Manufacturing costs are all the costs that turn raw materials and parts into final products. These include every cost that goes into the production process, such as direct materials, manufacturing overhead, and direct labor costs. The costs associated with manufacturing products are usually presented on the income statement. Each cost is a separate line item. They should represent the costs incurred during the manufacturing or production process.
Every cost should be included, such as salaries and wages, materials, factory management, and personnel who manage manufacturing equipment. All of the overhead costs are applied to the unit production cost using a variety of allocations, such as machine hours and direct labor hours. Overhead costs also include factory utilities, depreciation of the factory’s assets, insurance, property taxes, and equipment repair, including parts and supplies.
The first step to reducing your manufacturing costs is determining the overall costs and then looking at the areas you can cut back on or make more efficient. Here are 10 practical ways to reduce your manufacturing costs.
1. Examine Your Facility
One of the fastest and most effective ways to reduce manufacturing costs is to be familiar with them. This requires an audit of your main operating costs. Track them for a predetermined time to gain a good grasp of the actual costs. Then, you can eliminate costs on things like building maintenance, utilities, office supplies, insurance, and other incidentals.
2. Reduce Direct Material Costs
Material costs are often a large portion of a company’s manufacturing costs. There are a few ways to help minimize these costs. One way is to purchase materials in bulk. Most of the time, sellers provide a discount for bulk purchases. Secondly, do a little research to make sure you are not purchasing more materials than what is being used in production. Review the manufacturing process to find places where there may be a material waste. Preventing the purchase of excess materials can save costs and reduce waste.
3. Examine Production Procedures
When you evaluate how your product is made, you can get rid of any of the processes that are redundant or taking far too long to complete. This will require breaking down each of the individual steps in your production cycle and tracking how long each step takes to complete. Then you can consult with different staff members who are performing tasks or using the equipment. Make sure to keep your machinery in exceptional condition to help reduce downtime, which is costly. Routine maintenance can be done during slack times to maximize efficiency.
4. Recognize Your Product
There are many ways to reorganize your product. You may consider using less expensive materials for the manufacturing process. However, only do this if you can do so without significantly impacting the quality of your final product. Streamline your production by getting rid of features that are not contributing directly to its marketing appeal.
5. Remove Extraneous
In most cases, subsidiary materials like packaging and documentation can be reduced. Excess packaging is wasteful, but it can also be damaging to the environment. It can also add to the weight of the shipped item, which increases your shipping costs. Some documentation can be done paperlessly through an application. This helps reduce printer and ink consumption or copying facilities. If you print your own, going digital can save on paper too.
6. Reduce Shipping Costs
Evaluate how much time, fuel, and effort it is taking to bring in raw materials as well as deliver your finished goods. You can adjust delivery routes to reduce distances traveled as well as optimize traveling time. Check to see if sub-contracting shipping would be cheaper than doing it in-house. Negotiating a long-term contract can provide competitive pricing from a local or off-brand shipping company.
7. Increase Workforce Efficiency
Get involved with your workforce. This means you can motivate them as a team, share goals as well as successes, and help them feel like they are making an investment in your business. Proper and thorough training can help them work faster and more efficiently. You may want to offer incentives to workers who can reduce average production time. Also, make sure that each worker’s skills match their assigned tasks.
8. Reduce Your Use of Energy
Audit your machinery and workflow in general. Find out which times less energy is needed. You may be able to cut down on air conditioning costs. Or perhaps there is some equipment that can be turned off while it’s not in use. In some cases, automated control systems can help optimize energy use.
When companies produce more than they need, it costs them to store the excess. In a saturated market, this may mean reducing prices to move some of it. Tightening up your quality control usually reduces mess-ups, and it takes less time than trying to redo poorly done workmanship. Does your facility generate scrap? Streamlining may help reduce it some. If that is not possible, consider if it can be sold or recycled. Spring cleaning is also handy for helping identify surplus or unused equipment that can be resold.
10. Make Wise Investments
Companies can also help reduce manufacturing costs by upgrading machinery and tools. This is a smart investment that delivers long-term benefits. Carefully analyzing the company’s needs and the projected returns on purchases is necessary for profitability. Before making large purchases, asses the cost-benefit. Sometimes, it pays to wait, especially as quickly as technology is advancing today.
What is Manufacturing Cost?
Manufacturing cost is the total of all the resources it takes to make the product. Direct material cost, direct labor, and overhead all contribute to the overall manufacturing costs. It includes all the monies spent on materials, labor, running the required equipment, maintenance, and building costs. Overhead includes rent, insurance, and other costs to occupy and operate the facility.
What is the Advantage of Low Manufacturing Costs?
Just like running a household, managing costs keeps more money in your own pocket. When it costs less to manufacture a product or its components, you can be more competitive in pricing and get ahead of your top competitors. Good quality at a lower price also means more sales, which leads to increased profits and revenue that can be put back into the business.
Does Lowering Manufacturing Costs Reduce Profit?
No. In most cases, reducing manufacturing costs increases profits. However, this is only true if the number of sales remains constant. If reducing costs puts out a lower quality product, the company may have to reduce its prices just to maintain the same level of sales, and that can result in losses rather than gains.
Is it Necessary to Reduce Manufacturing Costs?
No, reducing manufacturing costs is not “necessary.” But it can mean you make more money. Lowering the costs of production is important since it increases revenue and profitability. Costs come in a variety of forms, so it’s essential to know what types of expenses are needed in the manufacturing processes. Then, they can be reduced as possible.
What is the Difference Between Production Costs and Manufacturing Costs?
Production costs are all the expenses needed to run a business. However, manufacturing costs are just the expenses that are related to building a product. Manufacturing costs, then, are calculated in the overall production costs. Production costs are all of the fixed and variable costs incurred to operate the business. Rent, advertising budget, business equipment, office supplies, computers, and many other items needed just for the business to function. Manufacturing costs are sensitive to how the production volume changes. When more product is produced, the manufacturing expenses increase.