It’s time to calculate your manufacturing costs!
Yeah, I know. We hear the grumbling.
The thought of figuring out your total manufacturing costs can be intimidating. The good news is that it’s far from impossible. You don’t have to pretend to be an accountant to figure it out.
You also don’t want to gloss over what your total manufacturing costs mean for you. If you know what your inventory value is, you can easily figure out your sales margins. There may be some wiggle room to cut down on unneeded costs.
There’s a smooth formula to follow to figure out what your total manufacturing cost is. Continue reading to see how you can apply it to your business.
Related: HOW TO TAKE CONTROL OF YOUR INVENTORY ONCE AND FOR ALL
What Is My Total Manufacturing Cost?
In the simplest terms, it is the total cost to make your products during a period of time.
There are three things to consider when figuring out your total costs:
- Direct Materials
- Direct Labor
- Firm Overhead
Add those three together, and you’ve got your total.
Direct Materials + Direct Labor + Firm Overhead = Total Manufacturing Cost
Your direct materials are the actual materials you need to buy, refine, and consume to make your product.
You need to figure out how much of these materials you have on hand. Then, add the total cost of new direct materials. Finally, subtract the ending inventory at the end of the financial period.
Beginning Inventory + Added Purchases – Ending Inventory = Direct Materials Cost
Think about it. Not all of your materials get put into your products. Some go into production. Some go into scrap. There are also some cases where you use materials that don’t go directly into the product.
For example, if you make soft drinks, there is water within the actual product. This water is a direct material.
You would also use water to wash the equipment you use. This water is not a direct material.
Some other examples of direct materials:
- Timber used to build a house.
- Steel used to make a car.
- Fabric used to create clothes.
You can’t forget that creating your products takes labor. Without anyone spending time on your products, they won’t be made.
It costs money to have staff in a production line and a manager to oversee them. It also costs money to offer them benefits such as retirement funds, holiday pay, and payroll taxes. Anything you pay for employees to create your product is part of direct labor.
There are two main types of direct labor:
- Variable labor: based on the production output (for example, hourly employees)
- Fixed Labor: Stays the same regardless of the output (for example, fixed salaries)
Keep in mind, there are certain roles that don’t have anything to do with direct labor. Support staff such as HR and Accounting don’t directly help create the product. Therefore, they’re not included in your direct labor calculation.
Related: BENEFITS OF TRACKING WORKERS’ PERFORMANCE
The last bit you need to think about in total manufacturing costs is your firm overhead. This is everything else you need to keep production running.
Here is a small list that can help you decide what to include:
- The cost of running your machines (water, electricity, etc)
- The cost of maintenance
- Depreciation of your equipment
- Quality inspection of your final products
Things overhead do NOT include are:
- Administration wages
- Office rent
- Other staff salaries
Examples of Total Manufacturing Cost
It may be helpful to see a few examples to get an idea.
Example #1: Manufacturing a Car
Direct Materials ($14,000) + Direct Labor ($20,000) + Manufacturing Overhead ($10,000) = Total Manufacturing Cost ($44,000)
Example #2: Manufacturing 1,000 Wooden Tables
Security overlooking facility: $500
Rent and utilities: $500
Direct Materials ($12,100) + Direct Labor ($2,500) + Manufacturing Overhead ($500) = Total Manufacturing Cost ($15,100)
Example #3: Skateboard Manufacturer
Deck materials: $20
Metal Trucks: $10
Per unit: $10
Bearings, lubricant, paint, staff, electricity: $10 per unit
Direct Materials ($46) + Direct Labor ($10) + Manufacturing Overhead ($10) = Total Manufacturing Cost ($66)
Example #4: Manufacturing Gardening Tools
Direct Materials ($320,000) + Direct Labor ($95,000) + Manufacturing Overhead ($75,000) = Total Manufacturing Cost ($490,000)
Figuring out Your Total Manufacturing Cost
To find out what your total manufacturing cost, use the simple formula:
Direct Materials + Direct Labor + Manufacturing Overhead = Total Manufacturing Cost
There is only one real way to figure out your total manufacturing costs. However, it may look different depending on your actual process.
A digital product may not have many direct materials. They do, however, still need direct labor and manufacturing overhead to produce.
Knowing how much you’re spending on production is important. It gives you an understanding of the relationship between manufacturing, profit, and sales.
Don’t make the mistake of underestimating some of your expenses. They might seem like minor details. Overlooking small numbers can still have a large impact that can hurt your business.
By using the right software you can streamline the process to make it less daunting and overwhelming. Want to learn more about how it works?
Contact us today at Prodsmart to learn more about our solution. It may be one of the best decisions you make for your business.