# How to Calculate Manufacturing Cost: A Step-by-Step Guide

What is the manufacturing costThis is an important expense for manufacturing businesses to ensure profitability and sustainable growth. In this article by Viindoo, we will explore in detail how to calculate manufacturing cost. By following these steps, businesses can make informed decisions and optimize their production processes to reduce costs and maximize profits.

>>>> See more: Manufacturing Software

## 1. What is the production cost?

The production cost is the total cost of producing a product, including all direct and indirect costs related to the entire production process . This cost includes raw material costs, direct labor costs (wages, salaries, and benefits of workers involved in the production process), and indirect overhead production costs (such as rent, utilities, depreciation of machinery, and maintenance costs).

>>>> See more:  What is Production Cost? Meaning and types of Production Cost

The manufacturing cost is very important for businesses to determine the selling price of a product. By understanding the production costs, businesses can identify areas of waste to  reduce costs and increase profits.

>>>> See more:   ERP for Manufacturing companies: the best ones for SMEs

What is the production cost of Manufacturing Cost?

## 2. Manufacturing cost

### 2.1 Formula for Manufacturing Cost

Manufacturing cost = (direct material cost + direct labor cost + overhead cost) / number of units produced

More specific:

• Direct material cost: The cost of all materials used in the production process.

• Direct labor cost: The cost of wages, salaries, and benefits paid to workers directly involved in the production process.

• Overhead cost: The total direct costs incurred in the production process, such as rent for the workshop, machinery, equipment, maintenance, etc.
• Number of units produced: The total number of units produced within a specific period of time.

The important thing to note is that the formula can be modified or adjusted depending on the specific needs of the manufacturer. Additionally, it is important to monitor and  accurately account for production costs  to ensure the accuracy of the data.

How to calculate the total production costs on a product unit

### 2.2 5 Steps to calculate the Manufacturing Cost

• Step 1. Direct materials cost: Summary of materials costs used in the production process.
• ​Step 2. Calculating direct labor costs: Identifying wages, wages and welfare expenses payable to workers directly involved in the production process.
• Step 3. Determining general production costs: including all indirect expenses such as factory rental costs, depreciation expenses, etc., allocated into finished products.
• Step 4. Add all costs: including direct raw materials, direct labor costs and general production costs to determine the total production costs.
• ​Step 5. Determine the Manufacturing Cost: Take the total production costs divided by the number of units produced to determine the cost per unit.

Cách tính giá thành sản phẩm

## 3. Examples of how manufacturing cost

Suppose a company produces 1,000 product units in a month and generates the following expenses:

• Direct material cost: \$ 5,000
• Direct labor cost: \$ 3,000
• General production cost: \$ 2,000

To calculate the Manufacturing Cost, we will add direct materials, direct labor costs and general production costs, then divide by the number of units produced:

• Product price = (\$ 5,000 + \$ 3,000 + \$ 2,000) / 1,000 units
• Product price = \$ 10 per unit

Therefore, Manufacturing Cost is \$ 10. This means that the company costs \$ 10 for each unit produced. By knowing the price of products, the company can set the price including production costs and profit.

Examples of product cost calculation

## 4. Calculate Manufacturing Cost in Viindoo software

### Calculate the cost of direct raw materials in Viindoo software

When executing production commands, VIindoo software allows you to record the actual amount of the material consumed. When completing the production order, the system of calculating the cost of raw materials directly based on the actual number recorded.

Calculate the cost of direct raw materials

### Calculate the cost of direct labor in Viindoo software

Your company calculates the cost of direct labor or the cost according to the output of each stage? Viindoo software allows you to set the corresponding labor cost calculation. When the production order is completed, the system automatically calculates labor costs according to the actual number of hours or the actual output that you have entered the system.

How to calculate Manufacturing Cost

### Calculate the general cost in Viindoo software

There are many common costs that need to be allocated into the finished product to calculate cost costs. Including: Factory expenses, electricity costs, depreciation expenses for equipment for production, shared raw materials ... VIindoo software allows you to gather and allocate costs There are corresponding finished products, and helps you track the costs that have been and have not allocated, avoiding the accounting of duplication.

Calculate the general production cost

### Calculate the total cost and cost of the product unit on Viindoo software

Viindoo software calculates the total cost of direct raw materials, labor costs, general production costs and product costs on the product price report.

Product price report

This article Viinddo has helped readers the answer to the question "What is Manufacturing Cost" and how to calculate the Manufacturing Cost correctly to adapt to market conditions and business needs always change. Prioritize costs and efficiency, businesses can improve profits and ensure long -term success.

## FAQs

Manufacturing cost is an important task that helps businesses determine the cost of producing a product and set appropriate pricing. It helps identify areas to reduce costs, optimize production processes, and improve profitability.

Yes, the formula can be adjusted based on the specific needs of the manufacturer. However, it is important to accurately track and record the accounting costs for the production process to ensure the accuracy of the calculation.

To optimize the cost of the product, businesses should prioritize cost efficiency and effectiveness. This involves continuous monitoring, adjusting to market changes and business demands, while finding ways to reduce costs while maintaining quality.

Product price provides businesses with important insights to make effective decisions. By knowing the costs related to production, businesses can evaluate the profitability of the product, set the appropriate valuation strategy, identify the inefficient areas, optimize resource allocation, Negotiate better terms with suppliers and make wise decisions on product development, process improvement and cost reduction costs.

In addition to direct raw materials, direct labor and common production costs, there may be other factors that businesses should consider based on their specific activities. These factors may include costs related to research, development, marketing, packaging, transportation and processing. It is important that businesses must identify and include all related costs to get a comprehensive view of their total production costs.

Rosie Vu April 6, 2023