How To Calculate Total Manufacturing Costs

Total manufacturing cost is the amount of money a company spends on its manufacturing operations, or essentially how much it costs in total to produce the goods that will be sold on to customers.

Total Manufacturing Cost

Total manufacturing cost formula

Here is the formula to measure total manufacturing costs:

What are total manufacturing costs?

The sum of a company’s manufacturing expenses is what it costs to produce finished goods and inventory over a specific period of time. The total manufacturing cost is an accounting calculation that looks at each department or operational stage and their cost of operation. It is frequently reviewed quarterly or annually.

Add the sums of these three elements to determine the overall manufacturing cost:

How to calculate total manufacturing cost

To determine a product’s or company’s overall manufacturing costs, follow these four steps:

1. Calculate cost of materials

Using the following formula, determine how much was initially on hand, how much extra was purchased, and how much is left over after production to determine the cost of materials:

2. Measure cost of labor

Compile all labor-related costs for the specified time period, including related payroll taxes and benefits compensation, in order to calculate the cost of labor. Both variable hourly wages and fixed salaries are covered by the cost of labor, but only for workers who are directly involved in production. Team members working in human resources or accounting, for instance, are not taken into account because their work is distinct from production.

3. Figure overhead costs

Add up all direct and indirect costs associated with maintaining production to determine overhead costs. Facility rent, mortgage payments, and property taxes are some instances of direct overhead expenses. The price of specialty oil for machinery and equipment, printing labels, or factory supplies are examples of indirect overhead costs.

4. Determine total manufacturing costs

Add the totals from steps one, two, and three to get the manufacturing cost amount.

It is significant to note that other general and administrative costs, such as advertising, storage, shipping, and delivery, are not included in total manufacturing costs. Additionally, they exclude executive and other staff salaries.

5. Analyze results

Consider how a product’s selling price, also known as the manufacturer’s suggested retail price, and ultimately a company’s profit margins are impacted by total manufacturing costs. Managers and business owners can reduce operational costs, increase profitability, or lower a suggested retail price for customers based on the total manufacturing cost amount.

When to use total manufacturing cost

For managers and businesses to comprehend the connection between manufacturing, profit, and sales, they need to know how much they spend on production. When conducting operational analysis, you can use total manufacturing cost calculators, such as:

Total manufacturing costs examples

Even those industries without a tangible product can use total manufacturing cost calculations. A digital product like computer software, for instance, might not have a lot of direct materials, but it still requires direct labor and manufacturing costs to produce.

Here are a few illustrations of how to use scenario companies to determine total manufacturing costs:

1. Grovers Green House Nursery

With a staff of five workers, Grovers Green House Nursery uses seeds, soil, fertilizer, pesticides, and grow lights.

Total manufacturing costs came to $112,900 (raw materials $22,200, direct labor $69,700, and manufacturing overhead $21,000).

2. Torch Candle Company

100 people work for Torch Candle Company in its factory, which makes traditional tapered candles and scented jar candles. The business uses wicks, packaging, scented oils, different class containers, and wax.

Total manufacturing costs were $556,300 for raw materials, $3,500,000 for direct labor, and $287,100 for manufacturing overhead.

3. Bradford Benches

A part-time sole proprietorship called Bradford Benches focuses on bench carpentry. Wood, paint or stain, wood glue, and various joint fasteners like nails, screws, and bolts are the primary materials. The warehouse has planing machines and other tabletop equipment.

Total manufacturing costs were calculated as follows: $35,400 for raw materials, $10,000 for direct labor, and $10,400 for manufacturing overhead.

4. Tail Wag Dog Collars, Inc.

Tail Wag Dog Collars, Inc. makes dog collars of various sizes out of fabric, ribbon, D-rings, fastener clips, and sewing machines.

Total manufacturing costs were calculated as follows: $151,000 for raw materials, $60,050 for direct labor, and $18,200 for manufacturing overhead.

FAQ

What is included in manufacturing costs?

Materials, labor, and overhead are the three main categories of manufacturing costs. All are direct costs. In other words, the office supplies and accountant’s salary for the company are not included, but the foreman’s salary and supplies are

What is total manufacturing cost incurred?

You must total up all indirect manufacturing-related costs incurred during the production of a product to determine manufacturing overhead. This includes the price of depreciation, insurance, electricity, factory supplies, indirect materials, indirect labor, machine repairs, and other expenses.

What is total direct manufacturing cost?

The total cost of manufacturing is the sum of all expenses incurred by a company during a reporting period for its production operations. It includes all potential expenses related to the production process, such as direct labor, direct materials, and manufacturing overhead.

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *