DEFINITION of 'Production Cost'. A cost incurred by a business when manufacturing a good or producing a service. Production costs combine raw material and labor.To figure out the cost of production per unit, the cost of production is divided by the number of units produced.roduction costs can be used to compare the expenses of different activities within the company. In production, there are direct costs and indirect costs. For example, direct costs for manufacturing an automobile are materials such as the plastic, metal or labor incurred to produce such an item.