The rental cost of a building used in manufacturing is part of manufacturing overhead. Manufacturing overhead is an indirect product cost. Indirect product costs are allocated or assigned to products on some reasonable basis. As a result, the rental cost of a manufacturing building will cling to the products manufactured. If the goods manufactured are in inventory, some of the rent of the manufacturing facility is in inventory. When a product is sold, the manufacturing rent that is included in the product cost will be part of the cost of goods sold.

The rental cost of a building that is not used for manufacturing (e.g. rent for a sales office, rent for the general administrative office) is not part of the manufacturing overhead. This rent does not cling to the products and will not be part of the cost of an item in inventory. The rent for nonmanufacturing facilities is immediately expensed in the accounting period when the building is rented.

If a rented building is used for both manufacturing and nonmanufacturing activities, the rent should be allocated to each (perhaps on the basis of square footage).

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