The Ultimate Guide to Calculating Manufacturing Costs

Calculating business costs is a critical aspect of running a successful monument company. Gaining an in-depth understanding of the various expenses involved in operating a monument business is essential for making informed decisions and achieving long-term profitability. In this blog post, we will explore the importance of accurate cost calculations and provide practical tips for effectively managing business expenses.

Why It’s Crucial

Accurately understanding and calculating yours manufacturing costs is crucial to setting prices for products or services. By understanding the total cost of production or delivery, you can establish pricing strategies that ensure your desired profitability while remaining competitive in your market.

Understanding your costs will also allow effective management of business costs. By continuously monitoring and evaluating expenses, you can identify opportunities for efficiency improvements and implement cost-cutting measures where necessary.

Two Types of Manufacturing Costs

Before we dig in and take a deep dive into cost analysis, it is important for you to understand there are two types of expenses associated with making monuments: fixed manufacturing costs and variable manufacturing costs.

Fixed Manufacturing Costs

Fixed costs are those that do now change based on the number of units you manufacture. For example, the mortgage on your business property or your lease.

Fixed costs may also include insurance, property taxes and shop salaries.

Understanding fixed manufacturing costs is vital for making informed decisions about pricing, production levels, and financial planning. It also helps companies determine the break-even point for their products or services.

Effectively managing fixed manufacturing costs is essential for maximizing profitability and competitiveness. Strategies such as negotiating favorable lease agreements, implementing energy-saving initiatives, and optimizing staffing levels can help control these costs.

Variable Manufacturing Costs

Unlike fixed manufacturing costs, which remain constant regardless of production levels, variable manufacturing costs fluctuate in with the volume of output. Understanding and effectively managing these costs is essential for maximizing profitability and competitiveness in the monument industry.

Variable manufacturing costs typically include expenses such as raw materials, direct labor, and utilities directly associated with the production process. As production levels increase, so do these costs. Conversely, when production decreases, variable manufacturing costs decrease as well.

Managing variable manufacturing costs requires a strategic approach that aims to optimize efficiency and minimize waste. One key strategy is to closely monitor and control inventory levels to prevent overstocking of raw materials, which can lead to unnecessary carrying costs and potential obsolescence.

Another important aspect of managing variable manufacturing costs is optimizing the utilization of direct labor. Efficient workforce scheduling, minimizing manufacturing disruptions, proper training, and performance incentives can improve productivity and help control labor costs.

Calculating Manufacturing Costs

It’s All In The Prep Work

Before beginning your cost analysis, you need several crucial pieces of information.

Now, most of this information should be organized within your accounting system. I use QuickBooks Online to help facilitate paperless record keeping and ease of information gathering.

For example, I need to know my insurance expense for my manufacturing facility. I don’t want to guess at this. Rather, I want the actual expense.

Once upon a time I used to thumb through paper folders, looking for whatever invoice I needed. While thumbing through paper invoices doesn’t sound like a big deal, the time spent searching took away from my productivity.

Instead of searching through paper, I simply upload all invoices into QuickBooks Online. While this sounds difficult, it is incredibly easy! Simply scan the invoice into your computer and then drag and drop it into the payment information you enter into QuickBooks.

You can see in the image below that we wrote check#3926 for insurance and also see the document (invoice in this case) attached to the payment. If you look down and slightly to the right of the document, you will see the area where you can add an attachment.

Your accounting system is going to be your best friend during any kind of cost analysis. Whether you use QuickBooks or another system, the important part is to ensure you can access the records you need.

Those records include:

• Square footage of manufacturing facility portion of building
• Payroll records
• Lease or mortgage agreements
• Most recent income statement
• Invoices for:
  • Granite/bronze/other materials
  • Shop supplies
  • Freight
  • Insurance
  • Employee benefits
  • Utilities
  • Contract Labor

Pull Our Your Spreadsheets 101 Sheet

This is a great time to make sure you pull out the spreadsheet we created in this previous post. In this post we calculated freight based on product weight, which is considered a variable manufacturing cost.

If you didn’t create your own spreadsheet during that series, I highly recommend creating it first. I promise- using a spreadsheet will make your analysis so much easier!

Let’s Dive In and Calculate Manufacturing Costs!

The easiest way to get started is to tackle your fixed manufacturing costs. Why is this easier? Because there are typically fewer fixed costs than there are variable.

I like to do this in a spreadsheet, but you can do it any way that works for you.

If your manufacturing facility is attached to your sales office, you need to start by listing your square footage for manufacturing and also for the sales office. Then you need to calculate the percentage of the total square footage dedicated to manufacturing.

You can see how I set it up in the example below. It doesn’t look like much, but it is the foundation for our calculations!

Once we know the percentage of square footage dedicated to manufacturing, we can then begin allocating costs to it.

How to Allocate Fixed Manufacturing Costs

Let’s look at insurance costs. Your business insurance may include a wide variety of insurable things. What we are looking for here is simply the amount of property and equipment insurance that needs to be allocated to your shop.

Let’s say that your annual business insurance expense is $20,000 with $5,000 being dedicated to your building and contents. We would simply take the $5000 for the building and multiply it by our square foot percentage.

If you look at the example below, we have broken down fixed expenses, annually, by location- the shop or the office.

If your shop is located elsewhere, then you won’t need to break down expenses like this. But, if have a shop, showroom, office, etc under one roof, you need to properly allocate them to the each business function.

In the example above we see our fixed manufacturing costs for the shop are $146,213.95. These are the costs we are going to incur no matter what.

How to Allocate Variable Manufacturing Costs

Now. This is the tricky part for monument makers. Why?

If we were mass producing the exact same stone, with the exact same engraving on it, day after day, we could rely on our raw materials figures.

But, as monument makers, our raw materials expenses will vary greatly depending on what we sell. So I like to do this a little differently than most. I like to allocate all variable manufacturing costs with exception of my raw materials first. Then I like to add in raw materials data from the previous year (or period if you are doing this quarterly).

In the example below we see where I have broken down the variable manufacturing costs. Please remember, this is an example and is only for example purposes. Your lists may look very different than this one.

Here we see our variable manufacturing costs, not including raw materials, is $166,600.

So now we have fixed costs of $146,213.95 plus variable costs of $166,600 = $312,813.95

Now It’s Time for Raw Materials

For example purposes, we are going to take our cost of granite and our cost of freight. You may have a million other things like photos, bronze, vases, etc, but I am just doing an example and want to keep it easy.

Looking at our income statement we will take our Cost of Goods Sold (COGS) and our freight (freight is technically included in cost of goods sold, so don’t add it again if it is in your COGS figure).

Then we will add them to our allocation like below.

Now our total manufacturing costs are $146,213.95 (fixed) + $391,600 (variable) = $537,813.95.

These are our total manufacturing expenses. But, what do you do with them now? And how will they help you in the future?

In my next post I am going to show you how to break this data down into useable knowledge that will help you be profitable on every single memorial you sell. It’s a post you won’t want to miss! Subscribe to the blog and be the first to know when the post rolls out.