Calculating Manufacturing Cost

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 Calculating Manufacturing Cost

The three major components to account for while determining manufacturing cost includes:

  • Labor
  • Overhead
  • Materials

Labor

When assessing the labor cost to produce an item, the cost should only be focused on workers involved in the production of the item. Such workers may be direct or indirect.

The easiest way to identify direct labor is to include resources that physically touch the product during the manufacturing process.  On the other hand, indirect labors are those that do not physically touch the product. An example of a direct labor is an assembly-line worker, while an indirect laborer may be a production line supervisor who does not generally touch the product during production.

All Production Labor can be divided into fixed labor and variable labor.

An example of a fixed labor may be a production line supervisor, whose wages are fixed regardless of the quantity of items being produced.  Furthermore, only one supervisor is needed for the production line even if the quantity of the product made increases during the shift.

On the other hand, an example of a variable labor may be the assembly-line worker.  The quantity of products made is based on the number of variable labor: if you increase the number of assembly-line workers, the quantity produced also increases; as such, variable labor depends on quantity.  If you increase the quantity of production, the number of variable labor also increases, and vice versa.

 

To be continued…

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