Finance For

Non-
Financials
Series

TMC – Total
Manufacturing
Cost
21/06/2021
Shared Knowledge = Shared Values
Data Collected By: Hamed Ali
 June 21, 2021 [TMC]

Article Subject TMC - Total Manufacturing Cost.

Data collected by Hamed Ali Mohamed, Master in food science & bio-technology
E-mail Hamed.ali.mohamed1982@gmail.com Address Eastern Provence, KSA

Release Date 21/06/2021 Doc. Ref (FU)/KSA – 2021 – 06 -35

Total Manufacturing Cost

Total manufacturing cost is the aggregate amount of cost incurred by a business to produce
goods in a reporting period. The term can then be defined in two ways, which are:
• The entire amount of this cost is charged to expense in the reporting period, which means
that total manufacturing cost is the same as the cost of goods sold; or

• A portion of this cost is charged to expense in the period, and some of it is allocated to goods
produced in the period, but not sold. Thus, a portion of total manufacturing cost may be
assigned to the inventory asset, as stated in the balance sheet.

The more common usage of the term is that total manufacturing cost follows the first
definition, and so is the amount charged to expense in the reporting period. For this situation,
the calculation of total manufacturing cost is as follows:
1. Direct materials. Add the total cost of materials purchases in the period to the cost of
beginning inventory, and subtract the cost of ending inventory. The result is the cost of direct
materials incurred during the period.

2. Direct labor. Compile the cost of all direct manufacturing labor incurred during the period,
including the cost of related payroll taxes. The result is the cost of direct labor.

3. Overhead. Aggregate the cost of all factory overhead incurred during the period. This
includes such costs as production salaries, facility rent, repairs and maintenance, and
equipment depreciation.

4. Add together the totals derived from the first three steps to arrive at total manufacturing cost.

The calculation of this cost is somewhat different if we use the second definition, where
some of the cost may be assigned to goods that are produced, but not sold. In this case, use
the following steps (assuming that standard costing is used):
1. Assign standard materials cost to each unit produced.

2. Assign a standard direct labor cost to each unit produced.

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3. Aggregate all factory overhead costs for the period into a cost pool, and allocate the
contents of this cost pool to the number of units produced during the period.

4. When a unit is sold, charge to the cost of goods sold the associated standard materials
cost, standard direct labor cost, and allocated factory overhead.

Note: If more units are sold than are produced in a period, then costs assigned to inventory
from a previous period are being charged to expense, in which case the cost of goods sold
will be higher than the total manufacturing cost incurred in the period.

Cost of goods manufactured

The cost of goods manufactured is the cost assigned to produced units in an accounting
period. The concept is useful for examining the cost structure of a company's production
operations. The best approach to examining the cost of goods manufactured is to
disaggregate it into its component parts and examine them on a trend line. By doing so, one
can determine the types of costs that a company is incurring over time to produce a certain
mix and quantity of goods. This cost structure usually includes all of the following:
• The cost of direct materials used in the manufacturing process during the period.

• The cost of direct labor used in the manufacturing process during the period.

• The amount of overhead allocated to manufactured goods during the period.

A retail operation has no cost of goods manufactured, since it only sells goods produced by
others. Thus, its cost of goods sold is comprised of merchandise that it is reselling.
The cost of goods manufactured is not the same as the cost of goods sold. Goods
manufactured may remain in stock for many months, especially if a company experiences
seasonal sales. Conversely, goods sold are those sold to third parties during the accounting
period. There can be numerous reasons for the cost of goods manufactured and cost of goods
sold to differ from each other, including:
• There may be no sales at all during the period, while production has continued. The cost of
goods sold is therefore zero, while the cost of goods manufactured may be substantial.

• There may be lots of sales during the month from inventoried reserves, while there is no
manufacturing going on at all. The cost of goods sold may therefore be substantial, while the
cost of goods manufactured is zero.

• The cost of goods sold may contain charges related to obsolete inventory.

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• The most likely reason for differences between the costs of goods manufactured and sold is
simply that the mix of products sold does not exactly match the mix of products
manufactured.

The cost of goods manufactured is a component of the calculation for the cost of goods sold.
The calculation is:
Beginning inventory + Cost of goods manufactured - Ending inventory
= Cost of goods sold
This calculation is used for the periodic inventory method. It is not needed for the perpetual
inventory method, where the cost of individual units that are sold are recognized in the cost
of goods sold.

What is Total Manufacturing Cost?

Definition: The total manufacturing cost is the total expense incurred by a firm’s production
process during a given period. Management and investors often compare it to total revenues
to determine a firm’s profitability.
What is the definition of total manufacturing cost? The TMC includes direct labor, direct
materials, and overhead costs. The cost of direct labor refers to the direct labor that
contributes to the manufacturing of a product or a service during a given period. The cost of
direct materials is the cost of the materials used for the manufacturing of a product or a
service during a given period. Overhead costs are the costs that are not directly related to the
manufacturing of a product or a service, but they contribute to the firm’s profit-making
activities.
Example
Company X manufactures copiers. George is the accountant of the company, and he is asked
to calculate the total manufacturing cost formula for January. Based on the transactions of the
month. George prepares a breakdown of transactions as follows:
What is Cost of Goods Manufactured (COGM)?
Cost of Goods Manufactured, also known to as COGM, is a term used in managerial
accounting that refers to a schedule or statement that shows the total production costs for a
company during a specific period of time. Just like the name implies, COGM is the total cost
incurred to manufacture products and transfer them into finished goods inventory for retail
sale.

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The formula to calculate the COGM is:

Add: Direct Materials Used
Add: Direct Labor Used
Add: Manufacturing Overhead
Add: Beginning Work in Process (WIP) Inventory
Deduct: Ending Work in Process (WIP) Inventory
= COGM
Example calculation of Cost of Goods Manufactured (COGM)
This can be more clearly seen in a T-account. For example, let’s say that a company that
manufactures furniture incurs the following costs:
Direct Materials: $100,000
Direct Labor: $50,000
Manufacturing Overhead: $60,000
Beginning WIP Inventory: $10,000
Ending WIP Inventory: $30,000
Work in Process (WIP) Inventory
Beginning Balance 10,000
Direct
Materials 100,000
190,000* COGM
Direct
Labor 50,000
Manufacturing Overhead 60,000
Ending
Balance 30,000

With this information, we can solve for COGM, which is on the credit side of the WIP
Inventory T-Account.
COGM = 10,000 + 100,000 + 50,000 + 60,000 – 30,000 = $190,000*

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Determining Direct Materials Used

In order to determine the actual direct materials used by the company for production, we must
consider the Raw Materials Inventory T-account. Raw materials inventory refers to the
inventory of materials that are waiting to be used in production. For example, if a company
were to make a raw material purchase for use, these would be stored in the debit side of the
raw materials inventory T-Account.
In addition, if a specific number of raw materials were requisitioned to be used in production,
this would be subtracted from raw materials inventory and transferred to the WIP Inventory.
Raw materials inventory can include both direct and indirect materials. Beginning and ending
balances must also be used to determine the amount of direct materials used. Let’s also
examine the following raw materials T-account.
The raw materials used in production (d) is then transferred to the WIP Inventory account to
calculate COGM.
Determining Direct Labor and Manufacturing Overhead
Determining how much direct labor was used in dollars is usually straightforward for most
companies. With time logs and time sheets, companies just take the number of hours worked
multiplied by the hourly rate. For information on calculating for manufacturing overhead,
refer to the Job order costing guide.
Linking COGM to COGS
Finally, once all the individual parts are calculated and used to figure out the total cost of
goods manufactured for the year, this COGM value is then transferred to a final inventory
account called the Finished Goods Inventory account, and used to calculate Cost of Goods
Sold. Finished Goods Inventory, as the name suggests, contains any products, goods, or
services that are fully ready to be delivered to customers in final form. The following T-
account shows the Finished Goods Inventory. Beginning and ending balances must also be
considered, similar to Raw materials and WIP Inventory.
Why is COGM important for companies?
In general, having the schedule for Cost of Goods Manufactured is important because it gives
companies and management a general idea of whether production costs are too high or too
low relative to the sales they are making.
For example, if a company earned $1,000,000 in sales revenue for the year and incurred
$750,000 in Cost of Goods Sold, they might want to look at ways to reduce their
manufacturing costs to increase their gross margin percentage.

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Comparatively, if another company earned $800,000 in sales revenue and incurred only
$400,000 in COGS, even though the company’s sales were lower, their gross margin
percentage is much higher, which makes the latter company substantially more profitable.

How to Calculate Total Manufacturing Cost

Total manufacturing cost combines the direct material, direct labor, and manufacturing
overhead costs involved in producing inventory. Learn to calculate this key business metric.
As a small manufacturing business owner, you probably spend a lot of time thinking
about pricing strategies and how to make your manufacturing process more efficient.
Before making decisions about inventory selling prices or changes to the manufacturing
process, take a look at your total manufacturing cost. The calculation breaks down your
manufacturing costs in a way that makes your expenses easy to analyze.

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Overview: What are total manufacturing costs?

Total manufacturing costs refer to how much a company spent to produce its inventory in a
given timeframe. The calculation is the sum of three product cost categories: direct material,
direct labor, and manufacturing overhead.
Business owners need to know their total manufacturing costs. Once you understand the true
cost of your manufacturing, you can more accurately account for inventory on your balance
sheet and cost of goods sold on your income statement.
It’s also an analysis tool. Splitting up your manufacturing costs into three buckets helps you
see where you’re spending too much and where you should invest more.
Total manufacturing costs are often conflated with the cost of goods manufactured (COGM).
COGM counts only the cost of inventory that was finished and prepared for sale in the period.
Total manufacturing costs include all costs incurred in the period, regardless of whether the
product was completely finished.
How to calculate total manufacturing cost for your small business
As noted above, your total manufacturing cost is the total of three costs in a given accounting
period: direct material, direct labor, and manufacturing overhead.
Total Manufacturing Cost = Direct Material + Direct Labor + Manufacturing Overhead
1. Direct material
Direct material is the cost of raw materials used in the manufacturing process which are
inextricably linked to the final product. If your manufacturing company makes screws, the
raw material is steel wire purchased from a supplier.
Raw materials that can’t be traced to a specific product or manufacturing run are considered
indirect material and are excluded from the direct material cost calculation.
For example, the cost of special oil used in a piece of manufacturing machinery is considered
indirect material. Indirect costs get counted below in manufacturing overhead.
Spoilage, or raw material that can’t be used in the final product, is to be expected. Unless
there’s an abnormal amount of spoilage, the cost of spoiled raw material gets included in your
direct material calculation.
When calculating total manufacturing cost, we only care about the costs incurred in the
accounting period. For businesses that use the accrual accounting method, direct material
expenses are incurred when the raw material is used, not when it is purchased.

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To calculate direct material, compare raw material at the beginning of the year and raw
material purchases during the year with raw material left at the end of the year. The
difference is how much direct material you used.
Direct Material = Beginning Direct Material Inventory + Direct Material Purchased
During Period – Ending Direct Material Inventory
2. Direct labor
Direct labor refers to the wages of those working on manufacturing your company’s
products. Machine operators and assembly line workers are the most common types of direct
labor workers.
For an employee’s wages to count as direct labor, he or she must be working hands-on in the
manufacturing process. Not all factory labor is direct labor.
Although they’re essential to the manufacturing process, supervisors and cleaning staff don’t
count as direct labor workers. They’re counted below in manufacturing overhead.
Check out our guide on the difference between direct and indirect labor.
Though there’s no direct labor formula to follow, calculating direct labor is the most
straightforward part of the calculation. Look at your payroll software and total the gross
wages of your direct laborers for the year.
3. Manufacturing overhead
Manufacturing overhead means those manufacturing costs that aren’t direct material or direct
labor.
Common costs included in manufacturing overhead include:
• Depreciation expense

• Indirect labor costs for supervisory, quality assurance, and cleaning staff

• Factory utilities

• Factory rent or mortgage

• Factory supplies

Manufacturing overhead does not include expenses incurred outside of inventory production.
Don’t add in accounting and human resources staff salaries, for example.

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4. Analysis
Finally, take a look at your total manufacturing cost and ask yourself a few questions:
• Based on my total manufacturing cost, is my selling price yielding my profit goal?

• Which expenses are higher than expected? Which are lower? Why?

• How can I streamline the manufacturing process for cost or time savings?

• How much inventory do I have at the end of the period? What are the carrying costs of
holding on to this inventory?

Answering these questions is the starting point to improving your manufacturing efficiency.
Total manufacturing cost: It’s a managerial must
Business owners and managers should keep an eye on their business’s total manufacturing
costs. It can provide insights for optimizing the manufacturing process.

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To calculate the TMC, George first calculates the overhead costs, that include the cost
of indirect labor, the cost of indirect materials, the marketing expenses, SGAs, rent, utilities,
insurance, taxes, and depreciation. The overhead costs are $46,730.

The cost of direct materials includes the direct materials, the inventory at the beginning of the
period and the inventory at the end of the period. The cost of direct materials is $ 47,718.

George calculates the TMC by adding the cost of direct materials, the cost of direct labor and
the overhead costs. The TMC is $111,448.

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For the calculation of the TMC or its components, George does not take into account the
revenues. However, by subtracting the total manufacturing cost of revenues, George finds that
the profit for the month of January is $150,000 – $111,448 = $38,552.
Summary Definition
Define Total Manufacturing Costs: TMC is the sum of all production costs incurred during
a fiscal period

How to Calculate the Total Manufacturing Cost in

Accounting
The calculation for total manufacturing cost involves a detailed accounting for the costs of
materials, labor and overhead. It requires a realistic analysis of a company's various
departments to show their contribution to the manufacturing process and the costs of those
contributions.
The manufacturing process goes through three stages: raw materials, work-in-progress and
finished products. The calculation of total manufacturing costs, also known as the cost of
goods sold, involves the accounting of costs for each phase of production.
Tip
The calculation for total manufacturing costs includes the expenses for direct labor, raw
materials and manufacturing overhead.

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The formula to Calculate Total Manufacturing Cost

The formula for calculating total manufacturing cost is:
Total manufacturing cost = raw materials + direct labor + manufacturing overhead
Consider an example of calculating manufacturing costs for Flying Pigs Corporation and the
company's costs to make roller skates.
Accounting for Raw Materials
Flying Pigs uses steel, wheels and leather straps to make its roller skates. The company
began production with the following inventory:
• Steel: $9,500

• Wheels: $6,800

• Leather straps: $2,700

• Total: $19,000

During the production period, Flying Pigs purchased an additional $23,200 in raw materials.
At the end of the production cycle, the company had a final raw materials inventory of
$17,600.
The formula to calculate the cost of raw materials used is:
Cost of raw materials = Beginning inventory + Purchases added - Ending inventory
Cost of materials = $19,000 + $23,200 - $17,600 = $24,600
Direct Labor and Manufacturing Overhead
The next stage of manufacturing is the production or work-in-progress. At this point, direct
labor is used to make the roller skates, and the cost of manufacturing overhead is added.
Manufacturing overhead includes those expenses that are not directly involved in the direct
costs of production. They are indirect costs that are necessary to support the manufacturing
process and must be allocated to each unit of production. Typical manufacturing overhead
costs are:
• Electricity and other utilities required to run equipment in the factory

• Depreciation of manufacturing equipment

• Factory supplies for the manufacturing processes

• Product quality inspectors

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• Maintenance workers and repair parts for the equipment

• Sanitation personnel

• Bookkeepers for the manufacturing processes

• Managers for the factory

• People who set up the equipment for manufacturing

• Material handlers, such as forklift operators

• Property taxes and insurance on the facilities and equipment

Note that for the indirect labor, the company incurs additional expenses for Social Security,
Medicare taxes, health insurance, vacation pay, holiday pay, unemployment compensation,
workers' compensation and retirement plans.
Flying Pigs paid its workers $38,300 in labor to make the skates, and its total manufacturing
overhead expense was $17,500.
Total Manufacturing Costs
Therefore, the total manufacturing costs for the company to make its skates is:
• Raw Materials $24,600

• Labor $38,300

• Manufacturing Overhead $17,500

• Total Manufacturing Costs $80,400

The calculation for total manufacturing costs does not consider the expenses that Flying Pigs
incurs for general and administrative costs. These expenses include selling and marketing
costs, office rent, administrative wages, sales commissions, accounting and legal fees, office
equipment, utilities and executive salaries.
General and administrative expenses could be included in manufacturing costs by allocating
these expenses based on a manufacturing metric such as labor hours or machine hours
consumed in making the products.
References: -
- www.educba.com .
- www.wallstreetmojo.com.
- www.Investopedia.com

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