What is Manufacturing Cost?
Manufacturing cost is the cumulative total of resources that are directly used in the process of making various goods and products. In some formulas, the cost of manufacturing includes the expenses associated with the purchase of raw materials. At other times, the cost for raw materials is excluded. In general, factors such as labor, equipment operation, and the general overhead for maintaining the production facility are common components that are included in determining the overall manufacturing costs.
Since the goal of most production companies is to earn a profit by selling goods manufactured and sold by the company, paying close attention to the overall manufacturing cost is extremely important. By monitoring the various elements that make up the cost for manufacturing, it is possible to ensure that available resources are being used to best advantage, and thus earning the highest amount of return on each unit that is sold at the current price.
When this monitoring activity indicates that the manufacturing cost is increasing, the company will often begin to investigate the status of each relevant factor and determine where the increase is originating. The increase may be due to wage increases among the labor force, a change in the pricing for raw materials, or the purchase of new equipment that is used directly in the manufacturing process. Knowing the origin of the increase can help the business decide if the increase is a temporary one that will be offset by higher production in a short period of time, or if some action must be taken to correct the reason for the increase.
In some cases, this close monitoring of the various costs of manufacturing can lead to ideas on how to utilize available resources to better advantage. For example, ways to minimize the waste of raw materials may become apparent, allowing the company to produce more units from the same amount of materials. Modifying the steps used in the creation of each product may also speed up production, making it possible to produce more finished goods in a shorter period of time.
The process for calculating manufacturing cost is not universal. Depending on the nation where the company is based and the industry that the business is associated with, there are different definitions of what constitutes direct expenses. This can lead to some differences as to what types of labor are considered direct to the process of determining manufacturing cost. In like manner, some businesses consider raw materials to be a direct expense, while others classify them as an indirect expense.
@angelBraids - You could well be right there. I know a few people who have their own business and they have all struggled with costing. Based on what I've learned from them it seems there is sometimes confusion about how to classify expenses.
It's very important that someone records the direct manufacturing costs, but that they aren't confused with marketing, wear and tear, or any other indirect costs. Many countries allow certain parts of business spending to be set against tax owing. Making an inaccurate claim by mistake isn't something you really want to do!
@topher - I can see that the labor may be cheaper if you shift production to certain overseas countries. But this direct cost saving would have to be weighed against indirect expenses. When costing a job you would also need to think about import taxes, freight charges and insurance.
I think the reason a lot of new small business owners go bust is down to poor manufacturing cost accounting. No matter which way you look at it, failing to include all expenses involved in making something is going to reduce your profit margin.
A good way to get a manufacturing cost reduction is to get a lot of the manufacturing done overseas in places like China and India.
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