Manufacturing costs

In business accounting, production costs are understood to be an original valuation standard for assets and economic goods produced in production .

General and delimitations

In Germany and Austria there is a common legal definition of the term manufacturing costs ( § 255 Paragraph 2 HGB , § 203 UGB ). According to this, it is not only a question of costs for the production of an asset, but also for its expansion and for a substantial improvement beyond its original condition. Manufacturing costs are much more difficult to determine than acquisition costs , because the latter can usually be determined precisely on the basis of invoices . In order to determine the production costs of an asset, a company usually uses its cost accounting . The basis of their determination is the production in the company, which not only includes the actual production process, but also the procurement , transport and storage of the production factors required for production . However, the manufacturing costs do not include all costs that are included in the manufacturing costs of cost accounting. In particular, costs that cannot be traced back to advance payments made or future payments are not included in production costs.

In Germany and Austria, a distinction is made between production costs and acquisition costs. Acquisition costs are a valuation standard for acquired assets. Other accounting systems, such as the International Financial Reporting Standards (IFRS) and the United States Generally Accepted Accounting Principles (US-GAAP) only know one valuation standard , called acquisition and manufacturing costs or historical cost , which is the valuation criteria of acquisition costs and manufacturing costs united.

The production costs of assets differ from the production costs of the services provided to generate sales under Section 275 HGB and Section 231 UGB, which are also referred to as cost of sales . When the income statement is presented using the cost of sales method, the cost of sales is all the expenses for materials and production that were necessary to achieve the sales performance of the current financial year. They also include idle costs and unscheduled depreciation .

Scope of manufacturing cost

Under the provisions of the German Commercial Code and the Austrian Commercial Code , the production costs are allocated to the measure of produced assets. Due to the acquisition value principle anchored there in Section 253 (1) HGB and Sections 203 to 208 UGB , the (amortized) production costs are the highest value with which an asset can be valued in the subsequent period. In the case of depreciable fixed assets , the production costs are used to measure the scheduled depreciation . The production costs reduced by scheduled depreciation are also called continued production costs. In German accounting law, assets that serve exclusively to meet pension obligations and are not accessible to all other creditors are to be recognized at fair value in accordance with Section 253 (1) sentence 4 HGB.

According to IFRS and US GAAP, the cost of production is the valuation standard for the initial valuation of assets. For example, inventories produced are initially valued at production costs. Certain financial instruments are to be recognized at fair value at the initial valuation . The cost principle applies in these accounting systems for about inventories and US GAAP for fixed assets.

In Germany, due to the principle of relevance, the manufacturing costs are also used in the tax balance sheet as the benchmark for the initial valuation of manufactured assets. Here, too, the acquisition value principle applies analogously to German commercial law.

Components of manufacturing costs

For financial statements according to German commercial law, Section 255 (2) HGB defines the components of production costs. This definition also applies to the tax balance sheet based on the principle of relevance . In Austria, Section 203 of the UGB defines manufacturing costs. Both regulations differentiate between costs that must be included in the production costs (mandatory components), costs that may be included in the production costs (optional components), and costs that may not be included in the production costs (prohibitions). The sum of the compulsory components forms the lower limit of the production costs, the sum of all compulsory and optional components forms the upper limit of the production costs. The IFRS define the manufacturing costs within the term “acquisition and manufacturing costs” in the standards IAS 2 for inventories and IAS 16 for property, plant and equipment. According to IAS 2, all costs that are attributable to the production process are to be included in the production costs. The composition of the historical cost according to US-GAAP is essentially the same as the composition of the “acquisition and production costs” according to IAS 2.

The production costs are composed as follows:

Cost type	Section 255 HGB	§ 203 UGB	IAS 2
material costs	mandatory	mandatory	mandatory
Manufacturing material	mandatory	mandatory	mandatory
Manufacturing wages	mandatory	mandatory	mandatory
Special direct costs of production	mandatory	mandatory	mandatory
Material overheads , provided there are no idle costs	mandatory	mandatory	mandatory
Production overheads , provided there are no idle costs	mandatory	mandatory	mandatory
voluntary social costs, expenses for social institutions, expenses for company pension schemes (production-related)	Suffrage	Suffrage	mandatory
voluntary social costs, expenses for social institutions, expenses for company pension schemes (not production-related)	Suffrage	Suffrage	Prohibition
General administrative costs attributable to production	Suffrage	Prohibition	mandatory
General administration costs that are not allocated to production	Suffrage	Prohibition	Prohibition
Interest on borrowed capital that was taken out for the production of the asset (qualified asset)	Suffrage	Suffrage	mandatory
unscheduled depreciation	Prohibition	Prohibition	Prohibition
Commitment interest for borrowed capital	Prohibition	Prohibition	Prohibition
Research costs	Prohibition	Prohibition	Prohibition
Imputed costs	Prohibition	Prohibition	Prohibition
Idle costs	Prohibition	Prohibition	Prohibition
Distribution costs	Prohibition	Prohibition	Prohibition
Sales tax insofar as the company is entitled to deduct input tax	Prohibition	Prohibition	Prohibition

Special direct costs of production are, for example, preliminary work such as costs for models and designs as well as customs and excise taxes .

Material and manufacturing overheads also include:

Appropriate parts of the depreciation of fixed assets caused by production ( depreciation ),
Administrative costs incurred in the material and production area.

Interest for borrowed capital may only be included insofar as it relates to the period of production. They must be as directly attributable to the asset as possible in terms of the subject matter and time. According to IAS 23, they are part of the production costs of qualifying assets for which a longer period of time is required to get them ready for their intended use or sale.

In Austria, Section 206 (3) of the Austrian Commercial Code (UGB ) regulates an exception for the determination of the production costs of current assets that are created in the context of long-term production contracts. In contrast to the prohibition of including general administration costs and sales costs, these costs may be included in the production costs if a reliable cost calculation is available and if there is no risk of losses from further order processing.

Period of manufacture and subsequent manufacturing costs

Part of the manufacturing costs are only those costs that were incurred during the manufacturing period. The period of manufacture also includes preparatory actions, provided that the asset has been substantiated through external orders or internal specifications. If the production process is interrupted by events that are not part of the production process, the costs arising there are not to be added to the production costs. The manufacturing process is finished when the asset can be used as intended.

After the original manufacturing period, the subsequent manufacturing costs are part of the manufacturing costs. These are expenses that are used to expand the asset or improve it beyond its original condition.

Financial leeway

There is scope for determining the production costs due to options in the allocation of costs. This can define any value between the lower limit and upper limit as production costs, which results from the cost accounting. Once he determines which costs he wants to include in the production costs, he is bound to his choice for the future by the continuity requirement of Section 252 (1) No. 6 HGB. He may only deviate from this in exceptional cases.