How to estimate your manufacturing cost?

So, are you making an extensive effort in finding out the cost of your manufactured product? Remember, there is nothing wrong with figuring out the cost; as a manufacturer, you must calculate the same for a better understanding and accessing the profit margin. If you miss calculating the cost, you can't know how much money you make from a specific product.

Knowing how to estimate the manufacturing cost also fills the gap in your financial statements and helps you make the right decisions. Moreover, you can also get a good idea of the production process and find unnecessary elements for cutting down the overall cost.

Hence if you are on a quest for the most informative help, then we are all set to guide you for your overall benefit.

Manufacturing Cost

Simply put, the manufacturing cost is the required expenses for assembling a specific product. It is quite sensitive to the alteration in production volume, and the cost is directly proportional to the production. However, an extensive analysis of the prospects is essential for calculating the manufacturing cost. Professionals look into the details of the material costs, labour cost and overhead.

So, in short, the manufacturing cost is the total expenditure of all the key resources responsible for making a finished product.

There are primarily three types of components associated with manufacturing costs such as direct materials, direct labour, and manufacturing overheads, which we will discuss below.

1. Direct & Indirect Manufacturing Costs

The direct manufacturing costs are the expenditures you incur during the manufacturing process, including the raw materials and wages. Direct manufacturing costs play a crucial role in the manufacturing process. On the other hand, indirect manufacturing costs are not directly related to the manufacturing process but essential. You can consider utility bills, maintenance and repair cost, and even depreciation cost as indirect manufacturing costs.

2. Direct materials, Direct labour & Manufacturing Overheads

Direct materials are the raw materials required to make the finished products. In contrast, direct labours are the employees who take care of assembling and manufacturing processes and creating required goods. Manufacturing overheads are the costs related to machining processes and maintenance. In this, direct material cost plays a significant role in the manufacturing process.

It is quite essential to find out the primary differences between the direct manufacturing cost and indirect manufacturing cost. The cost related to various activities related to production can be divided into direct and indirect costs. Both types o feature the costs related to raw materials, expenditures during production activities and customer service.

The key difference between direct and indirect costs is that direct costs can be traced to the specific item and is variable. When we discuss the direct costs we can identify the elements like direct labour, raw materials used, various supplies for the production process, and labour payments. On the contrary, indirect costs are the fixed costs such as the salaries of employees related to productions, different types of rentals, and insurance payments closely related to manufacturing process.

Direct materials are the raw materials, and different elements required for producing finished goods. They are crucial for effective manufacturing and are the focus of all activity..

Direct materials: To calculate the direct material cost you need to access the cost of materials procured within a specific period and the cost of initial stock and add them, you have to subtract the final stocks from the total.

Direct labour: Calculate all direct labour costs used in the manufacturing process for the period, including any related payroll taxes

Manufacturing overhead: Manufacturing Overhead brings together the production costs during a specific period that features mortgage payments, salaries, and the devaluation cost of the plant and its machinery.

1. Direct materials

To calculate the direct material cost you need to access the cost of materials procured within a specific period and the cost of initial stock and add them, you have to subtract the final stocks from the total.

• Calculating Direct Material Costs

Calculating direct material costs requires precision and skills as the direct material cost is variable and way too different from the fixed costs. It keeps changing according to the level of productivity. So, by calculating the direct material costs effectively, you can minimise the material input costs.

So, the calculation is as follows

Total direct material costs = Opening direct materials + Direct purchased materials – closing direct materials.

2. Direct labour costs

The direct labour cost isn't only about the employee wages. It also includes employee's compensation insurance, leaves entitlements, and retirement contributions. It also features workers for the assembling process and even the employees involved in the operation.

• Calculating Direct labour Costs

While calculating direct labour costs, you must first know the calculation methods such as direct hourly labour cost and direct labour costs.

So here is the complete calculation process.

• Calculating the direct labour hourly Cost

The direct labour hourly cost comprises payroll taxes, fringe benefit costs where you need to add the hourly pay, payroll taxes, and fringe benefits rate and divide the same with the number of working hours within a payment period.

So, the calculation is as follows

Direct labour hourly rate = (Hourly pay price+ Fringe Benefits pay+ Payroll taxes)/ total number of worked hours within the payment period.

• Calculating Direct labour Hours

Calculating direct labour hours is crucial for calculating the direct labour cost ad for this. You need to divide the total number of units manufactured by the total number of hours required to make the same.

So, the calculation is as follows

Direct labour hours = Units produced/ Labour hours

• Calculating Direct Labour Cost Per Unit

Once you get the direct hourly labour rate and direct labour hours, it is quite easy to calculate the direct labour cost per unit. Here you need to multiply both and find the required result.

So, the calculation is as follows

The Direct labour cost per unit is equals to the Direct labour hourly rate X Direct labour total hours

3. Manufacturing Overhead Costs

The manufacturing overhead is primarily an indirect cost that deals with the material and utility cost, employee salaries, depreciation on plant equipment as well as the depreciation of various production facilities.  

• Calculating Manufacturing Overhead

For calculating the manufacturing overhead, you need to find out the manufacturing overhead costs and the manufacturing overhead rate, which is mainly the percentage of monthly returns used for paying the overhead. So, you need to divide your month-wise overhead cost with monthly sales and multiplying the same by 100.

So, the calculation is as follows

Manufacturing Overhead rate = Overhead Costs/Sales X 100

Bottom Line

Manufacturing cost is the total cost that a business spends on producing final goods within a fixed timeframe. Hence the organisation and every business owner must know the actual manufacturing cost so that it can help maintain the income statement and balance sheet. Moreover, dividing the cost into three categories helps you access all the spending behaviours and make the right decision for further investments.

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3) Top 10 Businesswomen in the Industry & What You Can Learn From Them
4) How to Start a Flower Shop Business in India?

FAQs

Q. What is the Total Manufacturing Cost?

Ans The total manufacturing cost is the combination of raw materials and other crucial resources like Labour and Overhead needed for manufacturing a finished product. Accessing the total manufacturing cost offers a good insight into the entire production process's cost and a good overview of the expenditure.

Q. What is Direct Material, and what are the real examples of it?

Ans. Direct materials in a production process are nothing but the elementary materials required for making your product. For example, in a soft drink, water is the direct material, the timber inside a house used for the construction, the fabric of your shirt are the examples of direct material.