Total manufacturing cost is the measure of exactly how much it cost the company to produce its final products. Calculating total manufacturing costs takes into account all costs that are accrued throughout the entire production process beginning with the purchase of raw materials and ending with the final product.
The total manufacturing costs formula is:
Total Manufacturing Costs = Direct Materials + Direct Labor + Manufacturing Overheads
In order to get to the final total manufacturing costs, you first need to be able to calculate the three elements that make up those total costs: direct material, direct labor, and manufacturing overheads.
Direct materials refers to raw materials and any additional parts that were used to create the final product. Any material that can be directly assigned to a specific product line is considered a direct material. An example of a direct material is rubber used to make a tire or fabric used to make a dress.
The formula used to calculate the costs of direct materials in a given time period is:
Direct Materials Costs = Starting Inventory + New Purchases – Ending Inventory
This calculation takes into account raw materials that were used to complete a product during the time period in question as well as those that are part of the works still in progress.
Direct labor includes the salaries and benefits of all those employees who are directly involved in the production of products. This includes assembly line workers, quality control inspectors, and direct managers of those employees. It does not include the general management team and others who are not directly involved in the assembly line.
There is no specific formula to use to calculate direct labor costs, as it is merely an addition of wages, insurance and other benefits, taxes, vacation payouts, etc. It is important to include the total cost of all salaries and other benefits of each and every employee who participates directly in the production process.
The third component of the total manufacturing cost formula is the manufacturing overhead, also known as indirect expenses. These expenses include all the additional costs (in addition to the direct labor and materials) that are needed in order to maintain the production line. Manufacturing overhead costs do not include marketing or accounting, for example, as those have more to do with running the overall business and are not directly related to production.
Costs that are included in the total manufacturing overhead are:
- Utilities such as electric, gas, etc.
- Depreciation of equipment
- Wages of managers and others who are indirectly involved in production
The total manufacturing overhead formula is:
Total manufacturing overhead = indirect labor + indirect materials + utilities + insurance + depreciation + any other overhead costs
It is very important when calculating manufacturing cost to be as accurate as possible and to not underestimate any of the expenses as that can provide an inaccurate picture. Total manufacturing costs impact on the bottom line of the company, so accuracy is crucial.