Total Manufacturing Cost: Formula, Guide, & How to Calculate %%page%%

Total manufacturing cost is the sum of direct materials, direct labor, and manufacturing overhead. To calculate total manufacturing costs, use the total manufacturing cost formula. Much like with direct materials, direct labor costs constitute all labor that goes toward converting materials into finished goods.

FAQs about manufacturing costs

To calculate total manufacturing costs, you need to add up three key components – direct materials, direct labor, and overhead costs. First, identify the cost of direct materials, which includes all raw materials used in production. Next, calculate direct labor costs, which are the wages paid to workers directly involved in manufacturing. Finally, allocate overhead, which includes expenses like utilities, equipment maintenance, and factory rent. Total manufacturing cost refers to the total expenses involved in producing goods.

Factors Affecting Manufacturing Costs

1. The key takeaway of this case study is that understanding the fluctuations in manufacturing costs can empower companies to make informed and timely choices between outsourcing and in-house production.
2. For instance, if some raw materials are driving up costs, manufacturers can negotiate with other suppliers who may be willing to supply these materials at a lower cost.
3. Additionally, TMC can help uncover inefficiencies in the supply chain, shop floor, and inventory levels.
4. This simple formula shows how to find total manufacturing costs accurately and helps businesses understand their production expenses.
5. For instance, let’s say a company has an existing inventory worth $1,500.

To find manufacturing overhead, identify the manufacturing overhead costs then add them up. Now you can determine the manufacturing overhead rate — this is the percentage of your monthly revenue that goes towards paying for overheads each month. To do this, divide the monthly manufacturing overhead by the value of your monthly sales, multiplying that by 100. Producing too much stock in advance means you are spending a lot more on direct material costs. Equally, you will also incur the costs of holding excess inventory stock or risk being left with stock you cannot sell.

Step #1: Calculate the cost of direct materials

ERP/MRP software, however, continuously calculates the direct material cost from purchases as well as the direct labor costs by summing up reported work hours of manufacturing orders. Staff not handling the production of goods, such as management, accounting, maintenance, cleaning staff, etc. are not considered direct labor. These expenses constitute indirect costs, at least from the perspective of the manufacturing process, and are allocated as overheads. We understand what direct material costs are so now it’s time to talk about the formula used to calculate them.

This includes direct materials, direct labor, and manufacturing overhead. Accurately calculating total manufacturing costs is essential for determining product pricing, managing resources, and maximizing profitability. By using the total manufacturing cost formula, offset account in accounting companies can make informed decisions about cost-cutting strategies and pricing models.

Step #3: Add up the other direct expenses

Manufacturing costs, as we’ve already discussed, are the expenses that are needed to produce the product. Manufacturing overhead does not include expenses incurred outside of inventory production. Don’t add in accounting and human resources staff salaries, for example. Though there’s no direct labor formula to follow, calculating direct labor is the most straightforward part of the calculation. Look at your payroll software and total the gross wages of your direct laborers for the year.

For example, rent and insurance on the manufacturing plant are based on the assets’ value, not on the number of units produced. Once you identify the indirect costs, get detailed expense data for each of these overhead cost categories for a specific period, such as a month or a year. You can track expenses by looking at your invoices, receipts, and records of all expenditures related to manufacturing overhead. This means that unfinished products that were transferred into Work in Process (WIP) inventory are left out.

The primary aim of evaluating the these costs is to determine the cost of finished goods while analyzing those components that are increasing the production cost. It, thus, helps in cost management and operational efficiency at the factory level. It refers to the expenses incurred on manufacturing a single piece of an item. It is computed by dividing the total manufacturing cost in a given period by the total number of units of a particular commodity produced in that period. If the company produces 5000 bags quarterly, determine the total manufacturing cost per unit.

To give you an idea as to what manufacturing costs are, it’s often helpful to share an example that illustrates the idea. Let’s imagine Acme Manufacturing, a fictitious company that manufactures dog houses. Since Rose and Lily are not part of the candle-making process, their gross pay is excluded from the direct labor calculation.

Indirect costs include expenses like utilities, rent, maintenance, and indirect labor. For example, electricity powering machines, factory rent, and salaries for staff who don’t directly work on production are all considered gross margin accounting overhead costs. These are necessary for production but aren’t linked to a single product. Finally, multiply the total number of direct labor hours by the labor rate per hour. This will give you the total direct labor cost for producing the product.