What is Manufacturing Cost?
Manufacturing cost is an important figure for any manufacturer to know as it indicates the total costs involved in producing the products that are ultimately sold to customers.
The costs include fixed costs that stay the same regardless of production quantity – such as certain salaries and costs of leasing or purchasing factory or office space – as well as variable costs that are directly related to the amount of output.
Manufacturing cost takes into account absolutely everything that goes into the production process, which includes both direct and indirect costs.
Types of Manufacturing Costs
The two main categories of manufacturing costs that are included in the calculation of overall manufacturing cost are:
- Direct costs – these costs include raw materials or parts, salaries and other benefits, and other expenses that can be directly tied to the final output such as equipment costs.
- Indirect costs – any additional expenses that cannot be tied directly to the final output are considered indirect costs. These costs include administrative and factory overhead costs such as rent payments, utilities, management team salaries, etc. Marketing, distribution and R&D costs are also considered indirect costs.
How to Calculate Manufacturing Cost
The formula for calculating manufacturing cost is:
Manufacturing Cost = Direct materials + Direct labor + Indirect costs
A tool like Matics makes it easy to keep track of the production costs being incurred by each machine and production line. For example, if a machine breaks in the middle of the production process, the cost of the resulting downtime needs to be factored into the total manufacturing cost. The real time data provided by Matics can provide that needed-level of accuracy.
Benefits of Calculating Manufacturing Cost
In addition to needing to include the manufacturing cost on financial statements, knowing this number can also help inform and guide business decisions, including the following:
- Reducing costs – knowing exactly how much expenses are makes it easier to see where it might be possible to make some cuts and reduce overall costs. This could mean renegotiating with suppliers of materials, switching internet or other utility providers, or more.
- Understanding the full financial picture – without knowing exactly how much is being spent, it is easy to make poor budget decisions and then be surprised when the bottom line is lower than expected at the end of the year. Keeping track of manufacturing cost provides an ongoing picture of the company’s financial health.
- Rethinking pricing – if profits are lower than desired, the solution is to either increase income or reduce costs. Understanding what is going into the total cost number might make it clear that the costs are already as low as possible so what is needed is a new pricing and/or marketing strategy.
