What is the differences between manufacturing cost and non manufacturing cost?

Nonmanufacturing overhead costs are the business expenses that are outside of a company's manufacturing operations. In other words, these costs are not part of a manufacturer's product cost or its production costs (which are direct materials, direct labor, and manufacturing overhead).

Nonmanufacturing overhead costs are the company's selling, general and administrative (SG&A) expenses plus the company's interest expense.

Since nonmanufacturing overhead costs are outside of the manufacturing function, these nonmanufacturing costs are immediately expensed in the accounting period in which they are incurred. That is why accountants refer to nonmanufacturing costs as period costs or period expenses.

Examples of Nonmanufacturing Overhead Costs

Examples of the nonmanufacturing overhead costs include the salaries and other expenses for the following business activities: selling, distribution, marketing, finance, accounting, IT, human resources, legal, and so on. (We have additional examples within our AccountingCoach.com topic Nonmanufacturing Overhead.)

While the nonmanufacturing overhead costs are not allocated to the products, the company must have its selling prices and sales revenues sufficiently large to cover both the product costs and the period expenses to have a positive amount of net income.

Costs may be classified as manufacturing costs and non-manufacturing costs. This classification is usually used by manufacturing companies.

Manufacturing costs:

Manufacturing costs can be further divided into the following categories:

1. Direct materials
2. Direct labor
3. Manufacturing overhead

The above three categories of manufacturing costs are briefly explained below:

Direct materials:

Materials that become an integral part of the finished product and that can be easily traced to it are called direct materials. For example wood is a direct material for the manufacturers of furniture. Lime stone is direct material for the manufacturers of cement. Direct materials usually consists of a significant portion of total manufacturing cost. Direct material is sometime called raw material.

The finished product of a company may become raw material of another company. For example, cement is a finished product for manufacturers of cement and raw materials for companies involved in construction business.

Direct labor:

The labor cost that can be physically and conveniently traced to a unit of finished product is called direct labor cost or touch labor cost. Examples of direct labor cost include labor cost of machine operators and painters in a manufacturing company. Like direct materials, it comprises of a significant portion of total manufacturing cost.

The sum of direct materials cost and direct labor cost is known as prime cost.

Formula of prime cost:

Prime cost = Direct materials cost + Direct labor cost

Manufacturing overhead cost:

Manufacturing costs other than direct materials and direct labor are categorized as manufacturing overhead cost (also known as factory overhead costs). They usually include indirect materials, indirect labor, salary of supervisor, lighting, heat and insurance cost of factory etc. Mosly, manufacturing overhead costs cannot be easily traced to individual units of finished products.

The sum of direct labor cost and manufacturing overhead cost is known as conversion cost.

Formula of conversion cost:

Conversion cost = Direct labor cost + Manufacturing overhead cost

The sum of direct materials cost, direct labor cost and manufacturing overhead cost is known as manufacturing cost.

Formula of  manufacturing cost:

Manufacturing cost = Direct materials cost + Direct labor cost + Manufacturing overhead cost

Non-manufacturing costs:

Non-manufacturing costs are further divided into the following categories:

1. Marketing and selling costs
2. Administrative costs

Examples of marketing and selling costs include advertising costs, order taking costs and salaries of sales persons etc. Examples of administrative costs include salaries of executives, accounting costs, and general administration costs etc.

Production costs reflect all of the expenses associated with a company conducting its business while manufacturing costs represent only the expenses necessary to make the product.

Both of these figures are used to evaluate the total expenses of operating a manufacturing business. The revenue that a company generates must exceed the total expense before it achieves profitability.

Key Takeaways

• A factory's production costs are the total expenses of doing business.
• Manufacturing costs are the expenses directly related to building the product.
• Both production costs and manufacturing costs must be included in the calculation of the per-item cost of doing business.

Production Costs

Costs of production include many of the fixed and variable costs of operating a business. Raw materials and labor are production costs.

Fixed costs typically include:

• Building rent
• Advertising budget
• Business equipment
• Other miscellaneous expenses that do not go up or down with moderate changes in the volume of business

Variable costs increase or decrease as production volume changes. Some variable costs are:

• Supplies
• Wages
• Any other expenses that change with the level of production

Manufacturing businesses calculate their overall expenses in terms of the cost of production per item. That number is, of course, critical to setting the wholesale price of the item.

As the rate of production increases, the company's revenue increases while its fixed costs remain steady. Therefore, the per-item cost of manufacturing falls and the business becomes more profitable.

A lower per-item fixed cost motivates many businesses to continue expanding production up to its total capacity. This allows the business to achieve a higher profit margin after considering all variable costs.

Manufacturing Costs

Manufacturing costs, for the most part, are sensitive to changes in production volume. Total manufacturing expenses increase as production increases.

The opportunity to achieve a lower per-item fixed cost motivates many businesses to continue expanding production up to total capacity.

The per-item cost does not change substantially. Nonetheless, additional production always generates additional manufacturing costs.

Manufacturing costs fall into three broad categories of expenses: materials, labor, and overhead. All are direct costs. That is, the salary of the company accountant or the accountant's office supplies are not included, but the salary and supplies of the foreman are.

Production Costs vs. Manufacturing Costs Example

For example, a small business that manufactures widgets may have fixed monthly costs of $800 for its building and $100 for equipment maintenance. These expenses stay the same regardless of the level of production, so per-item costs are reduced if the business makes more widgets.

In this example, the total production costs are $900 per month in fixed expenses plus $10 in variable expenses for each widget produced. To produce each widget, the business must purchase supplies at $10 each. Each widget sells for $100. After subtracting the manufacturing cost of $10, each widget makes $90 for the business.

To break even, the business must produce 10 widgets every month. It must make more than 10 widgets to become profitable.

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What is the difference between manufacturing and production cost?

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What is the difference between manufacturing overhead and manufacturing cost?