What are Input Costs?

Input cost represents the direct and indirect expenditures specifically incurred to create a product or deliver a service, such as materials, direct labor, and production-related overhead. These costs are directly tied to revenue-generating activities and vary, to some extent, with production volume or service output. All other expenditures are classified as general and administrative costs because they support the organization rather than production itself. In many modern businesses, input costs comprise a relatively small proportion of total costs, with administrative and support functions representing a larger share of overall spending.

Types of Input Costs

There are only a few classifications of costs that are considered input costs. They are as follows:

Direct materials. This is the materials consumed during the process of constructing a product.
Direct labor. This is the labor consumed during the process of constructing a product, and is typically limited to people working on the shop floor. If a business provides services, then direct labor includes the cost of those people in the field who are providing those services.
Factory overhead. This is all other costs associated with the production process. Examples of these costs are factory utilities, factory rent, the cost of production supervisors, the cost of the materials management and purchasing employees, and the depreciation on factory structures and equipment.

Example of Input Costs

A bakery produces artisan bread and pastries for local cafes and retail customers. The input costs for the bakery include all the direct expenses related to making its products: flour, sugar, yeast, eggs, butter, packaging materials, and utilities used during baking, such as electricity and gas for ovens. The bakery also pays wages to its bakers and kitchen staff, which are considered part of input costs because these employees are directly involved in the production process. These costs are essential for turning raw ingredients into finished goods that can be sold. However, when comparing total business expenses, input costs make up a smaller proportion than general and administrative costs like rent, marketing, accounting services, and salaries of office staff. For example, if the bakery spends $10,000 monthly, only $3,000 might be tied to actual production, while the rest covers operations and administration. This illustrates how input costs function within a broader cost structure.