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Basic Types of Small Manufacturing Costs

Oct 11, 2016 7:59:12 AM / by Brian Paulson posted in manufacturers

Small manufacturing companies that produce products have additional cost factors to consider compared to retailers and service providers.

Common manufacturing costs include four basic types:

  • Raw materials
  • Direct labor
  • Variable overhead
  • Fixed overhead


Raw Materials

Also called direct materials, raw materials are used in the production of a product. For example, fabric and other raw materials are used to manufacture stuffed animals. These sourced materials fluctuate in price and influence the overall price of the finished product.

Direct Labor

Direct labor refers to the employees and temporary help who work directly on a manufacturer's products. (Conversely, people working in the production area, but not directly on the products, are referred to as indirect labor.) Direct labor costs need to be reported for each job to ensure proper pricing and profitability.

Variable Overhead

Variable overhead refers to production costs that increase or decrease as the quantity produced increases or decreases, such as the cost of electricity to run production equipment.

Fixed Overhead

Fixed overhead refers to indirect production costs that remain consistent regardless of the quantity produced. Three common fixed manufacturing costs are salaries for indirect labor, depreciation of buildings and equipment, and occupancy costs, including insurance and property taxes.

Income statements should include manufacturing costs for each product sold to ensure accuracy and cost advantages. To gain an edge on the competition, work with an accounting service with experience in small manufacturing costs.

Brian Paulson

Written by Brian Paulson

Brian began working at CSI in 1996, and he purchased the business in 2002. As Owner, his primary role is in the management and growth of the firm. Since 2002, the firm has more than quadrupled in size. In 2009, Brian started CSI’s payroll service to complement CSI’s accounting and tax services. Brian received his Bachelor’s degree from the University of North Dakota, with a double major in Accounting and Financial Management. He’s a member of both the National Society for Tax Professionals and the National Society for Accountants, and he serves on the board of directors for the Professional Association of Small Business Accountants, where he was once president. Brian also serves on the business advisory council for Opportunity Partners, an organization that helps people with disabilities find employment. He’s also contributed to several business books, including Six Steps to Small Business Success and The Lean Mean Business Machine. Fun Fact: To help put himself through college, he used student loans, delivered pizzas, and worked summers in a salmon processing plant in Alaska.