Total manufacturing cost [Formula | Variance | Cost Per Unit]

How do you calculate total manufacturing cost?

Basic concepts Cost is the monetary value of the price of manufacturing and selling products. This generalized indicator reflects all aspects of the production and economic activities of the enterprise and characterizes the efficiency of its work. The factory price is an integral part of the total manufacturing cost of the goods.

Determine the total manufacturing cost with this simple formula :

Total manufacturing cost = Direct materials + Direct labour + Manufacturing overheads

What does the cost of production include?

The factory price of a product consists of the following price:

• Manufacturing Raw materials and materials that directly from which products are manufactured;
• Deductions from wages - contributions to off-budget funds that are transferred at the expense of the employer;
• Fuel and energy resources - fuels and lubricants, heating, electricity, water supply and wastewater disposal;
• Depreciation deductions - monthly monetary compensation for the depreciation of the main equipment used for manufacturing;
• General total manufacturing costs - spare parts for the repair of equipment, commissioning works when new machines are launched, rental of cars, warehouse or manufacturing facilities;
• General accounting expenses - not directly related to manufacturing, for example, purchasing accounting software, paying for an auditor, renting office space;
• Commercial expenses - associated with the price of goods sold, for example, advertising, packaging, certification of goods. Due to the technological features of the release of various goods, when calculating the price, some types of price may not be taken into account. For example, if a company leases fixed assets, then it will not have depreciation charges.

Recommendations for reducing total manufacturing cost

To get the maximum profit, the enterprise should reduce the total manufacturing cost of its products. As already mentioned, the factors affecting the factory price are divided into external and internal.

The enterprise cannot influence external factors. Therefore, it is necessary to analyze the possibilities of reducing price in the enterprise itself. This can be achieved in several ways.

What is included in total manufacturing cost?

Total cost calculation

The cost price of a product is the sum of the price of productions and sale (marketing) of this product. It consists of price related to the use in the manufacturing process, plant and equipment, raw materials, fuel and energy workers and other costs of manufacturing and sale for planning, calculate the total manufacturing cost of manufacturing in industrial enterprises.

We will tell you how to calculate the total cost of direct labor and manufacturing, what is included in the price of productions and labor cost, and also briefly tell you how to calculate cost of goods sold. Note that we will focus exclusively on accounting.

Calculation of the cost of production

Calculation of productions price is the calculation of prices in value (monetary) form attributable to the fabrication of a unit or group.

The calculation of the price of manufacturing at the enterprise can be carried out in accordance with the above Basic Provisions or in accordance with the sectoral methodological provisions for planning, formation and accounting of price for the manufacturing and sale of products.

But in any case, each organization determines the methodology for calculating the cost price independently, based on the technological features of the manufacture of products, the equipment used and, which is important, based on management goals.

How to calculate the cost of production?

This, first of all, depends on what kind of manufacturing process needs to be calculated:

• Planned (standard) price. It is calculated on the basis of the norms for the consumption of material and labor resources established in the organization (that is, it is determined in advance how many raw materials and, semi-finished products, labor cost, indirect materials cost etc. should go to a unit of production);
• Cost direct. This is the sum of actual manufacturing price determined at the end of the reporting period. It may differ from the planned price. But in any case, the planned and actual price should be determined according to the same methodology and according to the same items. This will allow for a comparative analysis of price indicators;
• Estimated price. This is a kind of standard price. It is determined by one-time orders and products.

In addition, the product price accounting formula depends on whether you are counting total price.

The manufacturing price (formula) is the sum of the manufacturing costs of a particular workshop directly involved in the manufacture of products, general enterprise expenses (administrative and managerial and general enterprise costs) and auxiliary production costs.

The total manufacturing costs is the sum of the manufacturing cost and the price of selling the product .

How much is the total manufacturing cost per unit?

The unit price of a product consists of the following price (depending on the type of product produced, production characteristics and other individual factors):

• Raw materials cost & labor and manufacturing overhead
• Price of auxiliary materials for technological purposes;
• Fuel and energy price; raw materials used
• Expenses for preparation and development of manufacturing for small business
• Equipment maintenance and operation costs; beginning inventory
• Salary and insurance premiums for it;
• General startup (plant-wide) expenses;
• General manufacturing (shop) price;
• Overall management expenses.

True, there is such a feature. Management and implementation price (selling expenses), organization of its choice:

• or includes the price of each type of product, distributing it according to the selected indicator (for example, in proportion to the amount of direct price incurred);

• or monthly write off to reduce the financial result, without distributing it to the price (the so-called "direct costing" system).

The organization fixes the selected option for calculating the price of production in the accounting policy.

By the way, sometimes accountants ask how to calculate the price of manufacturing online using a calculator. So, in this case, there cannot be a universal calculator, since the price depends on many factors, in particular, technology courses and inventory management.

How to calculate the cost of goods?

The organization independently decides which types of price factors to include in the manufacturing inventory, and determines the methodology for calculating the cost. As a rule, the cost of goods sold includes:

• Amounts paid to the seller under the contract;
• Non-refundable taxes paid in connection with the purchase of goods;
• Expenses for the completion of the goods to the state in which the goods are suitable for sale;
• Interest on loans provided for the purchase of goods;
• Customs duties;
• Remuneration of the intermediary organization through which the goods were purchased;
• Other inventory cost formula directly connected to goods buying.
• Transportation and procurement price (for the delivery of goods to the warehouse of the organization) can:

- included in the cost of direct materials

- Immediately written off to the financial statements.

General business and other similar expenses are not included in the cost of goods if they are not directly related to the purchase of goods.

What is the total manufacturing overhead costs?

Basic and manufacturing overhead costs (labor and overhead)

Based on the accounting economic role in the manufacturing process, prices is divided into basic and overhead.

The main price is those directly related to the cost of direct materials beginning(technological) process of manufacturing products, performing works or rendering services, and ending inventory. In other words, manufacturing overhead cost include expended resources, the consumption of which is associated with the output of products (works, services) - for example, materials, wages of workers, depreciation of fixed assets, etc.

manufacturing overhead are recognized price that are incurred in connection with the organization, maintenance and management.

For example, general manufacturing and general business expenses - the maintenance of the management apparatus, depreciation and repair of fixed assets for shop or general plant purposes, direct materials, taxes, expenses for the selection and development of personnel, etc.

Direct and indirect manufacturing overhead cost

Classification of price by the way they are included in the cost of products, works and services into direct and indirect. It is this classification that determines the procedure for reflecting price on certain synthetic accounts, sub-accounts, and analytical accounts.

Direct costs are those that can be directly, directly, and economically attributed to a specific type of products or to a specific batch of products (work performed or services provided). In practice, this category includes:

1. Direct price of materials (that is, raw materials and basic materials used in the manufacture of products);
2. Direct labor cost (remuneration of personnel employed in the manufacturing of specific types of products).

However, if an enterprise produces only one type of finished product or provides only one type of service, all manufacturing price will automatically be direct.

Indirect costs are recognized as price that cannot be directly, directly and economically attributed to specific products, so they should first be collected separately (on a separate account), and then - at the end of the month - distributed by types of products (works performed, services provided) based on the selected techniques.

Indirect production costs include auxiliary materials and components, labor costs for auxiliary workers, adjusters, repairmen, vacation pay, overtime pay, downtime price, maintenance price of workshop equipment and buildings, property insurance, etc.

Product direct materials costs, period costs

This classification is very important, since only it is used in Western countries, where many of the methods of management accounting used today were developed, and such a classification is usually mandatory in both finished products management and financial accounting.

Products price are considered only those price that must be included in inventory planning and accounting, for which it must be accounted for in the shops and in the warehouse, and if it remains unrealized, reflected in the balance sheet.

These are "stock-intensive" price directly related to the manufacture of products and, therefore, subject to accounting as part of its price.

In practice, this direct labor costs category includes:

• Raw materials and basic materials;
• Remuneration of personnel employed in the manufacturing of specific types of products;
• General manufacturing price (overhead production cost)

including auxiliary materials and components; indirect labor costs (salaries of auxiliary workers and repairmen, overtime pay, vacation pay, etc.); other expenses - maintenance of workshop buildings, depreciation, and insurance of workshop property, etc.

Period costs (recurring price) include those types of price, the size of which does not depend on the volume of total manufacturing, but rather on the length of the period. In practice, they are represented by two articles:

• Commercial expenses – expenditures relevant to sale and supply of products (goods, works, services);
• General and administration management accounting - expenses for managing the enterprise as a whole

Such prices is not included in the price of finished goods, because they are not directly related to the manufacturing process. Therefore, they are always attributed to the period during which they were produced and are never attributed to residuals of finished goods.

Variable and fixed costs accounting

Depending on how the price responds to changes in the organization's business activity - to an increase or decrease in production volumes - they can be conditionally divided into variables and fixed ones.

Variable costs increase or decrease in proportion to the change in manufacturing, that is, they depend on the business activity of the organization. They, in turn, can be divided into:

• Production variable costs: direct materials, direct labor, as well as part of the general manufacturing price, such as the cost of auxiliary materials;
• Non-production variable costs (the price of packaging and transportation of finished products, commission to intermediaries for the sale of goods, etc.).

Fixed price in the total amount does not depend on the volume of productions and remains unchanged during the reporting period. Examples of fixed prices are rent, depreciation of fixed assets, advertising, security, etc.

The point is that the total fixed price usually do not depend on how much and what kind of products the company will release in a given month. For example, if a company rented premises for a productions workshop or inventory outlet, it will have to pay the agreed rent every month, even if nothing is produced or sold in one of the months.

But, on the other hand, if this premises will be open around the clock, instead of eight hours a day, the rent will not be higher. The same is the case when advertising is given - of course, the goal is to sell more products, but the amount of advertising price (for example, the cost of advertising agency services, the cost of advertising on television or in a newspaper, etc.) is directly from the amount products sold in the current month will not be affected.

But variable price clearly responds to changes in productions and sales. They did not produce products -they did not have to buy materials, pay wages to workers, etc. The intermediary did not sell the goods - there is no need to pay him a commission (if it is set depending on the number of goods sold, as is usually done). And vice versa, if the volume of production increases, it is necessary to buy more raw materials, attract more workers, etc.

Of course, in practice, especially in the long term, all prices tend to increase (for example, rent may increase, the amount of depreciation may increase due to the acquisition of additional fixed assets, etc.). Therefore, sometimes costs are called conditionally variable and conditionally fixed.

But the growth of fixed price, as a rule, occurs abruptly (stepwise), that is, after an increase in the number of costs, they remain at the achieved level for some time - and the reason for their growth is either an increase in prices, tariffs, etc., or a change in productions volumes and sales in excess of the "relevant level", leading to an increase or decrease in productions space and equipment.

Conclusion

The prime cost is the main economic indicator of the enterprise. The amount of costs is not constant, therefore it is necessary to periodically recalculate the factory price.

Due to the timely analysis of the cost price changes, the company can avoid losses, bankruptcy or reduce the cost of goods release, thereby increasing its own profit.

The low-cost price of a company that is traded on the stock market is an excellent competitive advantage that can increase the return on sales and investment attractiveness.