To figure out the total cost of making something, you add up the costs of direct supplies, direct labor, and factory waste. In mathematical terms, that means: The total cost of making something is the cost of direct supplies, direct labor, and factory fees.
That’s the short story. But having the method is not enough to figure out how much something costs to make as a whole. In this piece, we look at what goes into overall manufacturing costs, how to figure out what those parts are, and, most importantly, how a business can cut some of these costs.
First, let’s take a closer look at the total cost of making something.
What are the total prices of making something?
The total manufacturing cost is the amount of money spent on all of the materials used to make a finished product. To find out how much your company’s different areas add to the manufacturing process and how much they cost, you need to do an accurate study of them. This means keeping a thorough record of the cost of all supplies, fees, and labor in order to figure out the total cost of making finished things.
As we’ve already talked about, the main parts of the total cost of making something are direct supplies, direct labor, and factory fees.
Direct materials are the raw materials that go into the end product, and direct labor is all of the people who work on preparing, putting together, and making these things. Manufacturing overheads are all of the costs that come with cutting, upkeep, and any materials or labor that aren’t directly used in the production process but are still used.
Here’s how to figure out how much each of these things will cost.
Direct materials: Add up the cost of the materials you bought during a certain time period, then remove the cost of the materials you bought at the end of that time period. This will tell you how much you spent on straight item costs during the time period.
Direct labor: Calculate all direct labor costs for the time used in the production process, including any salary taxes.
Costs of doing business: Add up all the costs of plant and production overhead for the time period. This includes things like rent or mortgage payments, repair and maintenance costs, production salaries, and the cost of plant and equipment that has worn out over time.
If you want to improve industrial output, you need to know how much it costs to make everything.
If manufacturers want to make more money, they need to know how much everything costs.
How are direct and secondary production prices different?
It’s important to know the difference between direct and secondary prices when making something. When it comes to production tasks, most business costs are either “direct” or “indirect.” These can include the costs of raw materials, finished goods, production activities, and customer service, but not administration costs like rent, energy, office supplies, and office depreciation.
The main difference between direct costs and secondary costs is that direct costs can be tied to a specific thing and tend to change. Direct costs include things like direct labor, materials, pay, fees, and tools for making things.
Indirect costs are usually set costs like rent, insurance, quality control costs, depreciation, and the pay of production directors and managers.
Costs of direct products in more detail
Direct materials are the things in a company’s inventory that are used to make a finished product. Direct materials are raw materials, parts, and components that are used directly in the making of produced things.
For example, the cost of coffee beans is a straight raw cost in making coffee. And the yeast, hops, and water used by craft makers would make up their direct material costs.
The first step in lowering these prices is to figure out how much your main products cost.
How to determine direct material costs
To figure out direct material prices, add the direct materials you had at the start of the period to the direct materials you bought during the period and remove the direct materials you had at the end of the period.
Total costs for direct materials = direct materials at the start + direct materials bought - direct materials at the end
For example, a coffee grinder starts the period with $2,500 worth of coffee beans, buys another $4,000 worth, and still has $2,000 worth of beans left at the end of the period.
Total raw material costs = $2,500 + $4,000 – $2,000 = $4,500
Direct material costs are different from set costs because they change depending on how much production is going on. They go up when production goes up and down when production slows down.
The first step in lowering the cost of your material sources is to accurately figure out how much they cost.
How to lower the straight prices of materials
Direct material costs can make up a big chunk of a company’s manufacturing costs. How can you cut the material costs of your inventory stock by a large amount without lowering the quality of your end product? Most makers do this in one of three ways.
1. Using products that cost less
If you want to replace expensive materials with cheaper ones, you should always make sure you aren’t lowering the quality of your product or hurting your business.
2. Keep track of your source costs
Do some study to see if there are other companies that can sell you similar goods for less money. You can easily replace direct materials without lowering the quality by getting them from cheaper sources who sell the same or similar items, or by buying in bulk or buying locally to cut down on shipping costs.
3. Cut down on waste. Overproduction is a major cause of waste in the industry. When you make too much inventory ahead of time, you spend a lot more on actual material costs. You will also have to pay to keep extra goods on hand or risk being stuck with items you can’t sell.
Using online inventory control tools can help improve forecasts, which will cut down on waste from overproduction. Manufacturers can also cut down on direct material waste by changing how they make things to better use raw materials.
Leveraging partners. It’s a good idea to look at your supply chain regularly and look for ways to make it better. Take advantage of deals for buying in bulk or seasonal surpluses on the supply side to avoid price hikes when the season is over.
Make sure you have good ties with your straight suppliers so you can get the things you need when you need them. Good ties in the supply chain reduce the cost of material delays. Service level agreements help keep things clear, help keep product shipping plans on track, and help keep the quality of materials uniform.
Direct wage costs in detail
More than just pay to make up direct labor costs. Costs include perks like PAYE tax, pension payments, holiday pay, sick leave, and workers’ compensation insurance for all employees who work directly on making your goods. This can include people who work on an assembly line or who use machines and tools to make the final product. It can also include the processing team, quality assurance testers, coffee roasters, and brewers who are in charge of providing your finished goods.
How to figure out the cost of direct labor
Before you can figure out how much direct labor costs per unit, you need to know how to figure out how much direct labor costs per hour and how long direct labor takes.
Step 1: Figure out the straight hourly rate of pay
The direct labor hourly rate is the total of all salaries, payroll taxes, and extra benefits for the time period. Divide this amount by the number of hours worked during the pay period. The goal is to add up all of the varying costs, such as staff with different pay rates, to get a single cost per hour of work.
Direct labor hourly rate = (Wages + payroll taxes + fringe benefit costs) / number of hours worked in the pay period
Step 2: Calculate direct work hours
This number shows how many hours of direct labor it takes to make one unit. To figure this out, split the number of units made by the amount of time it took to make them.
Direct labor hours = number of units made / number of hours worked
Step 3: Calculate straight wage cost per unit
Now that we know the direct hourly labor rate and the direct labor hours per unit, we can multiply the direct hourly labor rate and the direct labor hours per unit to figure out the direct labor cost per unit.
Direct labour cost per unit = Direct labour hourly rate x Direct labour hours
Costs of running a business in detail
The extra costs of making something are secondary costs and include:
- Taxes and loss on the equipment used to make the goods
- Depreciation on factory buildings and tools
- Managers, bosses, quality control staff, and repair teams all have to be paid.
- The cost of fixes and care in terms of money
- Costs of utilities, like power and gas, used in the factory
- As a cost that isn’t directly related to making something, industrial waste is hard to put a price on. For example, the rent and insurance on the factory are based on the value of the assets, not on how many pieces are made. These secondary costs have to be split between the number of units made.
How to figure out manufacturing costs
Find the costs of manufacturing overhead and add them up to get the monthly manufacturing overhead. Now you can figure out the manufacturing overhead rate. This is the amount of your monthly income that goes toward paying for manufacturing overheads. To do this, split your monthly production costs by the total amount of money you make each month, then increase that number by 100.
Manufacturing overhead rate = Overhead costs divided by sales times 100
For instance, if your company’s monthly factory overhead costs are $60,000 and its monthly sales are $490,000, the amount of overhead costs is:
Overhead Rate in Manufacturing = $60,000/$490,000 x 100 = 12.24%
So, 12.24% of the business’s monthly income will go toward its extra costs.
A low rate of manufacturing waste means that your manufacturing processes are making good use of resources.
Why it’s important to divide up the prices of running a factory
The balance sheet and income statement of a business are directly affected by overheads, so it’s important to keep track of and assign these costs. Allocating waste helps you figure out where you can be more efficient and save money. It’s important for pricing decisions because if you include secondary costs in pricing, you can cover costs by pricing store stocks well and making more money.
Budgets for manufacturing overhead costs can also be helped by knowing how much manufacturing overhead costs are. If you know your manufacturing extra costs, you can put aside the money you need to pay for them.
COGS vs. total labor cost
The total cost of making something is different from the cost of goods sold (COGS). Total production cost is the cost of all the labor and materials used to make a finished product, while COGS sold is just the cost of finished goods sold during the reporting period. Here is a reminder of how to figure out COGS.
How the total cost of making something affects how productive it is
As a percentage of the difference between the number of inputs and the number of outputs, industrial productivity shows how well inputs like labor and cash are being used to make a certain amount of output.
By figuring out the total manufacturing cost, companies can figure out how much they are paying to make things. Businesses can use this number to track how much of their income goes toward manufacturing prices. Businesses become more efficient when they lower the total cost of making things.
In short, keeping track of the total cost of making can show how well a business is running. If the number is low, it means that resources are being used well. If the number goes up from one financial period to the next, it could mean that resources are not being used as well as they could be.
