouse rent, depreciation of equipment, and other overhead costs. Overhead costs also include the salaries of employees in the production area and the marketing department. They are treated as period costs. A manufacturing facility will incur these expenses, as long as they are necessary for the production process.
Nonmanufacturing costs fall into two categories: administrative overhead and selling expenses. Administrative expenses include legal fees, corporate salaries, and sales personnel. Selling costs and interest expense are not considered product costs and are reported as expenses on the income statement. So, which of the following is not a manufacturing cost category? Here are some examples. When defining manufacturing costs, ensure you understand the terms.
In general, indirect materials are materials that are used in production but cannot be directly traced to a particular product. For example, a furniture factory might classify the costs of glue, stain, and nails. Every type of furniture chair requires different quantities of nails. While they may not be traceable to a specific item, the cost of nails is a fraction of a cent per nail.