Know How to Calculate Total Manufacturing Cost

Know How to Calculate Total Manufacturing Cost

KNOW HOW TO CALCULATE TOTAL MANUFACTURING COST 

The main aim of manufacturing accounting is to figure out how much-finished products cost. Calman Analytics uses the most up-to-date accounting techniques to help our manufacturing clients save money.

You must measure the per-unit manufacturing cost before you can set a price on any item you produce. Raw material costs, direct labor costs, and operating costs are all factored into this commodity cost estimate. Your profit margin is determined by the price you set. A manufacturing account is needed if your company manages raw materials and turns them into finished goods. This account is for the net cost of goods sold, which includes direct expenditures.

 

MANUFACTURING OVERHEAD COST

The costs incurred during the manufacture of a product are known as manufacturing costs. Direct stock, direct labor, and production overhead are all included in these costs. The expenses are usually shown as different line items on the income statement. These expenses are incurred during the manufacturing process. 

The materials used in the production of a product are known as direct materials. A part of the labor cost of the manufacturing process that is allocated to a unit of production is known as direct labor. Manufacturing overhead costs are allocated to units of output using several methods, including direct labor hours or machine hours incurred. The following are some examples of expenses that can be found in manufacturing overhead:

  • Quality assurance, industrial engineering, materials processing, plant management, and machinery repair personnel's salaries and wages
  • Parts and services for equipment repair 
  • Tools for the factory 
  • Factory assets depreciation 
  • Land taxes and premiums related to the factory

Include all production costs in the costs of work-in-process and finished product inventory when accounting for inventory.

 

MANUFACTURING ACCOUNTING

Manufacturing companies obtain raw materials and turn them into new goods. Labor, equipment, machines, and a variety of raw materials are all used in the process. In this type of market, it's easy to overlook non-core functions like accounting, which can have disastrous financial implications.

Unlike a merchandising firm that only deals with finished products, the company must deal with inventory valuation and the cost of goods sold. A manufacturing company's financial statement varies from that of any other company because it requires the expense of direct materials and labor, as well as other production overhead.

At Calman Analytics, we understand that your company is more concerned with bringing goods to market as soon as possible. We work closely with you to account for all costs incurred by your company when producing resale goods.

 

DEFINITION OF TOTAL MANUFACTURING COST

Total product cost, also known as the cost of products manufactured, is an accounting and business term that appears in the income statement's cost of goods line and encapsulates a company's costs through divisions during the three phases of the manufacturing process:

DIRECT MATERIALS: Direct materials are the raw materials that must be imported, processed, and consumed to create a product. 

Without MRP software, it is necessary to determine how much raw materials the company has on hand in inventory, then add the cumulative cost of new direct material purchases made during the financial period, minus the ending direct material inventory at the end of the financial period.

Beginning inventory (before) + Purchases made (during) – Ending inventory = Cost of direct materials (After)

As you can see, performing a stocktake and adding up all material invoices is needed to determine the overall cost of consumed materials. 

Besides that, not all materials are converted into finished goods. Materials have two outcomes: consumption into a commodity and waste. 

This excludes any products used in the manufacturing process that aren't "inherently part of the component." Water in a soft drink, for example, is a direct material since it is part of the finished product. Water to clean the equipment, on the other hand, is not.

MRP software can measure direct materials costs by adding up the materials costs of all manufacturing orders completed during the time, obviating the need for complicated calculations.

DIRECT EMPLOYMENT COST: Of course, products are more than the sum of their parts; a company must invest resources (particularly labor) to transform raw materials into finished goods. 

It may be a worker on a production line or a boss overseeing some complicated machinery (It's not the maintenance of the machinery, just the operator).

Any retirement accounts, holiday pay, payroll taxes, or extra fees paid by paying direct labor should all be included. This does not include support workers (HR or Accounting, for example, who are not included in the overall production cost), only direct labor that creates the product and the process that pays them.

ENTERPRISE OVERHEAD COSTS:  The firm's overhead is the final piece of the puzzle. This includes everything from power to machinery repairs and depreciation. 

Here is a quick list that will give you a clear idea of what to think about:

    • Costs of machine operation (electricity, water*) 
    • The cost of upkeep 
    • Equipment depreciation
    • Quality inspection of the end product
  • Total factory cost

Wages for administration, distribution, publicity, office rent, and other staff salaries are not included in overhead.

It includes accurate accounting for labor, supplies, and overhead expenses.

 

CALCULATION OF TOTAL MANUFACTURING COST

By considering the usage of raw materials and labor count, the total manufacturing cost formula is framed.

The formula is,

Total Manufacturing Cost = Raw materials + Direct labour + manufacturing overhead

Although direct labor costs and manufacturing overhead costs are simple to add up, the cost of raw materials, also known as direct materials cost, is a formula-based measure that must be included in the overall manufacturing cost calculation.

Cost of raw/direct materials = Beginning inventory + Purchases added – Ending inventory is the formula.

 

HOW WILL YOU CALCULATE MANUFACTURING OVERHEAD COST

The manufacturing overhead formula requires the effort needed to calculate them. The first phase, estimating the total cost of direct materials used in manufacturing, requires a construction study, so you factor in the cost of each nut and bolt. Calculate the actual cost of each raw material component used to make the finished product.

Second, determine the overall labor cost that is directly related to the production process. Salaries, incomes, bonuses, and benefits are also included.

Third, you figure out the overall cost of manufacturing overhead, which includes things like indirect labor and indirect supplies, services, repair and maintenance expenses, taxes and insurance, depreciation, and stolen properties.

 

MANUFACTURING ACCOUNTING SYSTEM

Manufacturing accounting systems aid in the simplification of a complex system. Job order costing, process costing, activity-based costing, and variable costing is all accounting schemes with their own set of rules.

Material requirements preparation (MRP), quickBooks accounting, ordering, manufacturing management, bill of materials, assembly management requirements, raw materials management, barcoding, and asset management are some of the features and capabilities available.

Other production accounting systems include inventory control, revenue management, accounting and finance, inventory for various locations, reporting, and analytics, as well as cycle counting and personalized reporting.

At Calman Analytics, we assist our manufacturing clients in selecting the most appropriate accounting services for their specific operations.

 

IMPORTANCE OF TOTAL MANUFACTURING COST

Owners can compare production costs as a percentage of net revenue between accounting periods by closely monitoring the company's financial statements. Knowing this, management will look for cost-cutting opportunities to boost profits.

Since overhead expenditures have a direct effect on a company's balance sheet and income statement, it's important to keep track of and distribute these costs. Allocating overhead will assist you in identifying places where you can increase performance and cut costs. It's crucial for pricing decisions because integrating indirect costs into pricing allows you to cover costs by aggressively pricing inventory stock to boost profits.

Budgeting for manufacturing overhead is made easier by determining manufacturing overhead expenses. Knowing the production operating costs allows you to plan for the funds you'll need to fund them.

 

CONCLUSION:

We will assist you with manufacturing company accounting if you need it. Every client receives friendly, accessible, scalable, and dependable manufacturing accounting services from Calman Analytics

You get the following benefits when you choose our accounting services for your manufacturing company:

  • At your service is a team of accountants who are highly qualified and accredited. 
  • Accounting solutions that are adaptable and customized 
  • Accounting solutions that are cutting-edge (over 350 business solutions). 
  • Xero Certified Partner and Quickbooks Certified ProAdvisor 
  • Hands-on accounting practices improve company efficiency. 
  • Increased productivity by allowing workers to focus on core business functions.
  • All of your financial outsourcing needs can be found in one location. 
  • Join over 500 satisfied customers from a variety of industries.

We hope that this article has been of great assistance to you and has made many measuring variables easier to understand. Relax by taking a deep breath and focusing on each factor one at a time, then adding up the appropriate elements to determine the overall manufacturing costs.

Comments