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
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 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 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 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.