Understanding Total Manufacturing Cost

Total manufacturing cost is a crucial metric for engineers involved in product development and production. Understanding this concept is essential for making informed decisions throughout the engineering process, from design to production. Accurately assessing these costs helps optimize resource allocation and improve overall product profitability.

What is total manufacturing cost?

Total manufacturing cost comprises all expenses associated with producing a product, including direct materials, direct labor, and manufacturing overhead. For engineers, understanding this metric is vital for grasping the financial implications of design choices and production processes.

Comparing total manufacturing cost, cost of goods manufactured, and cost of goods sold

These financial terms, though related, serve different roles in product accounting and inventory management. Understanding these distinctions is essential for accurate financial forecasting and strategic business planning. It is also important to know the difference for proper communications within the team.

Total manufacturing cost

Total manufacturing cost encompasses all costs directly tied to the production of goods, including raw materials, direct labor, and overhead expenses. This metric provides a comprehensive view of the production expenses incurred by a company.

Cost of goods manufactured

Cost of goods manufactured (COGM) extends beyond total manufacturing costs to include changes in work-in-process inventory. This figure reflects the total cost of goods actually completed during the period, whether or not they were sold.

Costs of goods sold

Cost of goods sold (COGS) pertains to the cost of inventory that was actually sold during a specific period, influenced by both the COGM and the changes in finished goods inventory. It directly affects profit margins and is crucial for financial reporting and tax calculations.

The total manufacturing cost formula

The basic formula for total manufacturing cost is:

Total Manufacturing Cost = Direct Materials + Direct Labor + Manufacturing Overhead

What exactly comprises these categories?

Direct materials costs

• Raw materials used directly in product manufacturing
• Components or parts that become part of the final product
• Packaging materials for the finished product

Direct labor costs

• Wages and benefits for workers directly involved in production
• Includes assembly line workers, machine operators, and quality control personnel

Manufacturing overhead costs

• Indirect costs associated with production, such as:
• Factory rent or depreciation
• Utilities for the production facility
• Indirect labor (e.g., supervisors, maintenance staff)
• Equipment maintenance and repairs
• Factory supplies not directly used in the product

Why you should be calculating your total manufacturing cost

This may sound like a lot of bean counting but, for engineers, understanding total manufacturing cost is important in helping them build products that meet agreed-upon cost and performance targets.

Informing design decisions

Understanding the total manufacturing cost helps engineers optimize designs for cost-efficiency without compromising on quality.

Identifying cost-saving opportunities

By analyzing these costs, engineers can pinpoint where they can reduce expenses, leading to more economically produced goods.

Evaluating production efficiency

This calculation aids in assessing the effectiveness of the production processes and identifying areas for improvement.

Supporting pricing strategies

Accurate cost calculation ensures competitive pricing by factoring in all production expenses.

Facilitating communication with other departments

A clear understanding of manufacturing costs enhances the ability to communicate financial and operational needs across different company divisions.

How Bommer can help

The key to managing accurate and up-to-date information is a reliable BOM software or system. Bommer streamlines your BOM workflow by integrating data storage directly within your design tools, providing easy and intuitive methods to maintain a single source of truth. It simplifies the export of BOMs from CAD, eliminating the tedious task of manual data entry, and provides tools to build calculations directly in your BOM or export spreadsheet. Bommer makes makes it easy to manage the individual cost components of your total manufacturing cost, which lets you focus on more on high-value tasks while still keeping your eye on the target.