Accounting Dictionary

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Manufacturing Costs

Definition: Manufacturing costs include the costs of direct material, direct labor, and manufacturing overhead, which are typically presented in the income statement as separate line items. An entity incurs these costs during the production process.

Direct material and direct labor costs are assigned directly to individual units of production. You assign manufacturing overhead to units of production based on a variety of possible allocation systems. 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, you must include all manufacturing costs in the costs of work-in-process and finished goods inventory.