Manufacturing costs are the total expenses your business takes on to produce finished goods. This includes everything from raw materials and wages to machine use and electricity. These costs are grouped into three main parts: direct materials, direct labor, and manufacturing overhead.

Understanding your manufacturing costs isn’t just accounting talk — it’s how you figure out if your pricing is right or if you’re bleeding money without knowing it. You may be selling quickly, but without tracking the cost to produce each unit, you might be losing profit every time a product leaves your door.

Here’s the simple formula:

Manufacturing Cost = Raw Materials + Direct Labor + Manufacturing Overhead

It sounds simple, and it is — once you break it down. Each piece of that formula tells you something about how your business runs. Raw materials are what you physically need to build your product. Labor is the hands-on work that gets it made. Overhead covers the rest — things like machine time, rent, or the tape that holds parts in place while they dry.

If you don’t know your exact manufacturing costs, it’s hard to set the right price. Worse, you could end up undercharging and eating the difference.

So before you scale or launch new products, take a step back. Get a clear view of your total manufacturing costs. It gives you control, confidence, and room to grow with profit in mind.

The 3 Main Components of Manufacturing Costs

To get a full picture of your manufacturing costs, you need to break them down into three parts. Each plays a key role in how much it costs to make your product. Miss one, and your numbers will be off.

1. Direct Materials

These are the raw materials that go straight into your product. Think of wood for a chair, fabric for clothing, or metal parts for a machine. If it’s physically part of the final product, it goes here.

Example: For a skateboard, direct materials include the plywood deck, metal trucks, and wheels.

2. Direct Labor

This covers the hands that build, assemble, or package your products. If someone touches the product during production — even for a moment — their wages count as direct labor.

Example: The workers cutting, shaping, or assembling each skateboard.

3. Manufacturing Overhead

This is where many costs get overlooked. Overhead includes all the stuff that keeps production running — even if it never touches the product directly. That means machine maintenance, electricity, rent, tape, spray paint, and the janitor who cleans up the workshop.

Example: Powering the belt sander, using masking tape during molding, or paying for workshop space.

Every part matters. If you leave out even a small piece, you risk mispricing your product or misjudging your profit. Understanding these three parts makes your total manufacturing costs clear — and that’s the first step to staying profitable.

Direct vs Indirect Costs: Know the Difference

Once you’ve got a grip on your manufacturing costs, the next step is knowing what’s direct and what’s indirect. Mix these up, and your calculations won’t add up.

Let’s keep it simple.

What Are Direct Costs?

Direct costs are tied straight to the product. They’re easy to spot because they’re part of the job from start to finish. If the cost helps physically create the product, it’s direct.

Examples:

• The plywood used for a skateboard
  
• Wages for the worker assembling it
  
• Screws, wheels, and paint used on each unit
  

If it goes into the product or gets it made — it’s a direct cost.

What Are Indirect Costs?

Indirect costs keep things running but don’t show up in the product itself. They’re the behind-the-scenes expenses. You need them, but they don’t touch the product directly.

Examples:

• Electricity to power your tools
  
• Rent for the workspace
  
• Cleaning supplies
  
• Salaries for admin or support staff
  

Also, watch out for small things like glue or tape. These consumables are often indirect, even though they’re used during production. And don’t forget about depreciation — raw materials that expire or get damaged still cost you money.

Total Manufacturing Costs vs. Cost of Goods Sold (COGS)

Manufacturing costs and cost of goods sold (COGS) are closely related — but they’re not the same thing. Mix them up, and you might get the wrong picture of your business performance.

Here’s the difference:

Total Manufacturing Costs

This includes everything you spend to make your product.
Think:

• Raw materials
  
• Direct labor
  
• Manufacturing overhead
  

It covers the full cost of production — whether the product is sold or still sitting on the shelf.

Cost of Goods Sold (COGS)

COGS is the cost of making the products you’ve sold. It focuses on direct costs only, like Raw materials and labor used in finished goods that have gone out the door.

It leaves out overheads and any unsold inventory.

Why does this matter?

 Because COGS helps you figure out your gross profit. But total manufacturing costs show you what it really takes to run production — even if some units haven’t sold yet.

Use both.

• Use manufacturing costs to manage your operation.
  
• Use COGS to track your profitability.
  

That way, you always know where your money’s going — and where it’s coming back.

5 Reasons to Track Manufacturing Costs

Tracking your manufacturing costs isn’t just for the accountants. It’s how smart manufacturers stay in control. If you’re making products without knowing what they cost, you’re running blind.

Here are five solid reasons to start tracking them today:

1. Cut Costs Without Guessing

When you know what everything costs, you know where to save.
Maybe it’s switching materials. Maybe it’s speeding up production. But you can’t fix what you can’t see.

2. Understand Your Financial Health

If your costs are rising and your prices aren’t, your profits shrink — fast.
Tracking manufacturing costs helps you spot trends early and make better decisions.

3. Price Your Products Properly

Guessing your prices? Dangerous.
If your cost per unit is $60 and you’re selling at $65, you’ve got $5 to cover every other part of your business. That’s tight.
Know your real cost. Then price for profit.

4. Reduce Waste

Leftover materials. Downtime. Spoiled stock.
All of it adds up.
Tracking costs shows you where waste is happening — and how to stop it.

5. Improve Efficiency

Once you break down your costs, you can spot slow spots.
Maybe one task takes too long. Or a tool eats power.
Knowing this helps you improve the process, not just the product.

How to Calculate Manufacturing Costs: Step-by-Step

Calculating your manufacturing costs doesn’t have to be complicated. Once you break it down, it’s just a simple formula:

Manufacturing Cost = Direct Materials + Direct Labor + Manufacturing Overhead

Let’s walk through it using a real example. Imagine you run a small skateboard workshop.

Step 1: Add Up Direct Materials

List everything that goes into one skateboard:

• One deck: $20
  
• Two metal trucks: $10
  
• Four wheels: $16
  

Direct materials total: $46

Step 2: Add Direct Labor

Let’s say your team builds multiple boards per hour, and labor per unit works out to:
Direct labor: $10

Step 3: Add Manufacturing Overhead

This includes anything that supports production but isn’t part of the product:

• Masking tape: $1
  
• Paint: $1
  
• Electricity: $3
  
• Rent and tools: $5
  

Overhead per unit: $10

Final Calculation:

$46 (materials) + $10 (labor) + $10 (overhead) = $66 total manufacturing cost per unit

Once you’ve got this number, you can:

• Set accurate prices
  
• Track margins
  
• Spot problems early
  
• Plan for scaling
  

Repeat this for every product you make. It takes a bit of time upfront — but it gives you clarity every time you look at your numbers.

How Scale Affects Manufacturing Costs

As your business grows, your manufacturing costs don’t stay the same. Some go down. Some go up. If you’re scaling and still using the same cost estimates, you’re probably off the mark.

Here’s how scaling changes things:

Bulk Buys = Lower Material Costs

Ordering more raw materials usually means better prices per unit.
Buy 100 decks? You might pay $20 each.
Buy 1,000? The supplier may drop that to $17.

Labor May Get Faster (or Not)

With more experience and better processes, your team may build products faster.
That means labor cost per unit could shrink — but only if your workflow supports it.

Overhead Doesn’t Scale Evenly

Some overhead costs grow with you. Others stay flat.

• Rent might stay the same until you move
  
• Utility bills could rise
  
• Machines may need more maintenance
  

Always check which costs scale and which don’t.

Track Costs as You Grow

Don’t assume what worked at 10 units still works at 1,000.
As you scale, revisit your cost formula regularly. Adjust for what’s changed — and what hasn’t.

The goal?
Keep your costs clear and predictable. That way, growth brings more profit — not more problems.

 Tools to Automate Manufacturing Cost Tracking

Manually tracking manufacturing costs work for a while — until it doesn’t. As orders grow, spreadsheets break, mistakes creep in, and time gets tight.

That’s where automation steps in.

Why Use Cost Tracking Tools?

Good Inventory management software do the math for you. They pull real-time data from your inventory, production, and labor. No guesswork. no double entries.

You get:

• Accurate cost per unit
  
• Real-time updates as things change
  
• Fewer errors from manual input
  
• More time to focus on production, not paperwork
  

What to Look For in a Tool

Not all software fits every shop. Here’s what to check for:

• Tracks direct materials, labor, and overhead
  
• Syncs with your inventory and sales
  
• Shows cost breakdown per product
  
• Updates automatically as you make or sell items
  
• Scales with your business
  

Example: Using a Cloud Platform

Platforms like ArmPOS let you plug in your raw materials, assign tasks to team members, and track costs automatically. As production runs, your total manufacturing costs update live — no spreadsheet needed.
If your team is growing or your product line is expanding, automate your cost tracking. It saves time, keeps your data clean, and helps you make decisions based on facts — not estimates.