How to Calculate Total Manufacturing Cost [Formula + Step-by-Step Guide]

If you're scratching your head trying to figure out your total manufacturing costs, you're not alone. Whether you're making industrial equipment, automotive parts, or specialty tools, getting these numbers right is super important for your bottom line. Let's break this down into bite-sized pieces that'll make sense for your business.

Understanding Key Manufacturing Cost Metrics

Before diving into calculations, you need to understand three interconnected but distinct metrics that impact your financial result:

Total Manufacturing Cost represents the complete sum of all expenses related to production during a specific period, including materials, labor, and overhead costs. For example, if you manufacture precision machining equipment, this would encompass everything from raw steel to worker wages to facility maintenance.

Cost of Goods Manufactured (COGM) focuses specifically on products completed within the period. When producing industrial wire harnesses, for instance, any partially assembled units wouldn't factor into this calculation.

Cost of Goods Sold (COGS) only accounts for products actually sold to customers during the period. If you manufacture specialized automotive parts, this metric would exclude completed items still sitting in your warehouse.

The Basic Formula (Don't Worry, It's Not Rocket Science!)

Your total manufacturing cost comes down to this simple equation:

Total Manufacturing Cost = Direct Materials + Direct Labor + Manufacturing Overhead

Sounds straightforward, right? But there's more to each of these pieces than meets the eye. Let's dive into what makes up each part and how to nail down your numbers.

Direct Materials: The Building Blocks

Start with the direct costs involved in production. These include raw materials, labor costs, and any other expenses directly tied to the production process. For example, if you're manufacturing industrial wiring harnesses, this includes:

• The actual wire and cables
• Connectors and terminals
• Protective coverings and insulation
• Fasteners and mounting hardware

Pro tip: Don't forget to factor in shipping costs and any waste that happens during production. If you're buying wire in bulk but trimming off ends that can't be used, that waste needs to be part of your calculations.

Direct Labor: The Human Touch

This is all about the folks who are hands-on with making your products. We're talking about:

• Assembly line workers
• Machine operators
• Quality control specialists
• Direct production supervisors

Here's the thing many people miss: direct labor isn't just about hourly wages. You need to include:

• Benefits and insurance
• Overtime pay
• Training costs
• Safety equipment

A quick example: Let's say you've got workers assembling tool sets. If they're paid $25/hour and spend 2 hours on each set, that's $50 in direct labor per unit. But wait - when you add in benefits (usually about 30% of wages), you're actually looking at $65 per unit.

Manufacturing Overhead: The Silent Cost Eater

This is where things get interesting - and where many B2B suppliers trip up. Overhead includes everything else that goes into running your production facility:

Fixed Overhead

• Rent or mortgage on your production facility
• Equipment leases
• Property insurance
• Management salaries
• Quality management systems

Variable Overhead

• Utilities (electricity, water, gas)
• Machine maintenance
• Indirect materials (cleaning supplies, lubricants)
• Material handling costs

Putting It All Together: A Real-World Example

Let's say you're manufacturing specialized automotive diagnostic tools. Here's how the costs might break down for one unit:

Direct Materials:

• Electronic components: $150
• Casing and hardware: $50
• LCD screen: $75 Total: $275

Direct Labor:

• Assembly (3 hours @ $30/hour): $90
• Quality testing (1 hour @ $35/hour): $35
• Benefits (30%): $37.50 Total: $162.50

Manufacturing Overhead (per unit):

• Equipment depreciation: $25
• Facility costs: $40
• Utilities: $15
• Indirect materials: $10 Total: $90

Total Manufacturing Cost = $275 + $162.50 + $90 = $527.50 per unit

Why This Matters for B2B Suppliers

If you’re a B2B supplier, knowing your manufacturing costs helps you stay competitive. It allows you to price your products right, negotiate better deals with buyers, and keep your operations lean.

Plus, when you’re managing both B2B and B2C components, understanding where your money goes can help you allocate resources more effectively.

Smart Tips to Keep Your Costs in Check

1. Track Everything (But Make It Easy) Set up a system to monitor your costs in real-time. This doesn't have to be complicated - even a simple spreadsheet can work wonders. The key is consistency in tracking.
2. Look for Material Optimization Can you reduce waste? Are there opportunities for bulk purchasing? Sometimes, spending more upfront can save you big in the long run.
3. Cross-Train Your Team When your workers can handle multiple tasks, you can better manage labor costs and keep production flowing smoothly, even when someone's out sick.
4. Regular Maintenance Saves Money It might be tempting to skip maintenance to save a few bucks, but trust me - a broken machine will cost you way more in the long run.

Total Manufacturing Cost Checklist:

1. Direct Materials:

• List all raw materials needed for production.
• Gather purchase invoices or receipts for materials.
• Account for shipping and handling fees on materials.
• Subtract any material returns or discounts received.

1. Direct Labor:

• Identify all employees directly involved in production.
• Calculate total wages paid during the production period.
• Include employee benefits (healthcare, retirement, etc.).
• Add any overtime or bonus payments.

1. Manufacturing Overhead:

• List all indirect production costs (factory rent, utilities, etc.).
• Include equipment maintenance and repair costs.
• Account for depreciation on machinery and equipment.
• Add indirect labor costs (supervisors, maintenance staff).
• Include insurance, property taxes, and other facility-related expenses.

1. Final Calculation:

• Add Direct Materials + Direct Labor + Manufacturing Overhead.
• Review calculations for accuracy.
• Compare to previous periods for cost trends.

1. Additional Considerations:

• Review for any non-recurring costs.
• Check for opportunities to optimize or reduce costs.
• Document any changes in supplier pricing or labor rates.

The Bottom Line

Getting a handle on your manufacturing costs isn't just about number crunching - it's about understanding your business inside and out. By breaking down each component and staying on top of your numbers, you'll be better equipped to:

• Price your products competitively
• Spot opportunities for cost savings
• Make smart decisions about scaling production
• Keep your business healthy and growing

Remember, these calculations aren't set in stone. Markets change, material costs fluctuate, and new technologies pop up all the time. The key is staying flexible and regularly reviewing your costs to make sure you're on the right track.

Need help automating your inventory and order management to better track these costs? That's exactly what we do here at Flxpoint. Here’s how we support B2B suppliers:

• Invoice Automation: Automatically integrate or manually upload invoices, mapping supplier costs directly to customer orders.
• Customized Tracking: Set up custom filters to track invoices for order payments and reconciliation, keeping your finances in check.
• Profitability Analysis: Our Profitability Report helps you analyze total profit and spot your most (and least) profitable orders across sources, channels, and date ranges.
• B2B Order Management: Manage B2B resellers and order workflows alongside your B2C sales from one easy-to-use dashboard with our Reseller Portal.

With Flxpoint, you get more than just automation—you get a partner in optimizing your entire operation, from manufacturing costs to order management. Ready to make your business run smoother? Request a demo here.

FAQs About Manufacturing Costs

Question: How do I calculate cost savings when insourcing a part?

Answer: To calculate cost savings from insourcing, compare the total cost of producing the part in-house (including materials, labor, and overhead) to the cost of outsourcing. Factor in hidden costs like shipping, lead times, and quality control.

Question: What is applied manufacturing overhead?

Answer: Applied manufacturing overhead refers to the estimated overhead costs assigned to products based on a predetermined rate, often calculated using direct labor hours or machine hours. It differs from actual overhead, which includes all real, incurred indirect costs.

Question: Do I use applied manufacturing overhead or actual overhead in total manufacturing cost?

Answer: For financial reporting and accurate cost analysis, you should use actual overhead costs. Applied overhead is more for budgeting and estimating purposes.

Question: How do I calculate labor costs for COGS?

Answer: Include wages, benefits, and any other compensation for employees directly involved in production. Multiply the labor hours per unit by the hourly wage rate to find the labor cost per product.

Question: How do I price my products to ensure profitability?

Answer: Start with your total cost (materials, labor, overhead) and add other expenses like marketing, website fees, and shipping. Then, apply a markup to achieve your desired profit margin. For example, if your total cost is $15, and you sell for $20, your profit is $5.

Question: How can I boost margins in manufacturing?

Answer: To increase margins, consider raising prices, optimizing production efficiency, reducing material costs, or exploring higher-volume sales. In industries like apparel, balancing premium pricing with operational efficiencies can help improve profitability.

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