Total Manufacturing Cost. Download Table

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Table of Contents

• What is Total Manufacturing Cost?
• What are the Components of Total Manufacturing Cost?
• How to Calculate Direct Materials Cost?
• How to Calculate Direct Labor Cost?
• How to Calculate Manufacturing Overhead Cost?

What is Total Manufacturing Cost?

Total Manufacturing Cost refers to the total expense incurred by a company in the production of a product, including direct costs such as raw materials and labor, as well as indirect costs such as factory overheads. It is important for a company to calculate total manufacturing cost accurately in order to determine the profitability of its products and make informed decisions about pricing and cost reduction measures.

What are the Components of Total Manufacturing Cost?

The components of total manufacturing cost include:

• Direct Materials Cost: The cost of raw materials that are directly used in the production of a product.
• Direct Labor Cost: The cost of wages and benefits paid to workers who are directly involved in the manufacturing process.
• Manufacturing Overhead Cost: The cost of all other expenses incurred in the production process that cannot be directly attributed to a specific product, such as rent, utilities, and depreciation.

How to Calculate Direct Materials Cost?

The calculation of direct materials cost is relatively simple. It involves adding up the cost of all the raw materials that are used to manufacture a product. The formula for calculating direct materials cost is:

Direct Materials Cost = Beginning Raw Materials Inventory + Raw Materials Purchased During the Period - Ending Raw Materials Inventory

For example, if a company had $10,000 worth of raw materials at the beginning of the period, purchased $20,000 worth of raw materials during the period, and had $5,000 worth of raw materials left at the end of the period, its direct materials cost for the period would be:

Direct Materials Cost = $10,000 + $20,000 - $5,000 = $25,000

How to Calculate Direct Labor Cost?

Calculating direct labor cost can be a bit more complex than calculating direct materials cost, as it involves determining the total amount of labor hours worked and multiplying that by the hourly wage rate. The formula for calculating direct labor cost is:

Direct Labor Cost = Total Labor Hours Worked x Hourly Wage Rate

For example, if a company had 10 employees working on a product for a total of 400 hours, and the hourly wage rate was $15, the direct labor cost for the product would be:

Direct Labor Cost = 400 x $15 = $6,000

How to Calculate Manufacturing Overhead Cost?

Calculating manufacturing overhead cost is also a bit more complex, as it involves determining all the indirect costs associated with the production process and allocating them to each product based on a predetermined overhead rate. The formula for calculating manufacturing overhead cost is:

Manufacturing Overhead Cost = Total Indirect Costs / Total Direct Labor Hours

For example, if a company had $50,000 in total indirect costs for the period and 2,000 total direct labor hours, its overhead rate would be:

Overhead Rate = $50,000 / 2,000 = $25 per direct labor hour

If a particular product required 100 direct labor hours, its allocated manufacturing overhead cost would be:

Manufacturing Overhead Cost = $25 x 100 = $2,500

Conclusion

Calculating total manufacturing cost accurately is essential for companies to make informed decisions about pricing, cost reduction measures, and overall profitability. By understanding the components of total manufacturing cost and the formulas for calculating direct materials, direct labor, and manufacturing overhead costs, companies can gain valuable insights into their production processes and make informed decisions about their operations.