Total manufacturing cost is the amount that a company spends on producing goods in a specific period. It includes direct labor, direct materials, and manufacturing overheads.
What does total manufacturing cost mean?
Calculating the total manufacturing cost allows a firm to determine the sum that it is spending to make the goods that it produces.
Total manufacturing cost = amount spent on raw materials + amount spent on direct labor + manufacturing overhead
A company can use this figure to monitor the percentage of its revenues that go towards manufacturing costs. Analysts also evaluate this sum when studying a company’s financial statements.
If the manufacturing cost as a proportion of total sales increases between accounting periods, it may mean that the management of the company needs to analyze its cost structure. This will help it to initiate cost-cutting measures and improve its profitability.
The manufacturing cost incurred in an accounting period may need to be adjusted to arrive at the total manufacturing cost. The amount spent on producing goods that remain unsold at the end of the period would need to be reduced from the total expenditure on materials, labor, and overheads. This will allow the total manufacturing cost to be compared to the sales figure.
Example of total manufacturing cost
Giles & Co is a manufacturer of gardening tools. In the first quarter of 2018, it incurs the following costs to produce its range of cultivators, tillers, loppers, and hoes:
⇨ Materials used in the manufacturing process: $320,000
⇨ Labor: $95,000
⇨ Manufacturing overhead: $75,000
The total manufacturing cost that the company incurs in the January to March 2018 accounting period is $490,000.
Total manufacturing costs form a significant portion of a manufacturing company’s expenses. It is essential to monitor this figure as controlling these costs can help to improve profitability.