COGS calculates the costs of items that not only finished the product creation journey but also got sold to a customer. In contrast, total manufacturing cost includes any production costs within a window of time, regardless of what was finished or sold. To calculate the total manufacturing cost per unit, we need to determine the manufacturing overhead cost per unit. It includes the cost of all the raw materials and inventory stock items that have been used in manufacturing the finished product. For instance, when manufacturing a simple T-shirt, fabric, thread, and labels are considered direct materials.

How to Calculate Total Manufacturing Cost: A Simple Guide

• Direct costs are easy to trace directly to the production of your product, while indirect costs are necessary but not directly tied to each unit you produce.
• This provides you an easily understood number to work with to set your asking price, also known as the manufacturer’s suggested retail price, for your product.
• Effective cost management systems help control expenses, improve efficiency, and boost profitability.
• If all the finished goods were also sold during a specific period, COGS would be equal to COGM.
• Total manufacturing cost per unit is the amount of money required to produce a single unit of a product.
• The calculations for all these costs give the manufacturer a clear picture of what it costs to produce each dog house and, therefore, what price the dog house should sell for.

Finally, allocate overhead, which includes expenses like utilities, equipment maintenance, and factory rent. Your first step, calculating the total cost of direct materials used in the manufacturing purposes, entails an analysis of construction, so you include the cost of each nut and bolt. Determine the actual cost of each component of raw materials required to manufacture the finished product. Sum these expenses for the raw/direct materials component of the equation. Second, calculate the total cost of labor that contributes directly to the manufacturing process.

Direct Labor Calculation

With the right tools in place, you can take control of your manufacturing costs, make better business decisions, and grow your profitability. For example, if three employees work 160 hours each at $20 per hour, with additional payroll costs of $5 per hour, Brahmin Solutions will automatically calculate the direct labor cost as $12,000. When managing your production costs, it’s important to understand the difference between direct and indirect costs. Direct costs are easy to trace directly to the production of your product, while indirect costs are necessary but not directly tied to each unit you produce.

• Conversely, glue, sandpaper, or lubricants are indirect materials because they’re used across multiple products and do not become part of the finished good.
• When production increases, these costs rise, and when production decreases, these costs go down.
• This will be the cost of rent on the factory, heating, phone and other utilities, the salary of managers, packing and shipping clerks, administrative staff and so forth.
• Some companies may even decide to include costs related to training the production staff in direct labor costs.
• Examples of these direct costs would be the laborers that make the product and the materials like fabric that factory workers would use to create a blanket.
• This gives a better insight into cost and profit in real-time, helping to set more informed pricing.

Example #2: Direct labor

Utilize technologies like supply chain analytics and forecasting tools to make informed decisions and improve overall efficiency. Investing in technology and automation can streamline production processes, reduce labor costs, and minimize errors. Modern manufacturing technologies such as robotics, IoT (Internet of Things), and AI (Artificial Intelligence) can enhance productivity and efficiency. For instance, automated assembly lines can improve throughput and consistency while requiring fewer manual interventions.

#1. Calculate the cost of raw materials.

Understanding how to find total manufacturing costs allows businesses to maintain competitiveness and achieve sustainable growth. Regularly updating and reviewing costs will further enhance your overall cost efficiency. Prioritize precise calculations to keep your business financially healthy and optimized. To determine the total manufacturing cost for the production of your finished product, add the direct materials cost with the direct labor costs and the manufacturing overhead costs. Your business’s total manufacturing overhead summarizes the indirect costs of producing finished goods. These costs include indirect labor, indirect materials, utilities, maintenance, repairs, insurance, taxes, and depreciation.

How to Reduce Downtime and Increase Output with Effective Equipment Management?

In case you’re spending too many resources on a task or project, the option to set budgets in Clockify will give you a detailed insight into how you can better balance those resources. For total manufacturing cost formula example, you can allocate depreciation costs of refrigerators to the department that uses them. More cycles mean more variables, which ultimately makes it harder to keep track of things. It puts all the information in one place and keeps track of everything, so you don’t have to. Book a demo with one of our product consultants today and see how we can help you transform your manufacturing operations. During the month, you place a purchase order for an additional $5,000 worth of wood.

• Understanding how to calculate total manufacturing cost is crucial for any business involved in the production of goods.
• This could involve searching for a cheaper energy provider or finding a more cost-effective location (where the rent is not quite as high).
• While this is a simplified view of direct labor calculation, accountants also include the benefits, overtime pay, training costs, and payroll taxes when calculating the hourly rate.
• Investing in technology and automation can streamline production processes, reduce labor costs, and minimize errors.
• To obtain these details, you can refer to the company’s employment records that has a list of all the employees and their hourly rates.

Staff not handling the production of goods, such as management, accounting, maintenance, cleaning staff, etc. are not considered direct labor. These expenses constitute indirect costs, at least from the perspective of the manufacturing process, and are allocated as overheads. Conversely, indirect materials are generally used in many types of products in insignificant quantities per unit. These are not included in direct materials and fall into the manufacturing overhead. For example, for a furniture manufacturer, timber, paddings, and textile are the direct materials used in production, while glue or sandpaper are indirect materials. Costs of goods manufactured (COGM) includes all the costs for Airbnb Accounting and Bookkeeping finished goods manufactured during a given period.

These employees might include assembly line workers, machine operators, and quality control. Workers like janitorial staff and supervisors all play an essential role in the success of your business, but they are considered “indirect labor” for the sake of these calculations. The total manufacturing cost (TMC) shows the total production cost during a specific period, including all direct and indirect expenses. This metric does not ledger account consider whether the goods were completed by the end of the period or not, as it reflects the cumulative cost of production.