What are manufacturing costs?

Definition of Manufacturing Costs

Manufacturing costs are the costs of materials plus the costs to convert the materials into products. All manufacturing costs must be assigned to the units produced in order for a company's external financial statements to comply with U.S. GAAP.

The resulting unit costs are used for inventory valuation and for the calculation of the cost of goods sold.

Example of Manufacturing Costs

Manufacturing costs are typically divided into three categories:

  • Direct materials, which is the cost of the materials that are traceable to the product, such as the aluminum in beverage cans
  • Direct labor , which are the wages and fringe benefits earned by the individuals who are physically involved in converting raw materials into a finished product
  • Manufacturing overhead, which includes all of the other costs incurred in the manufacturing activities. These indirect costs include repairs and maintenance, depreciation of the manufacturing equipment, utilities, salaries of manufacturing supervisors, etc.