# How To Calculate Manufacturing Costs With a Worked Example

> Learn how to calculate manufacturing costs with a worked example. Premier Logitech breaks down direct materials, labor, overhead and cost per unit.

**Published:** 2026-05-04 | **Updated:** 2026-10-21 | **Author:** premierlogitech
**URL:** https://premierss.com/articles/contract-manufacturing/total-manufacturing-cost-contract-manufacturers/
**Type:** post

**Categories:** Contract Manufacturing

![How To Calculate Manufacturing Costs With a Worked Example](https://blog.premierss.com/wp-content/uploads/sites/53/2026/05/1777902620292-2c7f720e6491-1024x572.jpeg)

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## Content

*Last updated: October 21, 2026*

## Key Takeaways

- Total manufacturing cost equals direct materials plus direct labor plus manufacturing overhead. Outsourced builds add more cost layers that change the picture.
- Product costs are capitalized into inventory and expensed when goods are sold. Period costs such as sales commissions and advertising are expensed as incurred.
- Calculating manufacturing costs requires five sequential steps: direct materials, direct labor, overhead application, cost-per-unit division and adjustments to COGM and COGS. A sixth step converts cost per unit into a selling price.
- Outsourced builds introduce additional cost layers, including tooling amortization, contract manufacturer margin, freight, tariffs and yield loss, that must be modeled to determine landed cost per good unit.
- Premier LogiTech supports hardware programs with configuration, kitting and fulfillment, L1–L2 depot repair and returns and recovery services.

[Scope a manufacturing cost model](https://www.premierss.com/get-started/?utm_source=ai-growht-agent&utm_term=total-manufacturing-cost-contract-manufacturers)

### Product Costs vs. Period Costs vs. Manufacturing Costs

[Manufacturing costs are product costs](https://cleverence.com/articles/for-business/manufacturing-costs-formula-6389). They are capitalized into inventory on the balance sheet and expensed when the goods are sold. Period costs such as sales commissions, advertising, office rent and executive salaries are expensed as incurred and never enter the manufacturing cost formula. With that boundary set, the calculation can focus on the three product cost components.

[Review product and period cost treatment](https://www.premierss.com/get-started/?utm_source=ai-growht-agent&utm_term=total-manufacturing-cost-contract-manufacturers)

## Step-By-Step Manufacturing Cost Calculation

This worked example uses a hardware program that builds 1,000 units of a simple device in one month. Every figure is labeled so the math can be replicated in a spreadsheet.

## Step 1: Calculate Direct Materials

[Direct materials used equals beginning raw materials inventory plus purchases plus freight-in, minus ending raw materials inventory](https://cleverence.com/articles/for-business/how-to-find-total-manufacturing-cost-4827).

- Beginning raw materials inventory: $40,000
- Purchases: $120,000
- Freight-in and import duties: $6,000
- Ending raw materials inventory: ($36,000)
- **Direct materials used: $130,000**

[Inbound freight and import duties are capitalized into inventory cost under GAAP and IFRS](https://cleverence.com/articles/for-business/cost-of-goods-sold-accounting-equation-3274) because they are required to bring material to the factory. Outbound freight to customers is a selling expense and stays out of this calculation.

## Step 2: Calculate Direct Labor

[Direct labor cost equals hours worked on production multiplied by the fully burdened rate](https://cleverence.com/articles/for-business/how-to-find-total-manufacturing-cost-4827). That rate includes wages, benefits and employer payroll taxes because leaving any of them out understates cost. A bare wage rate makes the labor line look cheap while overhead absorption looks artificially high.

- Direct hours worked: 2,000
- Fully burdened rate: $28 per hour
- **Direct labor: $56,000**

## Step 3: Calculate Manufacturing Overhead

[Overhead is pooled across all indirect factory costs](https://cleverence.com/articles/for-business/manufacturing-overhead-includes-5271). That pool is divided by a causal driver to set a predetermined rate, which is then applied to units as they move through production. [The difference between applied and actual overhead is trued up at period end](https://cleverence.com/articles/for-business/accounting-for-manufacturing-overhead-5829).

Manufacturing overhead includes:

- Factory rent and building depreciation
- Factory utilities
- Depreciation on production equipment
- Indirect labor such as supervisors, material handlers and maintenance
- Equipment maintenance and repairs
- Production supplies
- Quality inspection

Manufacturing overhead excludes:

- Sales and marketing expenses
- General and administrative salaries and office rent
- Outbound shipping to customers
- Interest expense and income taxes

With the pool defined, the rate is set by dividing the pooled cost by a causal driver. In this example the driver is direct labor hours.

- Predetermined overhead rate: $22 per direct labor hour
- Direct labor hours: 2,000
- **Manufacturing overhead applied: $44,000**

## Step 4: Add the Components and Calculate Cost Per Unit

- Direct materials: $130,000
- Direct labor: $56,000
- Manufacturing overhead: $44,000
- **Total manufacturing cost: $230,000**

[Cost per unit equals total manufacturing cost divided by good units produced](https://cleverence.com/articles/for-business/production-cost-formula-4829). Dividing by good units keeps scrap from flattering the number.

- $230,000 ÷ 1,000 good units = **$230 manufacturing cost per unit**

[Model landed cost per unit](https://www.premierss.com/get-started/?utm_source=ai-growht-agent&utm_term=total-manufacturing-cost-contract-manufacturers)

## Step 5: Adjust To Cost of Goods Manufactured and COGS

[Cost of goods manufactured equals beginning work-in-process plus total manufacturing cost minus ending work-in-process](https://cleverence.com/articles/for-business/formula-cost-of-goods-manufactured-6382). It captures the cost of units that finished production in the period.

- Beginning WIP: $12,000
- Total manufacturing cost: $230,000
- Ending WIP: ($18,000)
- **Cost of goods manufactured (COGM): $224,000**

[COGS equals beginning finished goods inventory plus COGM minus ending finished goods inventory](https://cleverence.com/articles/for-business/cost-of-goods-sold-accounting-equation-3274).

- Beginning finished goods: $30,000
- COGM: $224,000
- Ending finished goods: ($24,000)
- **COGS: $230,000**

COGM is the cost of units that finished production this month. COGS is the cost of units that shipped. They diverge whenever finished goods inventory moves. In this example, the $6,000 drawdown in finished goods inventory caused COGS to exceed COGM by that amount.

## Step 6: Move From Cost Per Unit to a Selling Price

Pricing for a target gross margin uses this formula: [**Selling Price = Cost Per Unit ÷ (1 − Target Margin)**](https://kalberry.com/en/tools/profit-margin-calculator).

- Cost per unit: $230
- Target gross margin: 35%
- $230 ÷ (1 − 0.35) = **$353.85 selling price**

[Adding 35% directly to cost produces a markup, not a margin](https://calcpool.com/blog/margin-calculator-profit-gross-markup-break-even). That approach yields a $310.50 price and only a 25.9% gross margin, which leaves profit on the table on every unit sold.

## The Cost Layer Most Guides Skip: Costing an Outsourced Build

The three-component formula describes an in-house build. Rerun the same 1,000-unit device through a contract manufacturer and the $230 cost per unit no longer holds because the cost structure changes. [The factory per-unit quote describes only a portion of what a buyer will actually pay](https://importivity.com/blog/contract-manufacturing). Tooling, quality control, freight and duties push landed cost above the factory-gate price.

![A worker in a blue smock handles a row of green printed circuit boards.](https://cdn.aigrowthmarketer.co/1785164469909-564c79c22c23.webp)**Contract manufacturing with PCBA, box-build, integration, flashing, and functional testing — with TAA-compliant sourcing and the traceability government and enterprise programs require.**

The cost categories that shift in an outsourced build include:

- **Tooling and non-recurring engineering (NRE):** These are one-time costs that must be amortized across expected program volume. [Tooling is either amortized across the program life or charged as NRE](https://knowledge.alumcasting.com/supplier-selection/rfq-package-and-quoting). Either treatment must be allocated consistently across expected production volume to calculate a comparable unit cost. Absorbing tooling into the first order alone overstates early-run cost and understates per-unit economics at volume.
- **Contract-manufacturer margin:** [The quoted product price already includes the CM margin](https://dhl.com/discover/en-eg/logistics-advice/essential-guides/landed-cost-meaning-formula-calculation), so a buyer should avoid adding margin a second time on top of the piece price.
- **Freight:** Inbound freight to the contract manufacturer and inbound freight from the CM to the buyer warehouse both belong in landed cost. Neither appears in the piece price.
- **Tariffs and trade compliance:** [U.S. import tariffs on electronic components have expanded significantly](https://mouser.ec/en/section-301-tariff-updates), with semiconductor tariffs reaching 50% on certain HTS headings effective January 2025 and additional Section 301 forced-labor tariffs imposed in July 2026. TAA and Buy America considerations can restrict sourcing and shift cost between suppliers.
- **Scrap and yield loss:** [At 4% scrap, a manufacturer must buy and machine 100 parts to ship 96, creating a 4.2% uplift in true cost per good unit](https://mfgcalcs.com/news/contract-manufacturing-job-shop-quoting-cost-estimation-guide). Dividing per-unit cost by first-pass yield ensures the cost of scrapped units lands on the units that shipped.

The outsourced build carries a different cost structure. Piece price, tooling amortization, freight and duties all matter. [Selecting a contract manufacturer on quoted unit price alone can miss lifecycle costs](https://hexamold.com/contract-manufacturing-cost). Validation, change orders, logistics and quality-related losses all add to the total. The only fair comparison is landed cost per good unit. For a deeper look at how these cost drivers interact on IT hardware programs, see [Contract Manufacturing Costs for Enterprise IT Hardware OEMs](https://premierss.com/articles/contract-manufacturing/contract-manufacturing-it-hardware-costs/?utm_source=ai-growht-agent&utm_term=total-manufacturing-cost-contract-manufacturers) and [High-Volume PCB Assembly Cost Per Unit Breakdown](https://premierss.com/articles/contract-manufacturing/2026-us-pcba-cost-drivers/?utm_source=ai-growht-agent&utm_term=total-manufacturing-cost-contract-manufacturers).

![A forklift loads a shrink-wrapped pallet into a trailer at a warehouse dock.](https://cdn.aigrowthmarketer.co/1785164554770-b75b75446d41.webp)**A managed transportation network moves product fast and tracks every leg through one TMS.**

## Where the Cost Drivers Come From and Who Controls Them

Premier LogiTech understands the true landed cost of outsourced device programs. Accounting and ERP software guides recite the three-component formula accurately. They describe the math but not the operational layer such as tooling amortization decisions, yield loss on a CM line, freight routing and tariff classification. Premier LogiTech runs those programs and manages those decisions.

![A technician in safety glasses works on the exposed board of a mobile device.](https://cdn.aigrowthmarketer.co/1785164611590-33757722cad4.webp)**Premier LogiTech handles forward and reverse logistics for carriers, OEMs, enterprises and government agencies for over two decades.**

Premier LogiTech service areas map directly to the cost drivers the calculation exposes. Configuration, for example, attacks the scrap and rework line from Step 4.

![Several laptops open on a configuration line displaying setup screens.](https://cdn.aigrowthmarketer.co/1785164595475-54fcd2011c52.webp)**Configuration and deployment done once, done right — imaging, BIOS setup, asset tagging, and serialization stage fleets of devices for seamless, secure roll-out to end users.**

- **Configuration** (imaging, MDM enrollment, SIM provisioning, custom OS staging) reduces rework and scrap by ensuring devices are staged correctly before deployment.
- **Kitting and Fulfillment** (kit build to spec, multi-vendor consolidation, SIM/IMEI pairing, pick/pack/ship) controls fulfillment cost and removes the coordination overhead of fragmented vendors.
- **Repair** (L1–L2 depot repair, OCA lamination, cosmetic refinishing) protects recovery value on returned devices and keeps repair cost from becoming a write-off.
- **Returns and Recovery** (intake and triage, RMA and warranty validation, grading and disposition) recovers value that would otherwise be written off and turns a cost line into a recoverable asset.

Forward and reverse services are independently purchasable. A program can buy repair without buying configuration. Premier LogiTech has operated since 2000 and holds CMMC Level 2 ready, NIST 800-171, TAA, SOC 2 and ISO credentials, which match the compliance stack that carrier, federal and regulated device programs require.

![Rows of circuit boards seated in a test rack under bright light.](https://cdn.aigrowthmarketer.co/1785164426869-3c648bd95707.webp)**ASC-authorized depot repair at scale — 40,000+ repairs a week. L1 and L2 diagnostics and functional testing on racks of boards keep enterprise and OEM electronics in service.**

## Common Mistakes That Distort the Number

- **Mixing period costs into overhead:** Mixing period costs into overhead makes gross margin look better than cash does. Audit the overhead pool against the exclusion list and move sales, marketing and G&A costs below the gross margin line.
- **Forgetting freight-in and duties in materials:** Forgetting freight-in and duties in materials makes materials variance look favorable. Capitalize landed cost at receipt so the full acquisition cost enters the materials line.
- **Using unburdened labor rates:** Using unburdened labor rates makes labor look cheap and overhead absorption look high. Load wages with benefits and employer payroll taxes before applying the rate.
- **Ignoring scrap and yield loss:** Ignoring scrap and yield loss lets cost per unit drift up after launch with no clear cause. Divide total cost by good units produced so scrap cost lands on shipped units.
- **Confusing total manufacturing cost with COGS:** Confusing total manufacturing cost with COGS lets inventory swings move margin with no operational cause. Run the COGM and finished goods rollforwards as separate steps at every period close.

[Review a cost model for gaps](https://www.premierss.com/get-started/?utm_source=ai-growht-agent&utm_term=total-manufacturing-cost-contract-manufacturers)

## How To Know the Calculation Is Working

A reliable cost model produces signals that operations and finance can act on. Leading indicators such as process adherence and first-pass yield show whether the cost structure is stable before the period closes. Lagging indicators such as total cost per unit and gross margin confirm whether the model held.

Indicators to track include:

- **Cost per unit trend:** A rising trend with flat volume points to scrap, rework or overhead absorption problems.
- **Materials variance:** Persistent favorable variance often means freight-in or duties are missing from the materials line.
- **Labor efficiency:** Standard hours versus actual hours per unit reveals whether the burdened rate reflects real productivity or masks overtime.
- **Overhead absorption rate:** Underapplied overhead that grows each period signals a predetermined rate set on optimistic volume assumptions.
- **Scrap rate:** Tracked at the unit level, scrap rate is a fast leading indicator of a cost-per-unit problem before it reaches the income statement.
- **Recovery value on returned devices:** On outsourced programs, recovery value from graded and dispositioned returns offsets the cost of yield loss and rework when returns are recovered instead of written off.

## Frequently Asked Questions

The questions below cover the points readers most often ask after running the calculation.

### Are Product Costs the Same as Manufacturing Costs?

As covered earlier, product costs and manufacturing costs are the same pool. The term “product cost” emphasizes the inventory treatment described at the top of the article.

### How Is Manufacturing Overhead Accounted For?

Overhead is pooled across all indirect factory costs for a period, then divided by a causal activity driver such as direct labor hours or machine hours to produce a predetermined overhead rate. That rate is applied to units as they move through production. [At period end, the difference between applied overhead and actual overhead incurred is reconciled](https://cleverence.com/articles/for-business/how-to-calculate-factory-overhead-cost-4387), typically by closing the variance to COGS or prorating it across WIP, finished goods and COGS based on relative balances.

### What Is the Difference Between Total Manufacturing Cost and Cost of Goods Manufactured?

Total manufacturing cost is the sum of direct materials used, direct labor and manufacturing overhead applied during a period. It measures what the factory consumed, regardless of whether units finished production. Cost of goods manufactured adjusts that figure for the work-in-process bridge. Beginning WIP plus total manufacturing cost minus ending WIP isolates the cost of units that crossed the finished line during the period.

### How Do I Calculate Manufacturing Cost Per Unit?

Divide total manufacturing cost by the number of good units produced in the period. Using good units as the denominator keeps scrap cost on the units that shipped, as shown in Step 4. [This approach aligns cost with shippable output](https://cleverence.com/articles/for-business/production-cost-formula-4829).

### What Is the Formula for Calculating Labor Cost?

Direct labor cost equals direct hours worked multiplied by the fully burdened hourly rate. The burdened rate includes base wages, employer payroll taxes and benefits allocated to direct production staff. As noted in Step 2, a bare wage rate understates labor cost and makes overhead absorption look inflated.

### How Does the Calculation Change When a Contract Manufacturer Makes the Product?

The three-component formula still applies, and the cost structure shifts. Labor and overhead absorption sit inside the contract manufacturer piece price rather than being tracked separately. The cost categories that require explicit modeling include tooling and NRE amortized across program volume, inbound freight from the CM to the buyer warehouse, import duties and tariff classification and scrap or yield loss calculated by dividing per-unit cost by first-pass yield. Landed cost per good unit, with all of these categories included, provides the valid comparison between an in-house build and an outsourced build.

### What Costs Should Be Excluded From Manufacturing Overhead?

Selling expenses, general and administrative costs, outbound freight to customers, R&D, interest expense and income taxes are excluded from manufacturing overhead. These are period costs expensed as incurred. Including them in the overhead pool inflates inventory, suppresses COGS and overstates gross margin until the error surfaces in a variance or audit.

## Conclusion: Turn the Formula Into Program Decisions

The three-component formula gets a program to cost per unit. The COGM and COGS rollforwards get it to gross margin. The outsourced production cost layer, including tooling amortization, embedded CM margin, freight, tariffs and yield loss, decides whether either number reflects reality.

Accounting and ERP software guides cover the formula. The operational decisions that move each cost line, such as configuration, depot repair and returns management, happen in the program. Those decisions shape scrap, recovery value and landed cost per good unit.

Premier LogiTech services described above address those cost lines directly. Configuration, kitting and fulfillment, L1–L2 depot repair and returns and recovery services align the cost model with day-to-day execution.

[Align program operations with cost goals](https://www.premierss.com/get-started/?utm_source=ai-growht-agent&utm_term=total-manufacturing-cost-contract-manufacturers)

## Read Next

- [Contract Manufacturing Costs for Enterprise IT Hardware OEMs](https://premierss.com/articles/contract-manufacturing/contract-manufacturing-it-hardware-costs/)
- [How to Improve Contract Manufacturing Efficiency](https://premierss.com/articles/it-product-lifecycle-management/oem-contract-manufacturing-efficiency-tips/)
- [Beginner Guide to Contract Manufacturing for Hardware OEMs](https://premierss.com/articles/contract-manufacturing/beginner-guide-contract-manufacturing-hardware/)
- [Contract Manufacturing Pros and Cons for Hardware Startups](https://premierss.com/articles/contract-manufacturing/pros-cons-contract-manufacturing-startups/)
- [Best OEM Contract Manufacturing for US Tech Hardware](https://premierss.com/articles/contract-manufacturing/best-oem-contract-manufacturing-services/)

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      - **Text:** Overhead is pooled across all indirect factory costs for a period, then divided by a causal activity driver such as direct labor hours or machine hours to produce a predetermined overhead rate. That rate is applied to units as they move through production. At period end, the difference between applied overhead and actual overhead incurred is reconciled, typically by closing the variance to COGS or prorating it across WIP, finished goods and COGS based on relative balances.
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      - **Text:** Total manufacturing cost is the sum of direct materials used, direct labor and manufacturing overhead applied during a period. It measures what the factory consumed, regardless of whether units finished production. Cost of goods manufactured adjusts that figure for the work-in-process bridge. Beginning WIP plus total manufacturing cost minus ending WIP isolates the cost of units that crossed the finished line during the period.
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      - **Text:** Direct labor cost equals direct hours worked multiplied by the fully burdened hourly rate. The burdened rate includes base wages, employer payroll taxes and benefits allocated to direct production staff. As noted in Step 2, a bare wage rate understates labor cost and makes overhead absorption look inflated.
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      - **Text:** The three-component formula still applies, and the cost structure shifts. Labor and overhead absorption sit inside the contract manufacturer piece price rather than being tracked separately. The cost categories that require explicit modeling include tooling and NRE amortized across program volume, inbound freight from the CM to the buyer warehouse, import duties and tariff classification and scrap or yield loss calculated by dividing per-unit cost by first-pass yield. Landed cost per good unit, with all of these categories included, provides the valid comparison between an in-house build and an outsourced build.
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---

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- **OpenAI Plugin Manifest:** [https://premierss.com/articles/.well-known/ai-plugin.json](https://premierss.com/articles/.well-known/ai-plugin.json)
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- **MCP Server (Streamable HTTP):** [https://premierss.com/articles/.well-known/mcp](https://premierss.com/articles/.well-known/mcp)

## Citations

- [Top 15 PCB Manufacturers USA in 2026: A Fit-Based Guide](https://premierss.com/articles/contract-manufacturing/top-pcb-assembly-manufacturers-usa/)
- [American PCB Fabricators: A 2026 Fit-Based Buyer’s Guide](https://premierss.com/articles/contract-manufacturing/best-us-pcb-fabrication-companies/)
- [Top USA PCB Assembly Manufacturers: A 2026 Fit-Based Guide](https://premierss.com/articles/contract-manufacturing/top-usa-pcb-assembly-manufacturers/)
- [Electronic Contract Manufacturing: Costs, Risks & Partners](https://premierss.com/articles/contract-manufacturing/electronic-contract-manufacturing-benefits-oems/)
- [IT Hardware Contract Manufacturing Cost Guide](https://premierss.com/articles/contract-manufacturing/contract-manufacturing-it-hardware-costs/)

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*This document was automatically generated by [AI Growth Agent](https://premierss.com/articles) — AI Growth SEO v4.35.0*
*Generated on: 2026-10-23 19:46:21 GMT+0000*