Production costs are those costs incurred when a business manufactures goods. The three main categories of costs that comprise production costs are as follows:
- Direct labor. Consists of the fully burdened cost of all labor directly involved in the production of goods. This usually means those people working on production lines or in work cells.
- Direct materials. Consists of those materials consumed as part of the production process, including the cost of normal scrap that occurs as part of the process.
- Factory overhead. Consists of those costs required to maintain the production function, but which are not directly consumed on individual units. Examples are utilities, insurance, materials management salaries, production salaries, maintenance wages, and quality assurance wages.