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How to Calculate Total Manufacturing Cost for Small to Medium Manufacturers

Total Manufacturing Cost (TMC) is a key metric for all manufacturing businesses. Tracking TMC allows your team determine pricing, profitability, budget, financial health, and more. When it comes to manufacturing KPIs, your best bet is to start here.

In this article, we’ll teach you how to calculate total manufacturing cost and explain the role of the Industrial Internet of Things (IIoT) in tracking and using this metric.

 

Key Components of Total Manufacturing Cost

To calculate total manufacturing cost, first you need to understand what components go into the quation.

Direct Materials

Direct materials include the raw materials used in production. It also include all the materials that are directly incorporated in the finished product.

Direct Labor

Direct labor includes the wages and salaries of all employees directly involved in the manufacturing process. We’re talking about everyone from the staff who operate machinery to those who assemble products to the packing and shipping team.

Manufacturing Overhead

Manufacturing overhead includes all the indirect costs associated with production that are not directly tied to a specific product. In other words, manufacturing overhead includes utilities, maintenance, equipment depreciation, factory supplies, and anything else needed to keep the lights on and machines running.

 

How to Calculate Total Manufacturing Cost

Now that you understand the components of total manufacturing cost, we can get into the actual calculation.

Total Manufacturing Cost Formula

The formula for total manufacturing cost is:

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

Let’s break it down into steps:

  1. First, add the costs of all raw materials used in the production process over a specific period (for example, the last month, quarter, or year).
  2. Next, add up all the wages of all the employees directly involved in manufacturing during that timeframe.
  3. Then, estimate all indirect production costs to estimate manufacturing overhead.
  4. Finally, add up all of the above figures to get the total manufacturing cost.

 

Example of Total Manufacturing Cost Calculation

Let’s say that all raw materials cost $50,000, all direct labor adds up to $30,000, and all indirect costs amount to $20,000.

To calculate total manufacturing cost, you’d add:

  • $50,000 + $30,000 + $20,000 = $100,000 in total manufacturing cost

 

Benefits of Calculating Total Manufacturing Cost

By far the biggest benefit of calculating total manufacturing cost is that your team can gain a better understanding of your company’s financial health and improve it from there.

When you know your TMC, you can easily identify which aspects of your business are the most costly. For example, if your raw materials are dragging your profits down, TMC can help you renegotiate with suppliers to lower costs or find cost-effective alternatives.

Likewise, TMC identifies what materials are over-purchased, making it easy to reduce waste and the cost of excessive storage

Your team can also make pricing decisions that improve profits. Accurate costing helps set competitive and profitable prices. Total manufacturing cost helps your team make sure that product pricing aligns with market norms and earns ample returns.

 

How IIoT Can Streamline Manufacturing Cost Calculation and Management

The Industrial Internet of Things (IIoT) can significantly increase the timeline and accuracy of total manufacturing cost calculation, as well as innumerable other manufacturing metrics. IIoT devices can collect and analyze data in the moment, meaning your team can spend less time, energy, money, and manpower on menial and repetitive tasks, like tracking units or generating reports.

Up-to-the-Minute Data Collection

Any Wi-Fi or Bluetooth-enabled smart device, from sensors to machinery, is part of the Internet of Things. Each device collects data; this can include but is not limited to material usage, labor hours, machine performance, product defects, and more. Your team can configure your IoT system to automatically generate reports and offer actionable insights into areas of improvement.

Save Money with Predictive Maintenance

IoT-enabled devices let you forego scheduled maintenance and switch to predictive maintenance. Predictive maintenance is a maintenance plan that leverages IoT devices to let you know when it’s time for repairs. IoT devices and sense when machinery isn’t operating efficiently and alert your maintenance team. This saves you money by allowing you to repair equipment only when it’s necessary, and reduces downtime by alerting you to problems before machinery fails completely.

Improve Inventory Management

As raw materials are part of the total manufacturing cost equation, you want this metric to be as accurate as possible. IoT platforms like ProphecyIoT automate tracking so you can stick to preset inventory levels, reducing excess and stockouts.

Integrate and Automate

You can be sure that ProphecyIoT will integrate with your enterprise resource planning (ERP) system, CAD system, and other third-party software you use. Seamless integration means that cost tracking and reporting can be automated which reduces manual errors and saves time.

 

Ready to Make Calculating Total Manufacturing Cost a Breeze with IIoT?

In the modern age of industry, we throw pencils and graph paper out the window. It’s time to launch your factory into the 21st century by using digital tools like IIoT. Spend more time innovating, training, and building lasting connections with your customers. Let us handle the grind. Ask our experts about IIoT solutions for all your manufacturing woes.

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