If you fail to gather sufficient data on your manufacturing costs, it becomes nearly impossible to know if you’ll hit revenue targets. Also, if you don’t know how to calculate the cost of production, you won’t know whether your production process is running as efficiently as it could be.
Without possessing an accurate idea of profit margins, you won’t be able to make the effective, informed business decisions that are crucial for your future. You also have no way of knowing how to drive down manufacturing costs and expand your profit margins with inefficiencies hidden throughout your processes.
Digital manufacturing solutions can help identify, measure, and control these costs – but it also requires business leaders to have a deep understanding of how to calculate manufacturing costs. Let’s introduce the basics of how to identify/calculate estimated manufacturing costs.
Identifying manufacturing costs
To determine the cost of manufacturing accurately, you should have an idea of all the elements in your total manufacturing costs. This includes direct and indirect costs, so it’s important to identify and fully account for these.
- Materials costs – the cost of all raw materials used to create your finished product. These can be direct, such as prefabricated pipes that will be used to fabricate finished equipment. They can also be indirect, such as the palettes and bands used to safely store the pipes.
- Labor costs – these costs can be be both direct and indirect. Direct examples are the salaries of those workers who are on the production line. Indirect examples include the costs of those who deliver raw goods to your factory.
- Manufacturing overhead – This is a broad category of costs. These costs are neither direct materials or workers. They’re more difficult to accurately project. These include utility costs, tariffs, leased properties and equipment, service costs, etc.
How to accurately calculate the cost of manufacturing
Once you’ve defined all costs within your manufacturing line, you can determine precisely how much it costs to produce a product. In practice, the math is more complicated, but in principal, the equation is as follows:
Manufacturing Cost = (Raw materials + Labor cost + Allocated manufacturing overhead)/number of units
The raw materials for one widget may be $42.50. The direct labor costs may equate to $10 per widget, with many chairs produced per hour. As mentioned, accounting for overhead can be difficult, but it’s critical to accurate calculations. These costs may include rental space, janitors, electricity and internet bills.
Costs are divided by the amount of units produced for the span of time you’re calculating costs for, whether that happens to be hourly/daily/weekly/quarterly/annually/all-time.
By possessing a comprehensive understanding of manufacturing costs, you’re able to predict future margins. As you scale accordingly, remember that some costs will drive your cost per unit down – such as bulk purchases. Similarly, investing in larger machines may increase your maintenance and electricity costs. By knowing past costs, it becomes increasingly easier to predict future revenue and structure your business plans around that.
Digital manufacturing solutions help calculate costs—while often reducing them
Digital manufacturing also integrates technology, information, and innovation by connecting manufacturing assets to information collecting sensors and cloud computing systems. It offers countless benefits, such as the ability to accurately account for costs and make operational improvements to reduce those costs.
With sensored equipment, machinery, and assets, you can gain an increasingly accurate comprehension of power usage, uptime, and planned/unplanned downtime. You can also gain a more granular view into inefficiencies due to the depth of data being collected—making these issues easier to address.
Manufacturing costs are often the principal limitation on revenue, profit, efficiency, and overall growth. Controlling those important costs are limited by ability to measure and control those costs.