Being a small manufacturing business owner, you spend a lot of time thinking of the pricing strategies and how to make the manufacturing process more efficient.
Before deciding about inventory selling prices or changes in the manufacturing process, take a close look at the total manufacturing cost. The calculation would break down the manufacturing costs so that it becomes easy to analyze your expenses.
What are Total Manufacturing Costs?
Total manufacturing costs mean how much a company spends to produce its inventory in a given time interval. The calculation refers to the sum of three product cost categories, namely: direct material, direct labor, and manufacturing overhead.
Business owners must be aware of their total manufacturing costs. Once you know the actual cost of the manufacturing, you can more accurately account for inventory on the balance sheet and the cost of goods sold on the income statement.
Also, it’s an analysis tool. Splitting the manufacturing costs into three buckets helps you see where you are overspending and where you must invest more.
Total manufacturing costs are usually conflated with the costs of goods manufactured (COGM). COGM counts for the cost of inventory finished and prepared for sale in the period. Total manufacturing costs account for all costs incurred in the period, regardless of whether the product was finished.
Read about: Why Your Business Needs Manufacturing Control Software?
How to Calculate Total Manufacturing Cost
Now, we shall learn about how to find total manufacturing cost. The total manufacturing cost formula is as follows:
Total manufacturing cost = Direct materials + Direct labour + Manufacturing overheads.
You can use the following four simple steps to compute total manufacturing costs for a product or business:
Cost of Materials
To calculate the cost of materials, figure out how much was on hand to begin, how much additional was bought, and how much remains post-production with the formula:
Starting inventory + Added purchases – Ending inventory = Direct materials cost
Cost of Labor
To calculate the cost of labor, compile the expense of all labor wages for a specific period, including related payroll benefits and taxes compensation. Cost of labor covers both fixed salaried wages and variable hourly wages, though only for ones who work directly with production.
It doesn’t factor in team members in human resources or accounting as their work is different from production.
To measure the overhead costs, add all the factors that keep the production going, both direct and indirect. Few examples of direct overhead costs include facility rent, property, and mortgage taxes.
Indirect overhead costs are special for machinery and equipment, label printing, or factory supplies.
Total Manufacturing Costs
To determine total manufacturing costs, add together the totals from steps one, two, and three.
The total manufacturing costs do not include other general and administrative expenses like advertising, storage, shipping, and delivery. Plus, they do not include salaries for executives and other personnel.
Consider how the total manufacturing cost affects the selling price of an item, often called the manufacturer’s suggested retail price, and our company’s profit margins.
As per the total manufacturing cost amount, managers and business owners cut operational costs, improve their profitability, or lower a suggested price for customers.
When to Use Total Manufacturing Cost
Managers and companies must know how much they spend on production to understand the relationship between manufacturing, profit, and sales. You can make use of total manufacturing cost calculators while doing operational analysis, including:
- Seeing where the expenses are sky-high or where to invest more.
- Reducing direct material costs.
- Streamlining operations to save labor and time costs.
- Calculating inventory totals at the end of a period and the carrying costs to store.
- Accounting for cost of goods sold and balance sheet inventory on the income statement.
- Knowing if the selling price gives enough profit margin.
Read about: Food Manufacturing and the Lean Approach
Examples of Total Manufacturing Cost
Any industry can use total manufacturing cost calculations, including those that do not have a physical product. For instance, a digital product like computer software may not have several direct materials but needs direct labor and manufacturing overhead to produce.
Below are some examples of how to calculate total manufacturing costs using different companies:
Grover’s GreenHouse Nursery
With five employees, Grover’s GreenHouse Nursery uses soil, seeds, fertilizer, pesticides, and grow lights.
- Direct materials: $22,200
- Cost of labor: $69,700
- Overhead costs: $21,000
(Direct materials) $22,200 + (Cost of labor) $69,700 + (Manufacturing Overhead) $21,000 = (Total manufacturing cost) $112,900
Torch Candle Company
Torch Candle Company employs 100 people in the factory and produces classic tapered candles and scented jar candles. The company uses wax, various class containers, scented oils, wicks, and packaging.
- Direct materials: $556,300
- Cost of labor: $3,500,000
- Overhead Cost: $287,100
(Direct materials) $556,300 + (Cost of labor) $3,500,000 + (Manufacturing overhead) $287,100 = (Total manufacturing cost) $4,343,400
Tail Wag Dog Collars, Inc.
Tail Wag Dog Collars, Inc. produces various sized dog collars using ribbon, fastener clips, fabric, D-rings, and sewing machines.
- Direct materials: $151,000
- Cost of labor: $60,050
- Overhead costs: $18,200
(Direct materials) $151,000 + (Cost of labor) $60,050 + (Manufacturing overhead) $18,200 = (Total manufacturing cost) $229,250
DEAR Systems Manufacturing Software
Finding the ideal ERP software for the manufacturing industry is a challenging task but is worth exploring. By having all the information in one convenient place, you can access the data on the go and save countless hours tracking things individually.
DEAR Systems proudly offers you the most advanced Cloud-based ERP software in the market. We have served countless satisfied clients in the manufacturing sector with our affordable and intuitive software. Our software would help you lower down your total manufacturing cost.
We provide you with a 360-degree view of the business, and if you ever have any questions or concerns, our customer service team is always there for you.
Our ERP integrates with many big brands like Amazon, Xero, Stripe, Square, Quickbooks, etc., making for seamless integration into the operation. Contact DEAR Systems right away to learn more and start your 14-days free trial.