49 Costs of Manufacturing
Learning Objectives
By the end of this section, you should be able to:
Calculate the cost of manufacturing based on a few known process costs
Direct Costs of Manufacturing
Direct Costs of Manufacturing are costs that are directly impacted by the manufacturing rate. To assess the impacts of some of the main elements of the direct costs, we will use multiplication factors based on certain known costs.
| Direct manufacturing costs | Symbol or Range of multiplying factors | Avg. factor used |
|---|---|---|
| 1. Raw Materials | [latex]C_{RM}[/latex] | |
| 2. Utilities | [latex]C_{UT}[/latex] | |
| 3. Operating Labour | [latex]C_{OL}[/latex] | |
| 4. Waste Treatment | [latex]C_{WT}[/latex] | |
| 5. Direct Supervisory and clerical labour | [latex](0.1-0.25)C_{OL}[/latex] | [latex]0.18 C_{OL}[/latex] |
| 6. Maintenance and repairs | [latex](0.02-0.1)FCI[/latex] | [latex]0.06 FCI[/latex] |
| 7. Operating supplies | [latex](0.006-0.012)FCI[/latex] | [latex]0.009 FCI[/latex] |
| 8. Laboratory charges | [latex](0.1-0.2)C_{OL}[/latex] | [latex]0.15 C_{OL}[/latex] |
| 9. Patents and Royalties | [latex](0-0.06)COM(\text{cost of manufacturing})[/latex] | [latex]0.03COM[/latex] |
| Total direct costs of manufacturing | [latex]C_{RM}+C_{WT}+C_{UT}+1.33C_{OL}+0.03COM +0.069FCI[/latex] |
Fixed Costs of Manufacturing
Fixed Costs of Manufacturing are costs that are not directly impacted by the manufacturing rate. To assess the impacts of some of the main elements of the fixed costs, we will use multiplication factors based on certain known costs.
| Fixed manufacturing costs | Range of multiplication factors | Avg. factor used |
|---|---|---|
| 1. Depreciation – costs associated with buildings and plant equipment. Note that this is not an actual expense, but just accounted for in terms of tax purposes | 0.1 FCI (Note there are a variety of ways depreciation can be calculated, this is a very crude approximation) | [latex]0.1FCI[/latex] |
| 2. Local taxes and insurance | [latex](0.014-0.05)FCI[/latex] | [latex]0.031FCI[/latex] |
| 3.Plant overhead costs (referring to the costs related to running the business but not directly related to the process of making the product) | [latex](0.59-0.826)C_{OL}+(0.030-0.42)FCI[/latex] | [latex]0.708C_{OL}+0.036 FCI[/latex] |
| Total fixed costs of manufacturing | [latex]0.708C_{OL}+0.068FCI+depreciation(0.1FCI)[/latex] |
Depreciation
Governments will not let companies write off all expenses to build a plant immediately. Instead, they are written off over time, in what is known as depreciation.
Depreciation is calculated based on the purchase value of equipment minus the salvage value and evaluated over a number of years specified. This does not include land costs, since land generally retains its value, whereas equipment and buildings tend to lose their value over time.
Straight-line depreciation is the simplest calculation of depreciation:
[latex]\text{Depreciation}=\frac{\text{purchased value } (FCIL)-\text