Manufacturing Cost


Manufacturing cost are forgone resources which directly relate to production of the final good. The cost paid or incurred results to additional firm value and include the cost of direct raw materials, direct labor wages, direct expenses, packaging (primary) cost and all overhead expenses relating to creation such as manufacturing overhead. 

This classification of cost elements is based on the specific activities that take place as the product value is being added before it reaches the final consumer. So, cost elements are grouped on the basis on the primary function impacted on the product channel. Under this criterion, the following are the costs;

Scenario Of Manufacturing Cost

Advantages Of Manufacturing Cost

  1. Possible to trace or identify sources of cheap raw materials.
  2. Firm keeping records for manufacturing cost can easily plan for efficiency in production.
  3. Possible to identify the technology which is cheapest to produce or manufacture.
  4. Early planning on how to price the final products.
  5. Control of material usage and other inputs.
  6. Strategize on appropriate approach to have competitive edge in the market.

Disadvantages Of Manufacturing Cost

  1. Wrong classification of other costs as manufacturing may over estimate the cost of production resulting to wrong pricing and wrong pricing items.
  2. No universally accepted method of identifying the appropriate cost drivers of manufacturing cost and this may raise challenge of comparing performance for two or more firms in an industry.
  3. Quantification of some manufacturing costs may be difficulty hence either over or under estimating the amount thereof.

About the Author - Dr Geoffrey Mbuva(PhD-Finance) is a lecturer of Finance and Accountancy at Kenyatta University, Kenya. He is an enthusiast of teaching and making accounting & research tutorials for his readers.