How to calculate the total manufacturing cost of a product?

How to calculate the total manufacturing cost of a product?

How to calculate the total manufacturing cost of a product?

1) Introduction to manufacturing

Definition of manufacturing

Manufacturing is simply the process of converting raw materials in the form of components or parts into a finished good that meets the expectations and specifications of the customer. The manufacturing process may involve human workers or machines. It all depends on the final product, budget, the scale of the production and the cost/ efficiency of the goods. 

Definition of manufacturing
Examples of manufacturing industries

  • Food, Beverage, and Tobacco: this industry is involved in the manufacturing of eatable and consumable products such as butter, chocolate, cigarettes, soda…
  • Petroleum, Coal, Chemicals, Plastics, and Rubber: this industry is involved in the manufacturing of coal, tires, chemical, and plastic products…
  • Computer and Electronics: this field is where computers, electronics, phones, and other components are manufactured.
  • Aerospace: this includes the manufacturing of planes, aerial vehicles, drones, and other space-related products.
  • Automotive: It is one of the most common manufacturing industry. This industry is responsible for the manufacturing and creating of cars, trucks, buses, and vehicles in general.

2) Types and Purposes of Manufacturing

Types of Manufacturing

There are four primary manufacturing types and these are:

  • Molding in Manufacturing: molding is the shaping of a liquid or pliable raw material using a mold or a matrix. This process itself has lots of different types such as Casting which is one of the most famous types of molding involving turning plastic into liquid by heating it and then pouring it into a mold. Once the plastic cools down, the mold is removed thus obtaining the final desired form or shape.
  • Machining in Manufacturing: casting and molding, in general, may not systematically require machines however when the manufacturer is dealing with metals parts, it is important and necessary to use tools such as saws, sheers, and rotating wheels in order to obtain the desired shape or form. Some machines are used in manufacturing such as laser machine which is a machine that uses high energy light beam in order to cut a piece of metal.
  • Joining in Manufacturing: joining is a process of manufacturing that involves the use of heat in order to combine materials.
  • Shearing and Forming in Manufacturing: shearing is a process of manufacturing that deals with making straight cuts in a piece of metal using sharp cutting blades. Forming is a manufacturing process that applies compression or other types of stress onto materials in order to obtain the desired shape.

Purposes of manufacturing

There are three purposes of manufacturing, here they are:

  1. Make to Stock (also known as MTS): MTSisbasically the producing of products and goods to stock stores or showrooms.
  2. Make to Order (also known as MTO): MTO is somewhat the opposite of MTS, it is the producing of products based on orders and not really just for stocking.
  3. Make to Assemble (also known as MTA): MTA is the producing of component parts in anticipation of orders for assembly.

3) Calculating the Total Manufacturing Cost of a final product

cost of manufacturing of the final product

The total manufacturing cost of a product is the sum of all costs whether the costs are directly or indirectly related to the actual manufacturing of the goods or services. So the formula should be like this:

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

Direct Labor Cost

the direct labor cost also known as DLC is the sum and combination of the wages that have to be paid to the workers in order to produce the service or the product. However, the total labor cost is the sum of the payroll taxes associated with those wages and the sum of insurances such as the medical insurance, the life insurance, and the workers’ compensation insurance. 

Some examples of direct labor cost:

  1. Variable labor: which is based on the amount of production output (such as hourly employees)
  2. Fixed labor: which remains fixed and the same regardless of the company’s production output. (Also known as fixed salaries)

Direct Materials Cost

DMC is simply the cost of raw materials that are used in creating a product 

Examples of Direct materials: 

  1. Timber which is used to construct a house.
  2. Steel which is used in the manufacturing of an automobile.
  3. The fabric which is used in the manufacturing of clothes.

Examples of indirect materials: 

  1. Rags (used in the constructing of a house)
  2. Grease (used on machines that require lubrication)
  3. Thread (used in clothing)

Manufacturing Overhead Cost

MOC includes the cost of production salaries, facility rent, repair and maintenance costs.

Examples of manufacturing overhead cost: 

  1. The Cleaning costs of equipment
  2. Electricity and lighting
  3. Maintenance of the equipment – Safety and quality cost.

Sample calculation of the cost to manufacture a car

Let’s say that a factory is going to manufacture a car:

  • The cost of raw materials:
  1. Steel: 8,000 USD
  2. Wheels: 5,000 USD
  3. Leather: 1,000 USD
    In total: 14,000 USD
  • The cost of direct labor: 20,000 USD
  • The cost of manufacturing overhead: 10,000 USD
    So the total cost of manufacturing a car is
    14,000 + 20,000 + 10,000 which is equal to 44,000 USD

The total cost of manufacturing an iPhone 6S per example

  1. The total cost of materials and components is around 150 USD
  2. The total cost of building and assembly is around 5 USD
  3. Other costs: 80 USD
    So in total, the iPhone 6s costs the company around 185 USD

an estimated cost of the manufacturing of the iPhone 6S

4) Conclusion

In conclusion there pretty much only one way of calculating the total cost of manufacturing a product; however, the actual cost can vary by the changing either the type of manufacturing process, the wages and salaries of the workers or simply by being more conservative and using less electricity and raw materials.

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