Total Manufacturing Cost: How to Calculate It Correctly

Cost Engineering · Reading time: about 9 minutes

Total manufacturing cost is everything it costs to run production in a period: the direct materials used, the direct labour spent and the manufacturing overhead. Add those three and you have the figure. Divide by units to get the unit cost.

The formula is simple. Most errors come from what goes into each of the three inputs. This guide gives the formula, explains each input, walks through a full worked example (including cost of goods manufactured) and lists the mistakes that distort the answer.

Total Manufacturing Cost Defined

Total manufacturing cost (TMC) is the sum of all costs incurred in the factory to produce goods in a given period, such as a month or a year. It includes only manufacturing costs. Selling, marketing and head-office administration (SG&A) are excluded.

It’s used to:

• Price products and check margins
• Value inventory and report cost of goods sold
• Compare plants, lines or periods
• Build the baseline for a should-cost model

Our guide to direct vs indirect manufacturing costs explains how each cost is classified. This post focuses on the calculation. The classification here follows common cost-accounting practice; terminology varies slightly between US GAAP, IFRS and local standards.

Formula

Two related measures appear in the same calculation:

TMC measures the cost put into production during the period. COGM adjusts it for work-in-progress (WIP), so it measures the cost of the goods finished in the period. Both are covered in the worked example.

Direct Materials

Direct materials are the raw materials and purchased components that become part of the product and can be traced to it. The figure you need is materials used, not materials bought.

Include freight-in and import duties on the materials, because they are part of getting the material to the factory. Leave out indirect materials such as coolant, cleaning supplies and small consumables, which belong in overhead.

Direct Labour

Direct labour is the cost of the people who work directly on the product, for the time they spend on it.

The loaded rate includes wages plus employer-paid benefits and payroll taxes. Supervisors, maintenance staff and inspectors are indirect labour, so they go into overhead.

Where machines do most of the work, labour hours may be a small part of the cost, and machine time becomes the better basis for costing. See how to calculate machine hour rate.

Manufacturing Overhead

Manufacturing overhead covers every factory cost that isn’t direct material or direct labour:

• Indirect materials: coolant, lubricants, cleaning supplies, small tools
• Indirect labour: supervisors, maintenance, quality, material handlers
• Facility and equipment: rent or building depreciation, machine depreciation, insurance, utilities, factory software

Overhead can’t be traced to one product, so it’s allocated, usually with a rate based on direct labour hours or machine hours:

Worked Example

A small factory, one month (illustrative figures):

Direct materials

• Beginning raw materials inventory: $20,000
• Purchases (including freight-in): $85,000
• Ending raw materials inventory: $15,000

Direct labour

• 3,000 direct labour hours at $24 per hour (fully loaded)

Manufacturing overhead

• Indirect materials: $6,000
• Indirect labour: $18,000
• Factory rent: $9,000
• Utilities: $4,500
• Machine depreciation: $10,000
• Maintenance: $3,500

Work-in-progress and output

• Beginning WIP: $12,000
• Ending WIP: $17,000
• Units completed: 10,400

1. Direct materials used: $20,000 + $85,000 − $15,000 = $90,000
2. Direct labour: 3,000 × $24 = $72,000
3. Manufacturing overhead: $6,000 + $18,000 + $9,000 + $4,500 + $10,000 + $3,500 = $51,000
4. Total manufacturing cost: $90,000 + $72,000 + $51,000 = $213,000
5. Cost of goods manufactured: $213,000 + $12,000 (beginning WIP) − $17,000 (ending WIP) = $208,000

Summary:

Other figures from the same data:

• Prime cost: $90,000 + $72,000 = $162,000
• Conversion cost: $72,000 + $51,000 = $123,000
• Overhead rate: $51,000 ÷ 3,000 hours = $17.00 per direct labour hour, which equals 70.8 percent of direct labour cost

The example treats WIP simply, as one dollar figure. If you use process costing, the WIP adjustment is done in equivalent units instead.

Per-Unit Cost

$208,000 ÷ 10,400 = $20.00 per unit

Use COGM and not TMC here. Dividing TMC ($213,000) by units gives $20.48, which overstates the cost of finished units because it includes costs still sitting in WIP.

The same method at part level

Costing a single order works the same way. A batch of 200 machined brackets uses 50 direct labour hours, with $1,600 of material and the $17.00 overhead rate from above:

This is the bridge between factory-level accounting and part costing. When you estimate a part before it exists, you build the same lines from process times and rates, which is the approach covered in our guide to bottom-up should-cost estimating. Which inputs have the largest effect on that number is covered in manufacturing cost drivers.

Mistakes to Avoid

• Using purchases instead of materials used. Buying stock isn’t the same as consuming it. Adjust for inventory movement.
• Counting a cost twice. If machine depreciation is already in your machine hour rate, don’t also add it to the overhead pool.
• Including SG&A. Sales salaries and head-office costs are not manufacturing costs. Including them overstates product cost.
• Misclassifying indirect labour as direct. Supervisors and maintenance staff belong in overhead.
• Ignoring WIP. If you skip the WIP adjustment, the unit cost reflects the wrong goods.
• Dividing by units started instead of units completed (or the wrong equivalent units where WIP is large).
• Using budgeted overhead rates without checking them. If actual overhead or hours differ a lot, your unit cost drifts. Review rates and variances regularly.
• Forgetting freight-in, duties and scrap. These belong in the material cost.
• Ignoring idle capacity. Low volume spreads fixed overhead over fewer units, so unit cost rises. Know which part of the rise is genuine cost and which is underused capacity.

For how overhead behaves when volumes change, see direct vs indirect manufacturing costs. To apply these calculations to supplier quotes, explore our should-cost analysis platform.

FAQ

What is total manufacturing cost?

It is the sum of the direct materials used, direct labour and manufacturing overhead incurred to produce goods in a period. It excludes selling and administrative costs.

What is the formula for total manufacturing cost?

Total manufacturing cost = direct materials used + direct labour + manufacturing overhead.

How do you calculate total manufacturing cost?

Work out direct materials used (beginning inventory + purchases − ending inventory), add direct labour (hours × loaded rate), and add manufacturing overhead (indirect materials, indirect labour, rent, utilities, depreciation, maintenance and similar costs).

What is the difference between total manufacturing cost and cost of goods manufactured?

Total manufacturing cost is the cost put into production in a period. Cost of goods manufactured adjusts it for work-in-progress: add beginning WIP and subtract ending WIP. It represents the cost of goods actually completed.

How do you calculate unit manufacturing cost?

Divide cost of goods manufactured by the number of units completed. In the example above, $208,000 ÷ 10,400 units = $20.00 per unit.

Does total manufacturing cost include shipping and marketing?

Freight-in on raw materials is included, because it is part of acquiring materials. Shipping to customers and marketing are selling costs and are excluded.

Related reading: Direct vs indirect manufacturing costs · Manufacturing cost drivers · Machine hour rate · Should-cost modeling methodology