Manufacturing Product Costing Basics and Methods

Manufacturing product costing is the process of determining the costs involved in producing a product, including direct materials, direct labor, and manufacturing overhead. Understanding these costs helps manufacturers control expenses, plan production, isolate inefficiencies, set appropriate prices on produced merchandise, and improve profit margins. It also allows a company to respond more effectively to market changes.

But product costing is not as simple as adding up material costs and dividing by the number of produced units. There are many factors that a company must consider when determining overall product costs.

What Costs Are Included in Manufacturing Product Costing?

Manufacturing product costs include direct materials, direct labor, and manufacturing overhead.

Direct Materials

Direct materials include raw materials that become part of the finished product and the cost of transporting those materials to the facility.

Direct Labor

Direct labor costs are perhaps the easiest to recognize and apply. They include the gross salary-and-benefit costs for employees who directly contribute to manufacturing the product, including supervisors on the production floor.

Manufacturing Overhead

Overhead includes all other costs that are neither direct materials nor direct labor. They can be indirect materials (such as shop supplies used in the manufacturing process), indirect labor (such as the salaries of factory maintenance workers), and factory-related costs. Most of these costs fall into two categories: fixed or variable.

What Is the Difference Between Job Costing and Process Costing?

A company may use several methods to allocate a its costs to each item. The two most common methods are job costing and process costing. Job costing is best when the production is for specific customers or jobs. In this case, the total cost of the job order is accumulated through the production process. Process costing is best when producing different products, as costs can be allocated to those products using pre-established criteria. These include costing under the “units of production” method, whereby the company divides total manufacturing costs by the number of items produced.

A company must remain consistent in its approach to product costing so that financial reports can be relied upon to capture the company’s current operating metrics.

CRI’s manufacturing advisors understand the complexities of the manufacturing industry and are ready to help improve the accuracy and consistency of your monthly, quarterly, and annual reports. Contact CRI’s manufacturing team for help evaluating your cost accounting and determining the best methods to implement efficient cost production.