In managerial accounting and cost accounting, production costs are the direct materials, direct labor, and manufacturing overhead used to manufacture products. The production costs are also referred to as manufacturing costs, product costs, a manufacturer's inventoriable costs, or the costs occurring in the factory.
Production costs are often classified as direct or indirect product costs. For example, direct materials and direct labor are direct product costs because they can be easily and economically traced to the products being manufactured. On the other hand, manufacturing overhead costs are indirect product costs because they are not easily or economically traceable directly to the products. Instead, the manufacturing overhead costs must be allocated or assigned to the products often through a predetermined overhead rate.
Production costs can also be classified as direct or indirect as to a factory department. For example, the costs of the factory maintenance staff is a direct cost of the factory maintenance department, while at the same time being an indirect product cost.