TOTAL COST OF PRODUCTION: How to calculate it (2023)

When evaluating your company's balance sheet, cost of manufacture can be an important metric to consider. Using a simple cost formula, you can calculate how much it costs to convert raw materials into finished products and how much it costs to manufacture each item you produce. In this article, we will define total manufacturing cost, how it differs from production cost, and how manufacturing cost is calculated with its formula.

What are the total manufacturing costs?

A company's total manufacturing cost is the total amount that a company spends on its manufacturing operations, or how much it costs to produce the goods that are sold to customers.

As the name suggests, all expenses are taken into account. To get this information, you need to thoroughly understand your product creation process. You should also make sure you don't overlook any costs, no matter how insignificant they may seem. Otherwise, you won't get a true picture of your spending.

Total cost of manufacture should not be confused with cost of manufacture (COGM) or cost of sale (COGS), which are slightly different terminologies. Also, COGM is a formula that only considers the cost of items that have completed the manufacturing process and become salable products.

COGS is the cost of items that have not only completed the product development journey, but have also been sold to a customer. Total Manufacturing Cost (TMC), on the other hand, includes all production costs within a given time period, regardless of what was completed or sold.

Manufacturing costs vs. production costs

While both production and manufacturing costs are used to calculate the total cost of a manufacturing company, there are some significant differences between the two. A company's manufacturing cost reflects all of the costs associated with its ability to do business. In addition, manufacturing costs only include expenses that are directly related to the manufacture of products.

Below is an example of production cost and an example of something that affects production cost and manufacturing cost differently.

Manufacturing costs may include fixed costs.

Rent, office equipment, advertising costs, and other expenses that don't change as production increases or decreases are examples of fixed costs. Manufacturing companies therefore include fixed costs in their production costs. This also allows them to calculate the total production cost per item and set the wholesale price per item.

Different effects of unit costs on production and manufacturing costs

As a firm produces more products, its total revenue increases while its fixed costs remain constant. This means that the business becomes more profitable as the cost of production per item decreases. However, considering the manufacturing cost per item, the cost does not vary significantly. In fact, increased production can lead to increased manufacturing costs. For example, to increase production, the company may need to purchase additional machines or hire more workers to operate the machines.

Examples of manufacturing costs

Manufacturing costs are roughly divided into three categories:

#1. labour costs

These costs include both direct and indirect labor costs. The wages of workers in the factory, whether on the assembly 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 materials used to manufacture your products. Direct material costs include the components and raw materials used to manufacture the end product. Indirect material costs include items such as containers or pallets used to store raw materials safely.

#3. Overhead

Overhead includes essentially all expenses that are not related to labor or materials, so this category can be more difficult to forecast accurately. It can include service charges, utility bills, rent and equipment costs.

How to calculate the total manufacturing cost

The formula for calculating the total manufacturing cost is:

Total Manufacturing Cost = Raw Materials + Labor Cost + Associated Manufacturing Overhead.

Here are the basic steps you should take to calculate the total manufacturing cost:

#1. Calculate the raw material costs.

Start by calculating the total cost of your raw materials. You can determine this using the following formula:

Commodity cost = beginning inventory + added purchases - ending inventory

For example, if you determine that you have a total of $19,000 in raw materials and buy another $20,000 of materials, your raw material inventory is $39,000. At the end of the production cycle, if you find that you have a resource inventory of $17,000, your total resource cost is $22,000.

Raw Material Cost = $19,000 + $20,000 - $17,000 = $22,000

#2. Calculate labor costs

Then you need to calculate your total labor costs. This means that in addition to the wages and salaries of all other employees involved in the production process, you must include the labor costs of maintenance workers, plumbing workers, accountants involved in the production process, material handlers and production line workers operations managers. Remember that you only need to calculate labor for the production period that you calculate.

#3. Calculate the manufacturing overhead.

Finally, you need to calculate the overheads your business incurs during a production period. This can include the cost of electricity and other utilities, depreciation of your manufacturing facilities, property taxes and insurance for the equipment and facility, and other overheads.

#4. Calculate the total manufacturing cost.

To calculate the total manufacturing cost, add up all of your total costs from steps one through three. Your total manufacturing cost excludes general and administrative expenses such as office rent, administrative wages, office equipment and executive salaries.

#5. Calculate the cost per item.

As an optional step, you can calculate the manufacturing cost per item. This can help you determine 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 manufactured during the specified time period to calculate the price per item.

total manufacturing cost formula

Simply add up the above three key costs from the given financial period to find the total manufacturing cost. As a result, the total manufacturing cost formula is as follows:

The formula for calculating the total manufacturing cost is as follows:

Examples of total manufacturing cost calculations

To calculate the total manufacturing cost, use the following formula:

Raw Material Costs + Labor Costs (less G&A Costs) + Manufacturing Overheads

In the previous example, we would have $22,000 in raw materials. If we had $15,000 in manufacturing labor costs (excluding general and administrative expenses) and another $10,000 in manufacturing overheads (including taxes, insurance, and equipment depreciation), we would have:

Total crafting cost: $22,000 + $15,000 + $10,000 = $47,000

3. A furniture manufacturer stocks $8,000 worth of raw materials at the beginning 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 of commodities remained. Using these numbers, we can calculate the direct materials used.

Direct Materials = $8,000 + $5,000 – $3,000 = $10,000

The company employs eight shop floor employees who are directly responsible for 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. 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 warehousing (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 cost of goods sold for the quarter is the sum of direct material and labor costs and manufacturing overheads.

Total manufacturing cost = $10,000 + $57,600 + $28,600 = $96,200

What are the benefits of Total Manufacturing Cost?

#1. savings measures

It may seem obvious, but knowing all of the costs associated with your manufacturing operation will make it easier for you to reduce those costs. Total manufacturing costs can reveal (and therefore can be completely weeded out of) entirely unnecessary expenses.

#2. More clarity about financial health

Manufacturers who don't have an accurate picture of their spending often have a skewed perception of their financial health, which can lead to poor budgeting. When total manufacturing costs are compared to revenues and sales, profitability and overall company performance become clear.

#3. Well-informed pricing decisions

The profitability picture derived from the total manufacturing costs also determines other strategies, such as B. Your sales and pricing approach. If your profits aren't where you want them to be, you may find that your current sales model isn't working and you need to try something new or develop new sales channels (e.g. e-commerce).

#4. Reduced waste

If you look at the total cost of manufacture, you may find not only that the materials 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 overage that typically occurs during production.

#5. Efficiency-boosting insights

Your processes can often be streamlined as a result of cost-cutting measures. Removing steps from the production process to save money also increases efficiency, resulting in faster production of items (resulting in higher customer satisfaction).

Diploma

Now that you know what the total manufacturing cost is, how do they differproduction costs, and how to use its formula to calculate the manufacturing cost, how about manufacturing and selling your products? That's a whole different story. A story we've researched and answered, along with a ton of other things scale makers need to know.

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