The advanced planning of deciding which manufacturing projects to pursue and which ones to avoid is crucial to the success of any manufacturing company. Quite simply, if a manufacturing project does not generate enough revenue to cover its costs it will not be profitable. The outcome of a thorough manufacturing cost analysis helps determine that your project, partnered with a reputable nearshore manufacturing partner like NovaLink, is financially feasible before manufacturing begins.
What Is A Cost Analysis?
According to Wikipedia, manufacturing cost analysis “…is the sum of costs of all resources consumed in the process of making a product. The manufacturing cost is classified into three categories: direct materials cost, direct labor cost and manufacturing overhead.”
A simpler formula may be described as the following:
Total manufacturing cost = raw materials + direct labor + manufacturing overhead
Cost analyses are beneficial as they make even the most complex business projects more simple. A thorough cost-benefit analysis puts all manufacturing projects in the easiest terms: benefits, minus all costs, equals net profit.
Another reason for making a manufacturing cost analysis is to understand and identify potential problems and benefits such as:
- Finding and estimating cost-saving opportunities
- Securing financing to provide for the costs of producing the manufactured product
- Estimating the true price of the manufactured product that includes the overall costs of production
- Report the true costs of a program when claiming government reimbursements
Product Vs. Manufacturing Costs
It is important to remember that there is a difference between the costs for production and the costs for manufacturing. Production costs are the sum of all the expenses for the company doing business, however on the other hand, manufacturing costs represent only the expense involved in making the product. A cost analysis will use both numbers to evaluate the total expense of conducting a manufacturing business.
Production costs might include fixed and changing costs of operating a business. This may include:
- Cost of a facility
- Advertising
- Equipment
Manufacturing costs are more responsive to production volume changes. Generally, manufacturing costs can be associated with the same general categories of expenses: materials, labor, and overhead. All of these expenses are direct costs: For example, the salary of the company information technology workers and their equipment are not direct costs, but the salary and supplies of the workers in the factory are included.
Production Costs vs. Manufacturing Costs Example
According to Investopedia: “A small business that manufactures widgets may have fixed monthly costs of $800 for its building and $100 for equipment maintenance. These expenses stay the same regardless of the level of production, so per-item costs are reduced if the business makes more widgets.
In this example, the total production costs are $900 per month in fixed expenses plus $10 in variable expenses for each widget produced. To produce each widget, the business must purchase supplies at $10 each. Each widget sells for $100. After subtracting the manufacturing cost of $10, each widget makes $90 for the business.
To break even, the business must produce 10 widgets every month. It must make more than 10 widgets to become profitable.”
Labor and Manufacturing Overhead
After determining your product costs, the next important phase in determining your manufacturing cost analysis is determining is the production expenses. If your product needs direct labor (as is the case for most products manufactured in Mexico) your analysis must account for this, as well as the cost of the manufacturing overhead.
According to the Corporate Finance Institute, manufacturing overhead includes those expenses that are not directly involved in the direct costs of production. Typical manufacturing overhead costs are:
- Electricity and other utilities required to run equipment in the factory
- Depreciation of manufacturing equipment
- Factory supplies for the manufacturing processes
- Product quality inspectors
- Maintenance workers and repair parts for the equipment
- Sanitation personnel
- Bookkeepers for the manufacturing processes
- Managers for the factory
- People who set up the equipment for manufacturing
- Material handlers, such as forklift operators
- Property taxes and insurance on the facilities and equipment”
Conclusion
As you can see, making a thorough cost analysis of your manufacturing project can save you a lot of time as well as money, and ensure your project is a success. We believe that moving your manufacturing to Mexico is the obvious, and most cost-effective choice for manufacturing companies who may be concerned about the ongoing risks of operating overseas manufacturing. Contact NovaLink today for a free consultation on how you can get your manufacturing project started easily and seamlessly.
