What is the relevance of costing to manufacturing companies and non

See Also:
Activity-based Costing (ABC) vs Traditional Costing
Absorption vs Variable Costing
Average Cost
Standard Cost
Cost of Goods Sold (COGS)
Absorption Cost Accounting

Manufacturing Cost Definition

Defined as the labor, material, and overhead costs in producing a finished product, manufacturing costs are the most significant factor in any manufacturing business.

Manufacturing Cost Explanation

Many explain manufacturing cost as the cost to bring a product from raw material to the point where it can be sold.

Manufacturing Cost Estimation

Manufacturing cost estimation represents the complete expenditure incurred when manufacturing an end product. While they do not include all of the indirect costs involved in producing a product, they do represent a comprehensive list of direct expenses involved in creating an item to be sold.

Manufacturing Cost Per Unit

Manufacturing cost per unit is important to monitor. These, in many ways, represent the efficiency of the production process. If labor, material, or overhead costs appear too high then action must be taken. For labor, tools, procedures, or employee numbers must be altered to control cost of keeping employees. In order to maximize productivity of each unit of these materials, materials, procedures and tools must be altered to ensure that the company wastes as little raw materials as possible. When it comes to overhead, company managers must create a working environment which does not exceed the needs it has for production. You must change and balance all of these costs to maximize shareholder value.


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Manufacturing Cost Formula

Use the following equation to calculate the manufacturing cost:

MC = Labor + Materials + Overhead

To find the manufacturing cost per unit formula, simply divide the above results by the number of units produced.

Manufacturing Cost Calculation

Performing manufacturing cost calculations are simple once the essential data is available.

If:
Labor = $100,000
Materials = $75,000
Overhead = $200,000

Then:
MC = $100,000 + $75,000 + $200,000 = $375,000

Manufacturing Cost Example

For example, Austin is the CEO of a plant which manufactures home appliances. Although Austin is experienced in his trade, he has used the experiences former managers have passed on to create a profitable company. He has paid close attention to these managers for a long time and has absorbed their best practices.

Manufacturing Cost Example Calculation

Austin wants to make sure to constantly rotate manufacturing cost saving ideas. To do this, Austin has this calculation performed by his CFO:

If:
Labor = $100,000
Materials = $75,000
Overhead = $200,000

MC = $100,000 + $75,000 + $200,000 = $375,000

Although this amount is completely normal for Austin’s company, Austin would like to bring profits up by pushing his business to the next level. But the problem with this is that Austin already has state-of-the-art tools, computer hardware and software, warehousing, and all other necessary supplies. Austin falls back on what he has learned to find the solution.

Conclusion

As a result, Austin creates a department wide bonus plan to motivate employee efficiency. He then decides that the department which can decrease costs the most will receive a bonus of 5% increased pay each quarter. Additionally, these departments will have a free company lunch once a month as a reward. Austin also makes sure to have his CFO run the numbers to make sure this plan makes financial sense. Then, he begins the plan.
Austin is excited to see what lies ahead. If he can create the proper set of motivations, then he is sure that his employees will love showing up to work every day, just as he does.
If you want to find out more about how you could utilize your unit economics to add more value to your organization, then click here to download the Know Your Economics Worksheet.

What is the relevance of costing to manufacturing companies and non

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What is the relevance of costing to manufacturing companies and non

A manufacturing company incurs both manufacturing costs (also called product costs) and non-manufacturing costs or expenses (also called selling and administrative expenses). In the illustration below you can see the difference between manufacturing and non-manufacturing costs and their classification:

Manufacturing vs. non-manufacturing costs

Let us review these types of manufacturing and non-manufacturing costs in more detail.

Manufacturing costs and their classification

Manufacturing costs are the costs that a company incurs in producing a product.

From the managerial accounting standpoint, there are three types of manufacturing costs:

-Direct materials

-Direct labor

-Factory (or manufacturing) overhead

1. Direct materials as a type of manufacturing costs

Direct materials are raw materials that become an integral part of the finished goods.

Direct materials always have a variable nature. Variable costs change in proportion to production. For example, the company purchases metal parts (raw material) to produce valves. The more valves are produced, the more parts Company has to acquire. Therefore, parts have a variable nature; the amount of raw materials bought and used changes in direct proportion to the amount of valves created. For this Company, other direct materials would include, for example, plastic parts and paint.

Different manufacturing companies will have different direct material costs depending on the types of finished goods they produce. The table below provides a few examples:

Examples of direct material costs

Publishing company- Paper, ink, book covers

Automobile manufacturer- Tires, automobile metal parts

Computer manufacturer- Hard drives, monitors

From this you can see that direct materials are the integral part and a significant portion of finished goods.

2. Direct labor as a type of manufacturing costs

Almost any production plant or factory requires employees to operate equipment, move raw materials from the warehouse to equipment, and so on. These employees are directly involved in the production process and the cost of their remuneration and benefits represents direct labor:

Direct labor is the cost of wages to be paid to individuals who work on specific products or in other words, the cost of wages of employees who are directly involved in converting raw materials into finished goods.

Usually direct labor is a variable cost. In most situations the amount of direct labor required is directly correlated with the amount of finished goods produced. For example, wages and related benefits of employees who operate machinery to produce valves represent direct labor costs for a Company. The more valves are to be produced, the more employees will be required to operate machinery, paint, assemble, etc.

Direct materials and direct labor, when added together, represent the prime cost. Direct materials and direct labor are called prime costs because they are directly (physically, "primarily") associated with the finished goods production.

3. Factory overhead as a type of manufacturing costs

Factory overhead is any manufacturing cost that is not direct materials or direct labor.

Factory overhead can have variable or fixed nature, depending on whether overhead changes in direct proportion with production volumes. The following are some examples of factory overhead costs:

Variable Factory Overhead Examples

-Electricity

-Heating

-Water

-Indirect Materials

-Indirect Labor

Fixed Factory Overhead Examples

-Depreciation

-Property taxes

-Property insurance

-Salaries for non-production employees

Most items in the list above are self-explanatory, so they don't require further explanation, while indirect materials and labor may benefit from further explication.

Indirect materials are materials that are (a) not an integral (physical) part of the finished goods, or (b) a minor part of the finished goods to be economically traced to the finished good or have a very small physical association with the finished product.

For example, a Company would treat the following costs as indirect materials: oil lubricants and light bulbs used in manufacturing equipment, package boxes, wrenches, etc.

Other companies will have different types of indirect materials depending on their manufacturing processes. The table below provides a few examples:

Examples of indirect materials cost (overhead cost)

Publishing company- Glue, printing press lubricants

Automobile manufacturer- Factory light bulbs, drill bits

Computer manufacturer- Assembly line lubricants, screwdrivers, polishers

As you can see form the list, indirect materials are an insignificant portion or not an integral part of the finished goods.

Indirect labor is the cost of production employees who are involved in the manufacturing process, but do not work on a specific product.

For example, wages of custodians, maintenance people, supplies room supervisors, etc. are considered indirect labor.

Direct labor and factory overhead, when added together, represent the conversion cost. Direct labor and factory overhead are called conversion costs because they are involved in converting raw materials into finished goods.

The image below shows the relationship between direct materials, direct labor, overhead, prime cost, and conversion cost:

This is the relationship between direct materials, direct labor, overhead, prime cost and conversion cost.

Why is costing important in manufacturing?

Manufacturing costs play an important part in the successful design and manufacture of a product. Based on the model of added value, the manufacturing costs must be less than the value added to allow a profit to be made. Therefore, the costing of the design and manufacture of a product is vital in ensuring success.

What is the difference of manufacturing cost and non manufacturing cost *?

Manufacturing costs include the cost of direct materials, direct labor and manufacturing overheads. Non-manufacturing costs include administrative costs, marketing and selling costs, finance costs etc.

What is production and non production cost?

are not directly associated with production of manufactured goods (costs incurred outside the factory). They are taken directly to the income statement as expenses in the period in which they are incurred. Such costs consist of: administrative costs.

What are non manufacturing companies?

Nonmanufacturing business means any commercial enterprise other than a manufacturing business assigned to major NAICS categories 311 through 339.