How to Calculate the Total Manufacturing Cost in Accounting
The calculation for total manufacturing cost involves a detailed accounting for the costs of materials, labor and overhead. It requires a realistic analysis of a company’s various departments to show their contribution to the manufacturing process and the costs of those contributions.
The manufacturing process goes through three stages: raw materials, work-in-progress and finished products. The calculation of total manufacturing costs, also known as the cost of goods sold, involves the accounting of costs for each phase of production.
The calculation for total manufacturing costs includes the expenses for direct labor, raw materials and manufacturing overhead.
The formula to Calculate Total Manufacturing Cost
The formula for calculating total manufacturing cost is:
Total manufacturing cost = raw materials + direct labor + manufacturing overhead
Consider an example of calculating manufacturing costs for Flying Pigs Corporation and the company’s costs to make roller skates.
Accounting for Raw Materials
Flying Pigs uses steel, wheels and leather straps to make its roller skates. The company began production with the following inventory:
- Steel: $9,500
- Wheels: $6,800
- Leather straps: $2,700
- Total: $19,000
During the production period, Flying Pigs purchased an additional $23,200 in raw materials. At the end of the production cycle, the company had a final raw materials inventory of $17,600.
The formula to calculate the cost of raw materials used is:
Cost of raw materials = Beginning inventory + Purchases added – Ending inventory
Cost of materials = $19,000 + $23,200 – $17,600 = $24,600
Direct Labor and Manufacturing Overhead
The next stage of manufacturing is the production or work-in-progress. At this point, direct labor is used to make the roller skates, and the cost of manufacturing overhead is added.
Manufacturing overhead includes those expenses that are not directly involved in the direct costs of production. They are indirect costs that are necessary to support the manufacturing process and must be allocated to each unit of production. Typical manufacturing overhead costs are:
- Electricity and other utilities required to run equipment in the factory
- Depreciation of manufacturing equipment
- Factory supplies for the manufacturing processes
- Product quality inspectors
- Maintenance workers and repair parts for the equipment
- Sanitation personnel
- Bookkeepers for the manufacturing processes
- Managers for the factory
- People who set up the equipment for manufacturing
- Material handlers, such as forklift operators
- Property taxes and insurance on the facilities and equipment
Note that for the indirect labor, the company incurs additional expenses for Social Security, Medicare taxes, health insurance, vacation pay, holiday pay, unemployment compensation, workers’ compensation and retirement plans.
Flying Pigs paid its workers $38,300 in labor to make the skates, and its total manufacturing overhead expense was $17,500.
Total Manufacturing Costs
Therefore, the total manufacturing costs for the company to make its skates is:
- Raw Materials $24,600
- Labor $38,300
- Manufacturing Overhead $17,500
- Total Manufacturing Costs $80,400
The calculation for total manufacturing costs does not consider the expenses that Flying Pigs incurs for general and administrative costs. These expenses include selling and marketing costs, office rent, administrative wages, sales commissions, accounting and legal fees, office equipment, utilities and executive salaries.
General and administrative expenses could be included in manufacturing costs by allocating these expenses based on a manufacturing metric such as labor hours or machine hours consumed in making the products.