Three Basic Elements of Manufacturing Costs

Three Basic Elements of Manufacturing Costs

Three Basic Elements of Manufacturing Costs

Introduction to Manufacturing

  • What does the term manufacturing refer to?

The term manufacturing refers to the making of goods and products and selling them to customers. These goods and products could be either manufactured by hand or by a line of machines. The items that are used in the manufacturing process may be either simply raw materials or component parts of a larger product. In other words, the manufacturer (the owner) buys raw materials and necessary items and manufactures a finished product in order to sell it to the market. Manufacturing could be used in various different industries such as:

  • The Food, Beverage, and Tobacco industries.
  • The Textiles, Leather, and Apparel Industries.
  • The Petroleum, Coal, Chemicals, Plastics, and Rubber Industries.
  • The Computer and Electronics industries.

 

  • What are the types of manufacturing production?

Types of manufacturing production

Types of manufacturing production

  • Make To Stock: Make to Stock, also known as MTS, is a type of manufacturing production, the factory produces goods and products that will be stocked in stores and showrooms. The manufacturer has to accurately predict the demands and requirements of the clients and the market. If done correctly, the MTS Strategy is an efficient choice; however, if the factory somewhat ends up with too many products and goods, the owner and the marketing team may have to sell the surplus at a loss.
  • Make To Order: Make to Order also commonly known as MTO is a manufacturing strategy. The factory produces and manufactures goods only upon receiving the customer’s orders. MTO can be extremely beneficial due to the fact that the owner does not have to worry about ending up with extra amounts of goods worrying about where to stock them.
  • Make To Assemble: Make to Assemble or also referred to as MTA, is a manufacturing strategy that is similar to both MTO and MTS. This production method consists of the producing of component parts in anticipation of orders for assembly. However, if the orders do not materialize for whatever reason, the Manufacturer will have to deal with a stock of unwanted parts.

 

  • What are the Types of Manufacturing processes?

  • Repetitive Manufacturing: Repetitive Manufacturing is a manufacturing process that consists of producing goods in rapid succession. It is ideal when the same or similar products are produced over a lengthy period of time.
  • Discrete Manufacturing: Discrete manufacturing is a manufacturing process that involves the manufacturing and producing of parts and systems like nuts and bolts, brackets, wires, assemblies, and individual products.
  • Job shops: Job Shops is a manufacturing process that is designed to manufacture a wide variety of products with small lot sizes in order to achieve maximum flexibility.
  • Process Batch: Process batch, also known as Batch production, is a manufacturing technique in which the object under question is created a stage by stage over a series of different workstations.
  • Continuous Process: Continuous Process, also known as Continuous production is a manufacturing method that consists of producing or processing of raw materials either dry bulk or fluids without interruption.

Basic Elements of Manufacturing Costs

  • what are the basic elements of manufacturing costs?

Basic elements of manufacturing

Basic elements of manufacturing

There are three basic elements of manufacturing costs which are:

  • Material costs: Material Cost as its name implies is the cost of materials that are required and necessary in order to manufacture a product or produce goods. The cost of material covers two types of costs: direct materials cost such as the cost of Timber used to construct a house, the cost of Steel which is used in the manufacturing of an automobile, and the cost of the fabric which is used in the manufacturing of clothes. Indirect material cost refers to such costs as the cost of Rags, grease, and thread.
  • Labor Cost: It is the sum and combination of the wages that have to be paid to the workers in order to manufacture the product. There are two types of labor cost: Variable labor which is based on the amount of production output and Fixed labor: which remains fixed and the same regardless of the company’s production output.
  • Manufacturing Overhead Cost: manufacturing overhead cost is the cost of manufacturing a product. This includes the cost of production salaries, facility rent, repair and maintenance costs, the Cleaning costs of equipment and Electricity and lightning…

 

  • How to estimate manufacturing costs?

How to estimate manufacturing costs

In order to be able to fully estimate the manufacturing cost, the manufacturer must first create a BOM (Bill Of Materials: is a list of various elements such as the raw materials, sub-assemblies, intermediate assemblies, sub-components, parts, and the quantities of each needed to manufacture an end product in order to know the required parts and their quantities. Secondly, the manufacturer must create a routing list which is a list consists of the required operations needed to produce the final product and the estimated timing and cost for each operation.

Here is an example that shows the estimated cost of manufacturing an iPhone:

  • The total cost of raw materials and necessary components is around 150 USD
  • The total cost of building and assembling the phone is approximately around 5 USD
  • Other costs: estimated around 80 USD

So in total, the cost of manufacturing an iPhone 6s is around 185 USD

Conclusion

In conclusion, the manufacturing industry is highly competitive and can be extremely challenging due to the amount of money, research, effort, and equipment required to make it in the market. That’s why it is extremely important to know how to calculate and estimate its cost in order to be able to produce or manufacture a certain product. This could be challenging at first but the more the manufacturers studies how to make the routing list and bill of materials, the more accurate the forecast and prediction on the cost will get. 

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