# How to Calculate the Total Manufacturing Price per Unit

Paying attention to manufacturing costs is a necessity, no matter the size of your business, but for smaller enterprises that have lower cash reserves, carefully monitoring the production expenses is key to being profitable. If the price per unit on your major products can be reduced, your profits go up. When your profits increase, you may need to discontinue certain product lines or reduce production, until your costs stabilize. Learning how to calculate the cost-per-unit will guide you through many key business decisions and, hopefully, help you grow revenue.

## Manufacturing Expense Categories

Three types of expenses are added together to arrive at the total manufacturing cost for a product line: direct materials, direct labor and manufacturing overhead. Typically, two of these costs are product specific. For example, the cost of silk fabric used in manufacturing pajamas is easily assigned to that product, as are the labor hours needed to sew the garments. Manufacturing overhead, however, may apply to several different product lines produced within the same factory, and this needs to be allocated properly to accurately gauge the cost per unit.

## How to Calculate the Total Manufacturing Price Per Unit

Add the cost of direct materials, direct labor and manufacturing overhead within a given time period, such as one month, to determine the total manufacturing costs for a product line. Determine how many items were produced within the same time period. Divide the total manufacturing costs by the number of items produced to arrive at the production cost per unit.

Example:

• Direct materials: Silk: \$2500, thread: \$100 = \$2,600.
• Direct labor: Hourly wages (\$8 per hour x 8 hours x 22 days): \$1408.
• Units produced: 360.

Total manufacturing price per unit = (Direct materials + direct labor + manufacturing overhead)/number of units manufactured:

• (\$2,600+\$1408+\$2230)/360.
• \$6,238/360=\$17.33.

You may also want to assess fixed costs and the total variable manufacturing cost to make informed decisions regarding your product lines when production expenses climb. For example, further examination of higher direct material costs at your jewelry company may attribute increased expenses to higher gold prices - a variable cost.

Common overhead costs include the salaries of personnel assigned to a manufacturing unit but not directly assigned to production, such as managers and janitorial workers. Other overhead expenses are utilities, building depreciation or lease payments, quality control and indirect supplies, such as cleaning materials and waste containers. If your small business is producing multiple products in the same factory, these expenses need to be properly allocated to your different product lines.

Generally accepted accounting principles allow you to break these costs down by either the direct labor method or machine hours. The best method to use varies by industry. If your products are more labor intensive, examining overall costs based on many hours may be your best option. When you use a lot of machinery to move many products, the number of machine hours presents a more accurate financial assessment.

Using the direct labor hours method, calculate the number of direct working hours used to produce all of your products and the overhead costs for all of the products. Divide total overhead by the labor hours to arrive at the overhead allocation rate, which is expressed as a cost per labor hour. This overhead cost per labor hour is then multiplied by the number of labor hours per product to allocate overhead to an individual product line.

Example:

It takes 200 hours to produce 10 wooden chairs and 300 hours to produce 5 tables at the furniture factory. Total overhead costs are \$6,000.

• \$6,000/(200+300) = \$12 per hour.
• 200 hours x 12 = \$2,400 in overhead for wooden chairs.
• 300 hours x 12 = \$3,600 in overhead for tables.

For machine hours, use the same formula and substitute total machine hours for total direct labor hours to arrive at the overhead allocation rate.

Example:

Twenty machine hours are required to produce 10 chairs, and 40 machine hours are needed for 20 tables. Variable overhead costs are \$6,000.