Manufacturing costs include all of the costs associated with the direct production (manufacturing) of goods while inside of the factory. Manufacturing costs are product costs, and include both direct and indirect costs. Any costs that occur before or after the factory are not considered manufacturing costs. The only companies that can have manufacturing cost are those that directly create and produce a product.
Manufacturing inventory is made up of three parts: raw materials, work in process, and finished goods. Raw materials include pieces of materials purchased from other manufacturers that will be assembled into the final product. Raw material costs include the costs to acquire the materials (i.e. purchase price of the materials, incoming freight costs, taxes, etc.) Work in process includes any product that has not been completed in the manufacturing process. Work in process includes the cost of the raw materials used, the direct labor to assemble the product, and the allocated portion of manufacturing overhead. Manufacturing overhead is an indirect cost and includes costs associated with the factory. For example, electricity used by the factory is included in manufacturing overhead. If it is reasonable to do so, a portion of factory overhead cost is attributable to each individual product. Finished goods are the finalized products that are ready to be sold. All costs that accumulated during the work in process stage are transferred to the cost of the finished good. Once the product is sold, the finished good cost is transferred to cost of goods sold.
How and Where to Disclose:
Manufacturing inventory is disclosed either on the balance sheet or in the notes. Raw materials, work in process, and finished goods are broken out individually as a sub category for inventory. Each cost is added together to arrive at the total inventory value, which is represented on the balance sheet.
Calculating and tracking manufacturing costs can be very complicated. TGG Accounting can help you sort through and simplify your accounting process to ensure your business calculates these numbers properly. Call us today.Written by: Jake Cavanagh TGG Accounting References: Spiceland, David. (2009). Intermediate Accounting, 5th ed. McGraw-Hill Irwin. Boston, Massachusetts. Tanner, D. (2011). Manufacturing Costs. Retrieved on Jan 20, 2012, from, http://www.unf.edu/~dtanner/dtch/dt_ch29.pdf.