Handling Manufacturing Costs

Manufacturing costs are considered assets and are calculated as part of the cost of manufactured units in inventory until the units are sold.

There are three main types of manufacturing costs:

  1. Labor
  2. Materials
  3. Overhead

All three types of manufacturing costs are classified as assets under “work-in-progress inventory.”On the balance sheet, this section can be found under current assets or displayed in the notes section in financial statements.

The accounting for manufacturing costs contrasts with the way nonmanufacturing costs are recorded in the timing of their charge against earnings. Manufacturing costs are called product costs. They are labeled like this because manufacturing costs are not fully expensed until the product is sold.

When the manufactured units are complete, all manufacturing costs that were charged to the work-in-process inventory are moved to the finished-goods inventory. The finished-goods inventory is another asset account. Once the manufactured units are sold, the manufacturing costs are transferred to an expense account known as cost of goods sold.

A Breakdown of Manufacturing Costs Classifications

All raw materials used, direct labor and factory overhead compiled together to form the cost of manufacturing a unit is considered work-in-process inventory which become finished-goods inventory and once sold transfers to a cost of goods sold expense.

Factory overhead is the catch-all for all the indirect production costs that doesn’t include the raw materials and labor directly to produce the unit. Factory overhead includes more specifically factory and equipment depreciations, general supplies, the costs of supervisory personnel, maintenance, energy, and insurance.