In cost accounting, production costs is another name for manufacturing costs, the costs a business incurs to turn raw materials into finished products. They fall into three groups: direct materials, direct labour and manufacturing overhead. The main entry shows how these costs flow through the inventory accounts and gives a worked example.
How the term is used
Accountants treat production costs as product costs. They are held in inventory until the goods are sold and only then expensed as cost of goods sold. Selling, administrative and research costs are period costs instead and are expensed when incurred, even though they also help the business earn revenue. Getting the split right affects both inventory values on the balance sheet and reported profit.
The phrase is also used more loosely. In economics, the cost of production means the total cost of all inputs needed to produce output, including capital and sometimes a normal return to the owner, and it is split into fixed and variable costs rather than into the accounting categories. In film, television and publishing, production costs refers to the direct costs of making a particular title, such as cast, crew, equipment and editing.
Within a factory, two subtotals are also common: prime cost, which is direct materials plus direct labour, and conversion costs, which is direct labour plus overhead.