Blog Manufacturing How to calculate total manufacturing cost [formula + step-by-step guide]
03 April, 2024

# How to calculate total manufacturing cost [formula + step-by-step guide]

By John Bennett
Total manufacturing cost can be calculated by adding direct material cost, direct labor cost, and all overhead manufacturing expenses. It’s a valuable metric for determining profitability and increasing efficiency.

Business health can be measured in many ways: productivity, total sales, customer sentiment, and more. There are endless metrics for success, none of which matter unless the financial health of your company is sound.

The total manufacturing cost formula can be one of the most critical metrics for manufacturing businesses or those with a manufacturing and production management component. This calculation provides insight into how much it costs to make your product, identifying any underlying inefficiencies or exorbitant expenses.

Keep reading to learn how to calculate total manufacturing cost, how to use the formula, and why it matters.

## What is total manufacturing cost?

Total manufacturing cost is the amount of money spent to manufacture a product, including overhead expenses, materials, and labor.

Calculating the total manufacturing cost requires a thorough understanding of all expenses related to manufacturing, both direct and indirect. In order to gain this insight, your organization will need to have visibility into end-to-end spending.

## How to calculate total manufacturing cost

Total manufacturing cost = Cost of materials + Cost of labor + Manufacturing overhead expenses

You can calculate your total manufacturing cost by adding the total cost of direct materials, direct labor, and manufacturing overhead. However, before using the total manufacturing cost formula to calculate your costs, you need to understand what each part of the formula means.

1. First, you must know the key components of your formula:
• Direct materials: All materials used to create the final product
• Direct labor: The employees and associated expenses directly involved with production
• Manufacturing overhead: Storage fees, electricity, and equipment
2.  Collect expense data and compile the cost of materials, labor, and manufacturing overhead.

Cost of materials = Starting inventory + Purchases added – Finishing inventory

Cost of labor = The total cost of labor for the production period

Manufacturing overhead = The total cost of all manufacturing overhead for the production period, such as maintenance, utilities, taxes, and insurance

### Total manufacturing cost formula example

Let’s say you run a retail shop that sells specialty rubber ducks. Your materials would include:

• Rubber
• Squeakers
• Custom paint
• Anything else required for the manufacturing of the ducks

All of those materials cost \$11,100 per month. You have 14 employees and a total labor cost of \$44,800 per month. As for overhead, you pay for regular equipment maintenance and upgrades as well as utilities and insurance for \$7,000 per month.

\$11,100 (materials) + \$44,800 (labor) + \$7,000 (overhead) = \$62,900 per month total manufacturing cost for rubber ducks.

## Types of manufacturing costs

One of the big things to consider is the difference between direct and indirect costs. The key difference is that with direct costs, you can tie the expense back to the product directly –– such as the rubber to make the rubber ducks. In contrast, indirect costs cannot be tied back to the product directly. This includes fees like monthly rent on the building where you make the ducks.

### Direct costs

Direct costs change based on the production period and how much product you manufacture. This generally includes materials and labor, which vary based on many factors, such as demand planning and staffing.

Wondering how to calculate direct materials cost? Direct materials are calculated by subtracting the direct materials left at the end of the production period from the total amount of materials you started with and purchased in the period.

Direct materials cost = (Beginning direct materials + Purchased direct materials) – Ending direct materials

The cost of labor includes employee pay, benefits, labor taxes and contributions, and workers’ compensation insurance. You can calculate labor costs in several ways, such as per hour or per product.

Direct labor cost per hour = (Wages + Benefits + Additional labor expenses) / Total hours worked

Direct labor cost per product = Direct labor hourly rate x Direct labor hours

### Indirect costs

Indirect costs are not directly related to manufacturing and, therefore, generally remain the same period over period. This can include things like rent or other indirect materials that aren’t used to create the final product, like water or cleaning supplies. Other indirect costs can include indirect labor, such as the custodian or an executive who does not contribute directly to production.

Manufacturing overhead is considered an indirect cost, as it’s not directly related to the product. However, it falls into its own category as a type of indirect cost because manufacturing the product cannot take place without these overhead expenses.

You can calculate manufacturing overhead by adding up all manufacturing overhead expenses. It can also be expressed as a percentage, which indicates the amount of a company’s revenue that goes toward manufacturing overhead.

## Why is total manufacturing cost important?

Understanding the total manufacturing cost can provide valuable insights into production processes and their associated costs. The manufacturing cost provides a base metric for other formulas to measure profitability and productivity. As a result, businesses can make adjustments that help improve efficiency, reduce waste, and increase profitability.

## 7 benefits of calculating total manufacturing cost

There are many benefits of tracking the total manufacturing cost, whether you do it manually or with manufacturing ERP software, that impact the entirety of a business. From finances to efficiency, the manufacturing cost is an integral metric for understanding an organization’s health. Here are seven benefits:

1. Decreased expenses: Evaluating expenses is always valuable, as it provides greater insight into how you spend money and whether there are opportunities to reduce costs.
2. Financial transparency: Calculating total manufacturing cost gives a figure to compare other financial aspects of the company to, such as overall sales and ROI.
3. Data-backed decision-making: The information provided from calculating manufacturing costs can help you make better business decisions by providing data to help improve efficiencies and cut costs.
4. Informed purchasing: Examining manufacturing costs can pinpoint areas where costs have increased and allow for better use of funds by changing suppliers or reducing overstock of certain supplies.
5. Increased efficiency: Calculating manufacturing costs can reveal areas where there are inefficiencies, such as inventory and supply or processes.
6. Pricing and revenue insights: When compared against revenue, total manufacturing cost provides insight into an organization’s profitability.
7. Cost control: All of these insights will help an organization reprioritize its budget and control costs.

## Production cost vs. manufacturing cost

While manufacturing cost and production cost are often used interchangeably, they are not the same. Manufacturing costs are only associated with creating the product, whereas production costs include all operational expenses.

Production costs include manufacturing costs as well as outside costs, such as marketing spend and office supplies. Essentially, production costs encompass all direct and indirect costs of running a business.

## Total manufacturing cost vs. COGM vs. COGS

Total manufacturing cost is an important metric for providing insight into an organization’s financial health, particularly when used with other formulas. Other similar and important retail KPIs include COGM and COGS.

Costs of goods manufactured (COGM) includes all the costs for finished goods manufactured during a given period. Any unfinished products or work in progress (WIP) inventory is not included in the COGM calculation. However, in cases where all materials are used, the COGM and total manufacturing cost would be the same.

COGM = (Beginning WIP inventory + Total manufacturing cost) – Ending WIP inventory

Cost of goods sold (COGS) is the direct cost of producing goods, excluding overhead costs. This metric is important, as it represents the amount of product you have to sell to break even or make a profit. Conversely, the total manufacturing cost formula does include overhead costs.

COGS = (Beginning inventory + Purchases) – Ending inventory

## Streamline manufacturing data collection with Cin7

The total manufacturing cost formula is among many tools that can help improve efficiencies, reduce costs, and boost productivity. Another tool for streamlining inventory management is Cin7.

## FAQ

### What are the three types of manufacturing costs?

The three main manufacturing costs are materials, labor, and overhead expenses. Adding these three together is how you calculate the total manufacturing cost formula.

### How do you calculate total fixed manufacturing cost?

Add together all manufacturing costs, noting which are variable and fixed. Then, subtract the variable costs from the total and multiply it by the amount of product for the given production period.

### What are total manufacturing costs the sum of?

Total manufacturing costs are the sum of all expenses associated with manufacturing, including labor, materials, and manufacturing overhead expenses.

### How do you calculate the total cost of production?

Total cost of production includes the total manufacturing cost plus all additional indirect material and labor costs.