You’re producing items that you’re selling. During this process you encounter various types of expenses – material itself, your own time and / or people that work for you and produce those goods or components for those goods, depreciation of machinery and equipment, expenses relating to utilities etc.

It’s not just those expenses, but also marketing and general administrative expenses that a business encounters. 

A question when producing goods is which expenses of the above should be as a part of the item’s cost. Yes, all of those expenses should be covered by the selling price eventually so that you’d earn profits, but there’s the “cost” price that is the items own price you include into inventory for an example and that goes through “cost of goods sold” on the income statement. The expenses not included within the cost are covered by the difference between the selling price and the cost price. But that’s the ideology of pricing.

So when it comes to finding out expenses for produced items, you should ask for each expense if it’s made directly or indirectly in connection with the production. For an example, if you hadn’t produced the item you wouldn’t have encountered the expense – that’s called a direct expense (normally materials, labour etc.) Indirect expenses are those you do for production and encounter regardless whether you produce, i.e. depreciation of assets, utilities, rent etc. If it’s related to production, it’s part of the cost of the good.

When an expense is of general nature, for an example office supplies, accountant’s salary, it’s not related to production and you would still encounter the expense regardless if you’re producing so it’s not part of the cost of the good.

When deciding on an expense and it’s allocation, always ask if the expense is done because and / or for producing.