Are you trying to figure out how much a product you manufacture costs?
As a manufacturer, this is a cost you need to know. By taking the time to calculate it and understanding it will pay long terms dividends.
Why is this so important? Profit Margin!
If you don’t know what your product truly costs to make, you have no idea if you are making any money off it.
You do not want to have gaps in your financial statements. Accurately calculate all your costs so that you can make informed decisions.
By knowing the manufacturing cost of a product, you can get visibility into your production processes. Maybe there is an opportunity to lean-up your production by cutting down on some costs or even trying other things such as subcontracting certain operations to reduce the overall cost.
So, how do you get started with this calculation? What are your additional costs besides the cost of your raw materials? Why do you need to know these costs? How can you reduce the extra costs as much as possible?
We have answers to all these questions below, so keep reading!
Total manufacturing cost is the sum of the raw materials and the resources (Labor and Overhead) spent in creating your finished product.
It is essential to know what each part of your production process costs you. It would be best if you also split your costs into the appropriate areas to get an overview of your costs.
Here are the three key areas:
Each added together will create a total manufacturing cost.
One thing to consider here is costs can be direct or indirect. Some things never touch your product but still are part of your manufacturing cost.
Direct costs are anything you spend on the manufacturing process. This is the raw materials and labor costs (staff wages) involved.
Typically with direct costs, they have to play a physical role in the production to be considered a direct cost.
Some materials and labor are indirect costs and you must distinguish between the two types so that you are not counting these costs twice.
These are costs in your manufacturing that don’t come from the raw materials and labor used directly in your manufacturing process. This includes everything from utility bills to equipment maintenance and depreciation of equipment.
Here is a small list of indirect manufacturing costs to consider:
Let’s take a real-life example and put it all types of costs together.
Let’s use the example of a furniture manufacturer who wants to calculate the production cost of a table to understand all the costs involved.
The manufacturing cost formula is as follow:
Manufacturing cost = Raw Materials + Direct Labor + Manufacturing Overhead
So how do we put all this together? Let’s continue with our table example from above and add all the costs together.
Let’s assume the pieces of wood to make the table cost $40 / table.
Direct labor for the table is $25 / table.
Overhead costs for the table are $30 / table.
This brings the total of the table to $95 / table. With this, you can predict your weekly table production costs or monthly.
Keep track of everything and run the actual total costs against the estimated costs. See if they align at the end of a set period. This will help you see if you are underestimating or overestimating your production costs.
One thing to keep in mind: if you want to scale your production, you need to consider that not every production costs scale at the same rate.
Knowing and anticipating these changes will help you stay on top of your production costs and keep your business profitable.