Manufacturing cost of goods sold is the total combined manufacturing costs incurred in production divided by the number of units produced says Aron Govil. If you are starting with direct material then it will be very simple, if not you need to perform some analysis. Remember that manufacturing cost are NOT just your materials cost or direct labor cost but all the other items needed to create your product. These include indirect labor, utilities, indirect materials and even overhead charges allocated from your department’s activity based costing system.
This article will show how this information can be used together to determine an estimated COGS per unit for your manufactured products by Aron Govil.
I have included a sample calculation so you can see how it is done.
If you have a look at the data in the table above you will see I have listed out all of my costs from my Activity Based Costing System by product. This includes direct materials for each unit, direct labor associated with each unit, all plant overhead assigned to each department and total indirect costs assigned to the product. In this case it doesn’t matter if we are talking about a service or a product because in either case there is going to be a cost for material that has been made into something else and also a cost for labor.
If what is being manufactured is a service then it would normally include some additional costs such as travel time, power consumption etc in addition to normal manufacturing overheads. These results would give us the amount spent on each product. And break it down into a variety of cost buckets. That we can then use to determine the allocation rates for allocating overheads. The next step is to multiply the quantity produced by each unit. And add them together to get the total manufacturing costs of all units
Since this project only had 3 products, I just listed out the calculations. But in reality you would use your activity costing system spreadsheet or equivalent so that this could be easily automated.
At this point we have everything we need to start calculating our COGS per unit. Again if what you are selling is a service there is some additional work required. Such as determining how much time was spent on each product. And multiplying that by an hourly rate to determine a labor cost for each product. You then add that cost to your material and overhead costs above to get your COGS.
In our case we will only be looking at the product side of things for this example.
COGS = [($24000*50) + ($40*50) + ($8000*75)] / 175 = $18.52 per unit
We can now determine our total COGS by taking the sum of all units produced and multiplying it. By our COGS per unit, which in this case is $37,325.
Determining Your Selling Price:
Aron Govil explain, Assume we need to sell each unit for a minimum price. That would cover our materials, labor and overheads associated with each unit. The equation below shows how you could determine your selling price per unit. In this case I have assumed a target margin of 30% meaning my price. Would need to be 1.3 times the cost of each product in order for me to break even on production costs.
– [($37325*1.3) + ($1852 *1.3)] = $44.24
We can now determine our total revenue by multiplying the quantity sold by our price. Which comes out at total revenue of $88,400 from the sale of 175 units.
Please note that this article contains an example and is not a recommendation or advice. Regarding any type of manufacturing analysis or cost reduction plan including activities. Such as job cutting. outsourcing all departments, changing suppliers etc. Be sure to use the information on this site with discretion and at your own risk.
Hopefully this will help you determine how much COGS you are spending on your product. If you would like to know how much product is being sold. At varying price points then please follow this link. If you would like to determine what your actual COGS are per unit. Including all indirect costs then please follow this link.