How to Calculate Total Manufacturing Cost

The total manufacturing cost is the amount businesses spend to manufacture products. This metric is crucial for companies in the manufacturing sector. Having access to this information on the balance sheet is essential to making important decisions about inventory, pricing, sales initiatives, sourcing, and other areas of effective management.

Total manufacturing cost is a crucial metric for any business that produces goods because it gives a detailed picture of manufacturing costs over a given period. As a company grows and processes become more complex or bigger in scale, being aware of the total manufacturing cost is crucial to monitor the business, keep costs down, and find opportunities for maximizing efficiency.

The total manufacturing cost, the cost of goods manufactured, and the cost of goods sold are related but distinct pieces of information. Understanding the differences between each is critical for having a clear picture of your manufacturing business and creating an accurate income statement:

• Total manufacturing cost: Total manufacturing cost is the total amount of direct material costs, direct labor, and manufacturing overhead over a given period.
• Cost of goods manufactured (COGM): This metric only counts products finished during a given period. The total does not include unfinished products—these are considered works in progress for accounting purposes.
• Cost of goods sold (COGS): Cost of goods sold refers only to the manufacturing costs of products sold in a given accounting period. Calculating COGS factors in the COGM, but excludes any unsold units.

To calculate the total manufacturing cost, add up the direct material costs, direct labor costs, and manufacturing overhead costs:

1. 1. Begin with direct material costs. Direct material costs directly relate to the finished products manufactured by a company. For example, if a company produces toasters, the stainless steel to make the exterior of the units is one of the direct material costs. Other costs of raw materials might include the metal elements for heating and plastic for the knobs and handles.
2. 2. Add direct labor costs. Direct labor costs include payroll taxes and wages for workers in the production process. Direct labor includes jobs in manufacturing; accounting, managerial, and other staff are indirect labor.
3. 3. Add cost of manufacturing overhead. The overhead expenses is everything else necessary to keep the business running. Overhead expenses might include cleaning staff salaries, supervision, contractor work related to production, infrastructure and equipment depreciation, utilities, rent or mortgage, and general upkeep supplies.

When trying to figure out your total manufacturing cost, it can be helpful to know the difference between direct and indirect costs. Direct costs involve expenses in the manufacturing of the goods your company produces. If a material is necessary to keep the assembly line running, it is a direct production cost.

Indirect costs do not feature directly in manufacturing the finished product, such as general factory supplies and indirect labor. Indirect costs might also include materials that are part of the finished product but in insignificant amounts per production unit. For example, glue and staples are indirect materials in upholstered furniture manufacturing.

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