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How To Calculate Manufacturing Costs?

manufacturing cost

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! 

 

What is the total Manufacturing Cost?

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:

  • Direct Materials
  • Direct Labor
  • Manufacturing Overhead (Indirect Costs)

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 Manufacturing Costs

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. 

 

Indirect Manufacturing Cost

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:

  • Machine utility costs
  • Indirect materials cost
  • Maintenance cost
  • Depreciation cost

Let’s take a real-life example and put it all types of costs together.

 

Manufacturing cost with a real-life example

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.

  1. Direct materials: the cost of the pieces of woods to make the table;
  2. Direct labor: the staff who make and put the table together;
  3. Manufacturing Overhead (Indirect Labor): the cleaning staff
  4. Manufacturing Overhead (Indirect Material): the tape and glue used to put hold the table during certain operations;
  5. Manufacturing Overhead (Maintenance Cost): includes the costs of running machines like a belt sander, or paint room; and
  6. Manufacturing overhead (Utility Cost): the cost of rent and utilities to maintain your workshop.

 

Manufacturing Cost formula: Putting all together

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. 

For example:

  • Raw materials costs could go down because you are buying in bulk.
  • Maintenance costs for machines will likely go up as you produce more.

Knowing and anticipating these changes will help you stay on top of your production costs and keep your business profitable. 

Know all your production costs in real-time, by using MRP software such as Brahmin solutions. If you want to learn more, book a demo with one of the product consultants. 

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