Manufacturing cost is the sum of all collateral costs sustained during production. It is later added to the cost of the finished product with the direct raw material and labor expenses. Usually, manufacturing costs include inventory depreciation, salary and wages of laborers, and used electricity throughout the procedure.
According to GAAP (generally accepted accounting principles), manufacturing costs must be included in the final products and the price of the goods income statement.
Regardless of the size of your business, considering manufacturing cost is of utmost importance. In smaller businesses having lower cash reserves, constant monitoring of the production expenses brings profitability.
If the price per unit of your major commodities can be reduced, your profits will rise. If your profitability increases, you might be obliged to break off certain product lines or reduce production until the costs stabilize. Learning how to determine the cost per unit will be helpful for wise decision-making and bringing prosperity.
Types of Manufacturing Cost
Total manufacturing cost refers to the total expenditures, including finished product resources. Determining total manufacturing costs requires a righteous analysis of your company’s diversified operations to identify their contribution to crafting procedures and associated costs.
The three significant components of manufacturing costs include direct materials, labor, and manufacturing overhead. Let’s evaluate each one of them briefly.
Direct materials:Direct material includes inventory and equipment which are used in the production. Revise the cost of raw materials purchased for a particular project, add this amount to the cost of beginning inventory, and then deduct the cost of ending inventory. This activity will grant you the direct material costs sustained during the procedure.
Direct labor:
Direct labor expense contains more than just wages and refers to the workers on the front line. Calculate the salaries and wages of laborers who worked for a particular project in your company, including any payroll taxes, to determine direct labor.
Manufacturing overhead:
Manufacturing overhead is quite challenging to assign to every single produced unit. Consolidate the cost of all the inventories and equipment utilized during the process, including the rent, mortgages, repair and maintenance expenditure, and machinery depreciation.
Calculating Manufacturing Cost Per Unit
To calculate the total manufacturing cost, you must primarily determine the total production cost of all the finished products. Secondly, divide the estimated value by the total number of items. After this process, you’ll obtain the total manufacturing cost of the products. Acknowledging the total manufacturing cost is mandatory, and you can also compare it with the gross revenue while anticipating profitability.
Lastly, you’ll anticipate the total cost of manufacturing overhead, which usually considers indirect labor, raw materials, taxes, insurance, and depreciation of assets. Total manufacturing cost is a pivotal figure when analyzing expenditures during the production process.
To calculate the total manufacturing cost per unit, you’ll have to divide the estimated costs by the total number of units created during the production. For instance, if your company generated 2 million units in 2018 and sustained total production costs of $10 million in the same year, the total manufacturing per unit will be $5.
However, you must set a terminable unit to calculate the total manufacturing cost. Systematically, it is a fiscal quarter. The formula utilized for determining the price is,
Per unit cost= Total production cost/ total number of items produced.
Utilizing the formula provides an easy acknowledgment, and you can tag your product, also known as the retail price. Comparing the total manufacturing cost and gross revenue lets you examine your company’s profitability effortlessly.
Significance of Total Manufacturing Cost Per Unit
The calculation of total manufacturing cost per unit includes evaluated accounting rules for raw materials, labor, and manufacturing overhead costs. It requires a practical analysis of a company’s departments to represent their contributions to the production procedures and costs.
Reviewing the company’s financial records, the business owner can analyze the production cost or COGM as a proportion of sales generated during an accounting period. With this determination, the management can overlook cost-cutting measures to enhance profitability.
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