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:
- 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.
- 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.
- 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.
- 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):
- Assign a standard materials cost to each unit produced.
- Assign a standard direct labor cost to each unit produced.
- 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.
- 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.