Manufacturing cost

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Manufacturing cost is the sum of costs of all resources consumed in the process of making a product. The manufacturing cost is classified into three categories: direct materials cost, direct labor cost and manufacturing overhead. [1]

Direct materials cost the cost of direct materials which can be easily identified with the unit of production. For example, the cost of glass is a direct materials cost in light bulb manufacturing.

Overhead (business) overhead

In business, overhead or overhead expense refers to an ongoing expense of operating a business. Overheads are the expenditure which cannot be conveniently traced to or identified with any particular cost unit, unlike operating expenses such as raw material and labor. Therefore, overheads cannot be immediately associated with the products or services being offered, thus do not directly generate profits. However, overheads are still vital to business operations as they provide critical support for the business to carry out profit making activities. For example, overhead costs such as the rent for a factory allows workers to manufacture products which can then be sold for a profit. Such expenses are incurred for output generally and not for particular work order; e.g., wages paid to watch and ward staff, heating and lighting expenses of factory, etc. Overheads are also very important cost element along with direct materials and direct labor.

Contents

Direct materials cost

Direct materials are the raw materials that become a part of the finished product. Manufacturing adds value to raw materials by applying a chain of operations to maintain a deliverable product. There are many operations that can be applied to raw materials such as welding, cutting and painting. It is important to differentiate between the direct materials and indirect materials.

Welding fabrication or sculptural process for joining materials

Welding is a fabrication or sculptural process that joins materials, usually metals or thermoplastics, by using high heat to melt the parts together and allowing them to cool causing fusion. Welding is distinct from lower temperature metal-joining techniques such as brazing and soldering, which do not melt the base metal.

Painting Practice of applying paint, pigment, color or other medium to a surface

Painting is the practice of applying paint, pigment, color or other medium to a solid surface. The medium is commonly applied to the base with a brush, but other implements, such as knives, sponges, and airbrushes, can be used. The final work is also called a painting.

Direct labor cost

The direct labour cost is the cost of workers who can be easily identified with the unit of production. Types of labor who are considered to be part of the direct labor cost are the assembly workers on an assembly line.

Assembly line manufacturing process

An assembly line is a manufacturing process in which parts are added as the semi-finished assembly moves from workstation to workstation where the parts are added in sequence until the final assembly is produced. By mechanically moving the parts to the assembly work and moving the semi-finished assembly from work station to work station, a finished product can be assembled faster and with less labor than by having workers carry parts to a stationary piece for assembly.

Manufacturing overhead

Manufacturing overhead is any manufacturing cost that is neither direct materials cost or direct labor cost. Manufacturing overhead includes all charges that provide support to manufacturing.

Manufacturing overhead includes

  1. Indirect labor cost: The indirect labor cost is the cost associated with workers, such as supervisors and material handling team, who are not directly involved in the production.
  2. Indirect materials cost: Indirect materials cost is the cost associated with consumables, such as lubricants, grease, and water, that are not used as raw materials.
  3. Other indirect manufacturing cost: includes machine depreciation, land rent, property insurance, electricity, freight and transportation, or any expenses that keep the factory operating.

Related Research Articles

Cost accounting financial term

Cost accounting is the process of recording, classifying, analyzing, summarizing, and allocating costs associated with a process, and then developing various courses of action to control the costs. Its goal is to advise the management on how to optimize business practices and processes based on cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.

Cost value of money that has been used up to produce something

In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this case, money is the input that is gone in order to acquire the thing. This acquisition cost may be the sum of the cost of production as incurred by the original producer, and further costs of transaction as incurred by the acquirer over and above the price paid to the producer. Usually, the price also includes a mark-up for profit over the cost of production.

Cost of goods sold carrying value of goods sold during a particular period

Cost of goods sold (COGS) is the carrying value of goods sold during a particular period.

Activity-based costing method of measuring economic consumption

Activity-based costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing.

Variable cost costs that change in proportion to the good or service that a business produces

Variable costs are costs that change as the quantity of the good or service that a business produces changes. Variable costs are the sum of marginal costs over all units produced. They can also be considered normal costs. Fixed costs and variable costs make up the two components of total cost. Direct costs are costs that can easily be associated with a particular cost object. However, not all variable costs are direct costs. For example, variable manufacturing overhead costs are variable costs that are indirect costs, not direct costs. Variable costs are sometimes called unit-level costs as they vary with the number of units produced.

Operations management An area of management concerned with designing and controlling the process of production and redesigning business operations

Operations management is an area of management concerned with designing and controlling the process of production and redesigning business operations in the production of goods or services. It involves the responsibility of ensuring that business operations are efficient in terms of using as few resources as needed and effective in terms of meeting customer requirements. Operations management is primarily concerned with planning, organizing and supervising in the contexts of production, manufacturing or the provision of services.

Quality, cost, delivery (QCD), sometimes expanded to QCDMS, is a management approach originally developed to help companies within the British automobile sector. QCD analysis is used to assess different components of the production process. It also provides feedback in the form of facts and figures that help managers make logical decisions. By using the gathered data it is easier for organizations to prioritize their future goals.

Process costing is an accounting methodology that traces and accumulates direct costs, and allocates indirect costs of a manufacturing process. Costs are assigned to products, usually in a large batch, which might include an entire month's production. Eventually, costs have to be allocated to individual units of product. It assigns average costs to each unit, and is the opposite extreme of Job costing which attempts to measure individual costs of production of each unit. Process costing is usually a significant chapter. It is a method of assigning costs to units of production in companies producing large quantities of homogeneous products..

Operating (Operational) costs are the expenses which are related to the operation of a business, or to the operation of a device, component, piece of equipment or facility. They are the cost of resources used by an organization just to maintain its existence.

Indirect costs are costs that are not directly accountable to a cost object. Indirect costs may be either fixed or variable. Indirect costs include administration, personnel and security costs. These are those costs which are not directly related to production. Some indirect costs may be overhead. But some overhead costs can be directly attributed to a project and are direct costs.

Total absorption costing (TAC) is a method of Accounting cost which entails the full cost of manufacturing or providing a service. TAC includes not just the costs of materials and labour, but also of all manufacturing overheads. The cost of each cost center can be direct or indirect. The direct cost can be easily identified with individual cost centers. Whereas indirect cost cannot be easily identified with the cost center. The distribution of overhead among the departments is called apportionment.

Job costing is accounting which tracks the costs and revenues by "job" and enables standardized reporting of profitability by job. For an accounting system to support job costing, it must allow job numbers to be assigned to individual items of expenses and revenues. A job can be defined to be a specific project done for one customer, or a single unit of product manufactured, or a batch of units of the same type that are produced together.

Factory overhead, also called manufacturing overhead or work overhead or American English factory burden, is the total cost involved in operating all production facilities of a manufacturing business that cannot be traced directly to a product. It generally applies to indirect labor and indirect cost. Overhead also includes all costs involved in manufacturing with the exception of the cost of raw materials.

Manufacturing overhead costs are all manufacturing costs that are related to the cost object but cannot be traced to that cost object in an economically feasible way.

Direct labor cost is a part of wage-bill or payroll that can be specifically and consistently assigned to or associated with the manufacture of a product, a particular work order, or provision of a service. Also, we can say it is the cost of the work done by those workers who actually make the product on the production line.

A glossary of terms relating to construction cost estimating.

J. Lee Nicholson American economist

Jerome Lee Nicholson was an American accountant, industrial consultant, author and educator at the New York University and Columbia University, known as pioneer in cost accounting. He is considered in the United States to be the "father of cost accounting."

Cost breakdown analysis

In business economics cost breakdown analysis is a method of cost analysis, which itemizes the cost of a certain product or service into its various components, the so-called cost drivers. The cost breakdown analysis is a popular cost reduction strategy and a viable opportunity for businesses.

"Cost breakdown analysis is the process to build and understand the elements that compose the cost of a product or service. This technique is also referred to as Clean Sheet Costing, Open Book Costing [...] Tear down analysis, Price Breakdown Analysis or Supplier Cost Analysis"

References

  1. Ostwald, P. F., McLaren, T. S. (2004), Cost Analysis and Estimating for Engineering and Management, Prentice Hall, ISBN   978-0-13-142127-1

Further reading

International Standard Book Number Unique numeric book identifier

The International Standard Book Number (ISBN) is a numeric commercial book identifier which is intended to be unique. Publishers purchase ISBNs from an affiliate of the International ISBN Agency.