Free Guide to Calculate the Total Manufacturing Cost | Definition | Examples
This is a simple version to properly calculate the total manufacturing cost by understanding its definition and formula. Let’s look more in detail.
What is a Manufacturing Cost?
Manufacturing cost is the total expenses associated with all resources used in creating a finished product.
Total Manufacturing Cost needs an accurate analysis of any company’s various departments to find how they contribute to manufacturing and its associated costs.
What do all the Manufacturing Costs include?
The manufacturing cost includes 3 main manufacturing expenses which are the
- Direct Materials
- Includes the raw materials that turn into a finished product
- Manufacturing Overhead
- Costs associated with maintenance, machine process, and indirect material or supporting role labor
- It includes all plant & production overhead costs like rent, repair & maintenance expenses, mortgage fees, production salary
- Depreciation of Plant & Equipment
- Direct Labor
- Includes all employees who work in preparation, assembly, and manufacturing the goods
What is Manufacturing Budget?
A manufacturing budget can be a set of 3 budgets that will estimate the cost of direct materials, cost of direct labor, and cost of overhead for the predicted number of units that has to be produced in your production budget.
How to reduce the Manufacturing costs?
Direct Material Cost can be reduced by
- Substituting lower-cost materials with zero comprise in quality
- Managing the supply costs by finding an alternative supplier for similar products
- Reducing waste by avoiding overproduction
Manufacturing Cost Examples
Here, let us see some examples for calculating the cost of direct material, labor, and overhead cost using formulas.
Direct Material Cost
For example, a coffee roaster machine has got a worth of ₹2,500 coffee beans at the starting period. You have purchased the coffee beans additionally for ₹4,000 and you have beans worth ₹2,000 at the end.
Direct Materials = Cost of material purchased + Beginning Inventory cost + (- Ending Inventory)
Total Direct Material Cost = ₹2,500 + ₹4,000 + (-₹2,000) = ₹4,500
Direct Labor Cost
A coffee roasting service providing team assembles 1Kg bags of coffee. The team wants to find the direct labor cost for each coffee bag.
Every member will work for 40 hours & get paid ₹25 per hour with a payroll tax of ₹5 per hour and fringe benefits of ₹3 per hour.
Direct Labor per hour = (25 + 5 + 3) ₹ /40 = ₹0.83
The team will assemble 150 bags within 40 hours.
Direct Labor Hours = 150/40 = 3.75 hours
Direct Labor Cost per unit = 0.83 * 3.75 = ₹3.11
Manufacturing Overhead Costs
A company with a monthly manufacturing overhead of ₹60,000 & sales of ₹490,000, then the overhead percentage will be
Manufacturing Overhead = (Overhead Costs / Sales) * 100
Manufacturing Overhead Rate = (₹60,000/₹490,000) * 100 = 12.24%
The types of manufacturing costs included in manufacturing overhead are
- Salaries & Wages
- For Material Handling, Quality Assurance, Factory Management & Equipment Maintenance Personnel
- Equipment Repairs (Parts & Supplies)
- Factory Utilities
- Factory Assets Depreciation
- Insurance & Property Taxes related to factory
Finally, Total Manufacturing Cost can be calculated using the formula,
Total Manufacturing Cost = Direct Materials + Manufacturing Overhead + Direct Labor .