Business health can be measured in many ways: productivity, total sales, customer sentiment, and more. There are endless metrics for success, none of which matter unless the financial health of your company is sound.
The total manufacturing cost formula can be one of the most critical metrics for manufacturing businesses or those with a manufacturing and production management component. This calculation provides insight into how much it costs to make your product, identifying any underlying inefficiencies or exorbitant expenses.
Keep reading to learn how to calculate total manufacturing cost, how to use the formula, and why it matters.
Total manufacturing cost is the amount of money spent to manufacture a product, including overhead expenses, materials, and labor.
Calculating the total manufacturing cost requires a thorough understanding of all expenses related to manufacturing, both direct and indirect. In order to gain this insight, your organization will need to have visibility into end-to-end spending.
You can calculate your total manufacturing cost by adding the total cost of direct materials, direct labor, and manufacturing overhead. However, before using the total manufacturing cost formula to calculate your costs, you need to understand what each part of the formula means.
Cost of materials = Starting inventory + Purchases added – Finishing inventory
Cost of labor = The total cost of labor for the production period
Manufacturing overhead = The total cost of all manufacturing overhead for the production period, such as maintenance, utilities, taxes, and insurance
Let’s say you run a retail shop that sells specialty rubber ducks. Your materials would include:
All of those materials cost $11,100 per month. You have 14 employees and a total labor cost of $44,800 per month. As for overhead, you pay for regular equipment maintenance and upgrades as well as utilities and insurance for $7,000 per month.
$11,100 (materials) + $44,800 (labor) + $7,000 (overhead) = $62,900 per month total manufacturing cost for rubber ducks.
One of the big things to consider is the difference between direct and indirect costs. The key difference is that with direct costs, you can tie the expense back to the product directly –– such as the rubber to make the rubber ducks. In contrast, indirect costs cannot be tied back to the product directly. This includes fees like monthly rent on the building where you make the ducks.
Direct costs change based on the production period and how much product you manufacture. This generally includes materials and labor, which vary based on many factors, such as demand planning and staffing.
Wondering how to calculate direct materials cost? Direct materials are calculated by subtracting the direct materials left at the end of the production period from the total amount of materials you started with and purchased in the period.
The cost of labor includes employee pay, benefits, labor taxes and contributions, and workers’ compensation insurance. You can calculate labor costs in several ways, such as per hour or per product.
Direct labor cost per hour = (Wages + Benefits + Additional labor expenses) / Total hours worked
Direct labor cost per product = Direct labor hourly rate x Direct labor hours
Indirect costs are not directly related to manufacturing and, therefore, generally remain the same period over period. This can include things like rent or other indirect materials that aren’t used to create the final product, like water or cleaning supplies. Other indirect costs can include indirect labor, such as the custodian or an executive who does not contribute directly to production.
Manufacturing overhead is considered an indirect cost, as it’s not directly related to the product. However, it falls into its own category as a type of indirect cost because manufacturing the product cannot take place without these overhead expenses.
You can calculate manufacturing overhead by adding up all manufacturing overhead expenses. It can also be expressed as a percentage, which indicates the amount of a company’s revenue that goes toward manufacturing overhead.
Understanding the total manufacturing cost can provide valuable insights into production processes and their associated costs. The manufacturing cost provides a base metric for other formulas to measure profitability and productivity. As a result, businesses can make adjustments that help improve efficiency, reduce waste, and increase profitability.
There are many benefits of tracking the total manufacturing cost, whether you do it manually or with manufacturing ERP software, that impact the entirety of a business. From finances to efficiency, the manufacturing cost is an integral metric for understanding an organization’s health. Here are seven benefits:
While manufacturing cost and production cost are often used interchangeably, they are not the same. Manufacturing costs are only associated with creating the product, whereas production costs include all operational expenses.
Production costs include manufacturing costs as well as outside costs, such as marketing spend and office supplies. Essentially, production costs encompass all direct and indirect costs of running a business.
Total manufacturing cost is an important metric for providing insight into an organization’s financial health, particularly when used with other formulas. Other similar and important retail KPIs include COGM and COGS.
Costs of goods manufactured (COGM) includes all the costs for finished goods manufactured during a given period. Any unfinished products or work in progress (WIP) inventory is not included in the COGM calculation. However, in cases where all materials are used, the COGM and total manufacturing cost would be the same.
COGM = (Beginning WIP inventory + Total manufacturing cost) – Ending WIP inventory
Cost of goods sold (COGS) is the direct cost of producing goods, excluding overhead costs. This metric is important, as it represents the amount of product you have to sell to break even or make a profit. Conversely, the total manufacturing cost formula does include overhead costs.
COGS = (Beginning inventory + Purchases) – Ending inventory
The total manufacturing cost formula is among many tools that can help improve efficiencies, reduce costs, and boost productivity. Another tool for streamlining inventory management is Cin7.
Learn how Cin7’s all-in-one inventory management software can help your business.
Total manufacturing cost is calculated by adding a business’s material, labor, and overhead expenses.
The three main manufacturing costs are materials, labor, and overhead expenses. Adding these three together is how you calculate the total manufacturing cost formula.
Add together all manufacturing costs, noting which are variable and fixed. Then, subtract the variable costs from the total and multiply it by the amount of product for the given production period.
Total manufacturing costs are the sum of all expenses associated with manufacturing, including labor, materials, and manufacturing overhead expenses.
Total cost of production includes the total manufacturing cost plus all additional indirect material and labor costs.
John Bennett
Manager of Financial Planning & Analysis (FP&A), Cin7
In his role, John oversees the tracking & forecasting of KPIs across all business segments in the organization to drive insights for the objective of operational excellence and growth. He is passionate about empowering key stakeholders at Cin7 to achieve more today than they could yesterday. John brings over 10 years of career experience across various operational and data analytics roles.
