When evaluating your company’s balance statement, manufacturing costs can be an important metric to consider. You can calculate how much it costs to turn raw materials into finished products and how much it costs to manufacture each item you produce using a simple cost formula. In this article, we will define total manufacturing cost, how it differs from production costs, and how to calculate manufacturing cost using its formula.
What Is the Total Manufacturing Cost?
A company’s total manufacturing cost is the total amount of money spent by a company on its manufacturing operations, or how much it costs to produce the goods that will be sold to customers.
So, as the name implies, it takes into account all spending. To obtain this information, you must thoroughly understand your product creation process. Furthermore, you should ensure that you don’t overlook any expense, no matter how insignificant it may appear. Otherwise, you won’t get a true picture of your outgoings.
Total manufacturing cost should not be confused with cost of goods manufactured (COGM) or cost of goods sold (COGS), which are slightly different terminologies. Also, COGM is a formula that only takes into account the costs of items that have completed the manufacturing process and have become sellable products.
COGS is the cost of items that not only completed the product creation journey but were also sold to a customer. Total manufacturing cost (TMC), on the other hand, includes all production costs within a given time frame, regardless of what was finished or sold.
Manufacturing Cost vs. Production Cost
While both production and manufacturing costs are used to calculate a manufacturing company’s total expenses, there are some significant differences between the two. The production costs of a company reflect all of the expenses associated with its ability to conduct business. Furthermore, manufacturing costs only include expenses that are directly related to the creation of products.
Below is an example of production cost and an example of something that affects production cost and manufacturing cost differently.
Production costs can include fixed costs.
Rent, business equipment, advertising costs, and other expenses that do not change as production increases or decreases are examples of fixed costs. So, manufacturing companies include fixed costs in their production costs. This also enables them to calculate the total cost of production per item and set the wholesale price per item.
Differential effects of per-item cost on production and manufacturing costs
As a company produces more products, its total revenue rises while its fixed costs remain constant. This means that as the cost of production per item decreases, the business becomes more profitable. However, when looking at manufacturing costs per item, the cost does not vary significantly. In fact, increased production can result in increased manufacturing costs. To increase production, for example, the company may need to purchase additional machinery or hire more employees to operate the machines.
Manufacturing Cost Examples
Manufacturing costs are broadly classified into three categories:
#1. Labor costs
These costs include both direct and indirect labor. Employee salaries in the factory, whether on the production line or managing the team on the floor, include indirect labor costs. Indirect labor could include the cost of delivering raw materials to your manufacturing facility.
#2. Material costs
Material costs include all of the materials used to manufacture your products. Direct material costs include the components and raw materials used to create the finished product. Indirect material costs include items such as containers or pallets used to store raw materials safely.
#3. Overhead
Overhead costs essentially include all expenses that aren’t related to employees or materials, which is why this category can be more difficult to project accurately. It can include service fees, utility bills, rent, and equipment costs.
How to Calculate Total Manufacturing Cost
The formula used to calculate total manufacturing cost is:
Total manufacturing cost = raw materials + labor costs + allocated manufacturing overhead.
Here are the basic steps you should take to calculate the total manufacturing cost:
#1. Calculate the cost of raw materials.
Begin by calculating the total cost of your raw materials. You can determine this using the following formula:
Cost of raw materials = beginning inventory + purchases added – ending inventory
For example, if you determined that you had a total of $19,000 in raw materials and purchased an additional $20,000 in materials, your raw material inventory would be $39,000. If you determine at the end of the production cycle that you have a raw material inventory of $17,000, your total raw material cost is $22,000.
Raw material cost = $19,000 + $20,000-$17,000 = $22,000
#2. Calculate labor costs
Then you must calculate your total labor costs. This means that, in addition to the wages and salaries of any other employees involved in the production process, you must include the labor costs for maintenance employees, sanitation personnel, bookkeepers involved in the production process, material handlers, and production line employees, and factory managers. Remember that you only need to calculate labor for the production period you’re calculating.
#3. Calculate the manufacturing overhead costs.
Finally, you must calculate the overhead costs incurred by your company during a production period. This could include the cost of electricity and other utilities, the depreciation of your manufacturing equipment, property taxes and insurance for the equipment and facility, as well as other overhead costs.
#4. Calculate the total manufacturing cost.
To calculate total manufacturing cost, add all of your total costs from steps one through three. Your total manufacturing cost will not include general and administrative expenses such as office rent, administrative wages, office equipment, and executive salaries.
#5. Calculate the cost per item.
You could calculate the manufacturing cost per item as an optional step. This can assist you in determining how to price your products and whether you need to reduce your production-related expenses. Divide the total manufacturing cost by the number of products produced during the specified time period to calculate the price per item.
Total Manufacturing Cost Formula
Simply add the aforementioned three key costs from the specified financial period to find the total manufacturing cost. As a result, the total manufacturing cost formula is as follows:
The formula to calculate the total manufacturing cost is as follows:
Total manufacturing cost = raw materials + direct labor + manufacturing overhead
Total manufacturing cost formula
Examples of Total Manufacturing Cost Calculations
To calculate total manufacturing costs, use the following formula:
raw material costs + labor costs (minus general administrative costs) + manufacturing overhead
In the preceding example, we would have $22,000 in raw materials. If we had $15,000 in production labor costs (excluding general administrative costs) and another $10,000 in manufacturing overhead (including taxes, insurance, and equipment depreciation), we would have:
Total manufacturing cost: $22,000 + $15,000 + $10,000 = $47,000
3. A furniture manufacturing company has $8,000 in raw materials in inventory at the start of a quarter. During this time, $5,000 in stock is added to the raw material inventory. However, at the end of the period, only $3,000 in raw materials remained. We can calculate the Direct Materials used using these figures.
Direct Materials = $8,000 + $5,000 – $3,000 = $10,000
The company employs eight shop floor workers who are directly in charge of production. Four of them have seniority and/or special skills and earn $2,600 per month, while the remaining four earn $2,200 per month. The Direct Labor Costs are the sum of their quarterly payments.
Direct Labor = [($2,600 x 4) + ($2,200 x 4)] x 3 = ($10,400 + $8,800) x 3 = $19,200 x 3 = $57,600
Manufacturing overhead consists of indirect labor costs for maintenance (wages totaling $9,000 per quarter) and warehouse (wages totaling $12,000 per quarter), additional materials such as glue and sandpaper ($800), rent ($6,000 per quarter), insurance ($200 per quarter), and equipment depreciation of $2,400 per year, or $600 per quarter. That’s a total of $28,600.
Manufacturing Overhead = $28,600
As a result, the total manufacturing cost for the quarter is the sum of direct material and labor costs as well as manufacturing overhead.
Total Manufacturing Cost = $10,000 + $57,600 + $28,600 = $96,200
What Are the Advantages of Total Manufacturing Cost?
#1. Cost savings
It may seem obvious, but knowing all of the expenses associated with your manufacturing operation makes it easier to reduce these costs. Total manufacturing costs may reveal completely unnecessary expenses (and can therefore be eradicated completely).
#2. Greater clarity regarding the financial health
Manufacturers who do not have an accurate picture of their spending will often have a distorted perception of their financial health, which may lead to poor budgeting. When total manufacturing costs are compared to income and revenue, profitability and overall business performance become clear.
#3. Pricing decisions that are well-informed
The profitability picture derived from total manufacturing costs will also govern other strategies, such as your sales and pricing approach. If your profits aren’t where you want them to be, you may realize that your current sales model isn’t working and that you need to try something new or open up new sales channels (such as e-commerce).
#4. Reduced waste
When you examine total manufacturing costs, you may discover not only that the materials being purchased are too expensive, but also that far too many materials are being purchased in the first place. You can adopt a more conservative purchasing strategy by analyzing the amount of excess that is typically generated during production.
#5. Efficiency-boosting insights
Cost-cutting measures can often be used to streamline your processes as well. Removing steps from the production process to save money also increases efficiency, resulting in faster production of items (which leads to greater customer satisfaction).
Conclusion
So now that you know what the total manufacturing cost is, how it differs from production costs, and how to use its formula to calculate the manufacturing cost, what about producing and selling your products? That’s a completely different story. A tale in which we have looked into and answered, along with a ton of other things scaling manufacturers need to know.
Frequently Asked Questions
How do you calculate total manufacturing overhead cost?
To calculate manufacturing overhead, add all of the indirect factory-related expenses incurred during the production of a product. Indirect materials, indirect labor, machine repairs, depreciation, factory supplies, insurance, electricity, and other costs are all-inclusive.
What is total manufacturing cost incurred?
Manufacturing overhead does not include wages for administration, sales, marketing, office rent, and other staff salaries. The Cost of Goods Manufactured (COGM) and Cost of Goods Sold (COGS) are both calculated using the Total Manufacturing Cost (COGS).
How do you calculate total manufacturing costs quizlet?
You divide total manufacturing costs by the number of units produced to get the cost per unit. So, multiply the manufacturing cost per unit by the number of units produced to get the total manufacturing costs in this problem.
How do you calculate total cost to a company?
“How do I figure out an employee’s total cost of employment?” is another question that employers frequently ask. The answer is straightforward. To calculate the employee’s cash salary (basic pay plus allowances), add the company’s contributions to the employee’s benefit funds.
