Hispanic Male Factory Worker Checking Goods On Production Line, to ilustrate the idea "Porduction costs"
Betsy Wise
By: betsy_wise
Read in 16 minutes

A complete guide on how to reduce manufacturing costs and production expenses

Reducing manufacturing costs and production expenses are critical issues for companies in many industries. By reducing them, you can improve your competitiveness and profitability.

This guide will provide tips on how to reduce these costs. We will start by discussing strategies for reducing manufacturing costs. Next, we will look at strategies for reducing production costs.

Table of Contents
1. What are manufacturing costs
2. Reducing manufacturing costs: how to do it
3. What are production costs?
4. How to reduce the cost of production
5. Difference between production and manufacturing costs
7. FAQs

What Are Manufacturing Costs?

Manufacturing costs are the costs incurred in the production of goods. These costs can include raw materials, labor, and other overhead expenses.

These costs have a significant impact on a company’s bottom line, so businesses need to track and manage these costs carefully.

Why is it important to reduce manufacturing costs?

There are many reasons why it is vital for manufacturing cost reduction. Here are some of them:

  • It can help to increase profits. When reducing their manufacturing costs, companies can sell their products at a lower price, making more sales and generating more revenue.
  • This also helps to create jobs. When your company has low manufacturing costs, you can invest more in their businesses, which can create new jobs.
  • Improve the environment’s health. When you manufacture products, using fewer resources and generating less waste can help reduce pollution and conserve energy.

Elements of Manufacturing Costs

The cost of manufacturing a product comprises several elements, which can be broadly classified into the following categories:

  • Direct materials costs are the raw materials used to manufacture the product.
  • Direct labor costs are the wages you pay to the workers directly involved in the production process.
  • Factory overhead costs are the indirect costs incurred in the manufacturing process, such as utilities, property taxes, insurance, and depreciation.
  • Marketing and selling expenses include the costs of marketing and selling the product, such as advertising, promotion, and commissions.
  • General and administrative expenses are the business’s costs, such as rent, salaries, and office supplies.

The total cost of manufacturing a product is the sum of all these elements. The relative importance of each element varies from one industry to another and from one type of product to another.

In some cases, direct materials costs may be the largest component of the total cost. In other cases, labor costs may be the largest.

It all depends on the particular circumstances when considering reducing manufacturing costs.

Discover how to track business expenses

Reducing Manufacturing Costs: How To Do It

Review your manufacturing process

The first step to reducing manufacturing costs is to review your manufacturing process.

This will help you identify areas where you can make changes or improvements that will lead to cost savings.

Reduce raw material costs

One way to reduce manufacturing costs is to reduce the cost of raw materials.

You can do it by negotiating better prices with suppliers or by using lower-cost materials.

Reduce labor costs

Labor costs are often one of the biggest expenses for manufacturers.

Several ways to reduce labor costs include automating processes, training employees more efficiently, and reducing overtime hours.

Reduce energy costs

Energy costs can be a significant expense for manufacturers.

Some ways to reduce energy costs include installing more efficient equipment, improving insulation, and using alternative energy sources.

Reduce waste

Waste can add up quickly and cost manufacturers a lot of money.

There are several ways to reduce waste, including streamlining manufacturing processes, recycling materials, and reusing components.

Reduce overhead costs

Overhead costs are all the other costs not directly related to labor, materials, or energy.

These can include rent, insurance, marketing, and office supplies. One way to reduce overhead costs is to move to a smaller or more efficient facility.

As you can see, there are many ways to reduce manufacturing costs.

By closely examining your manufacturing process and making some changes, you can save your business money.

Other manufacturing cost-saving ideas

  • Review your manufacturing process regularly and look for ways to streamline or automate steps.
  • Make sure you are using the most efficient production methods and equipment.
  • Use lean manufacturing principles to eliminate waste and boost efficiency.
  • Consider outsourcing some or all of your manufacturing operations.
  • Use just-in-time inventory methods to reduce the cost of holding inventory.
  • Take advantage of economies of scale by producing larger quantities of products.
  • Review your costs regularly and look for ways to reduce them.
  • Implement a continuous improvement program to strive for more efficient operations constantly.
  • Work with your suppliers to find ways to reduce the cost of materials and components.
  • Consider moving to a lower-cost location if it makes sense for your business.

What Are Production Costs?

A business incurs production costs to produce goods or services. These costs can include materials, labor, and other expenses related to production.

You can refer to production costs as the “cost of goods sold” (COGS).

Accounting for production costs is to track the expenses associated with manufacturing or providing a product.

Why is it important to reduce production costs?

There are several reasons why it is essential to reduce business expenses. Here are the most important:

  • It can help increase profits.
  • It can help make products more affordable for consumers.
  • Ensure that businesses can stay competitive in today’s marketplaces.
  • Companies can protect the environment by using fewer resources.

Elements of Production Costs

Monitor the expenditures listed below without sacrificing quality, and you’ll be well on your way to improving the overall performance of your business.

Labor

Small business owners consider the people who make the production happen as the backbone of their operation.

Associated costs include expenses like wages, employee benefits, and payroll taxes.

Business owners try to balance employing the right number of employees and reducing or increasing production levels to realize a profit.

You must also calculate expenses incurred by outside vendors or paid employees to maintain equipment.

Raw materials

If, for example, you manufacture a line of furniture, the wood, screws, glue, sandpaper, and other materials you use in construction are raw materials.

Likewise, indirect materials would include light bulbs, rags, and other consumables used during the production process.

Machinery

Equipment used in the cost of production might include forklifts used to load or move raw materials through the production line.

Other examples are bulldozers, conveyors, and industrial equipment to create textiles or semiconductors.

Energy

In addition to utility costs, energy purchases may include gasoline, oil, or coal to run equipment or heat your facility.

Are you beginning to see that it’s not that hard to track your cost of production?

Let’s take a bird’s eye view of additional categories of production costs.

Types of Production Costs

Keeping a close eye on your costs builds confidence in your ability to stay on budget or even keep expenses lower than estimated.

You may be surprised by how quickly your business grows by keeping abreast of costs to increase your cash flow.

Fixed

These costs stay constant even if production and related expenses increase. In other words, you’ll pay fixed costs every month for the life of your business.

Fixed costs include expenditures for insurance, interest, property taxes, and annual salaries. Think of these costs as what you always pay regardless of your level of business activity.

Variable

On the other hand, variable costs fluctuate as production increases or decreases. Variable costs are directly related to output. As volume increases, so do these expenses.

Examples include costs for raw materials, commissions, and labor.

Fixed and Variable Combined

As production increases, it’s understandable that constant expenses (like utilities and salaries), as well as variable costs (such as direct materials cost and other associated supply expenses), could increase exponentially. In other words, when production ramps up, your fixed and variable costs may increase.

As you grow your business, the cost structure of your business will evolve.

For example, businesses may need to add equipment or lease more production space to serve more demand.

When making these investments, calculate how much volume you need to maintain or increase your gross margins and cover all the new fixed costs.

In short, keep an eye on your profit margins to ensure your business growth doesn’t put you out of business.

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How To Reduce The Cost of Production: 10 Best Ways To Do It?

When thinking about the best ways to reduce costs in manufacturing, you should consider these ideas to do it.

Reduce supply costs

Check out new suppliers, so you buy quality materials at the best possible wholesale price.

Don’t hesitate to ask for an additional discount when you use a certain supplier consistently and always pay them on time.

Maybe you can join with another business and purchase materials in larger bulk quantities to reduce costs.

Save money on insurance

Insurance companies are notoriously competitive whether you’re shopping for vehicles, liability, or other types of insurance.

Work with an insurance broker to review your business insurance needs and have them get you the best rates.

You can increase deductibles when possible or secure discounts when installing a security system, fire alarm, or water sprinklers.

Modernize marketing efforts with affordable tools

It’s possible to increase sales just by investing a little money in digital marketing.

By creating an online presence, potential buyers become familiar with your signature brand and become interested in your business.

And this shouldn’t cost you a leg and an arm if you choose the right platforms. Remember that most social platforms are free.

Visit your accountant

Check in with a professional accountant yearly, if not more often, to ensure you are listing allowable business expenses to take advantage of every business tax deduction.

It’s important to keep receipts in a safe place, such as a secure binder, and to record vehicle mileage as you travel between locations.

Optimize the use of technology

Cheap and free management software is available to manage inventory, sales, employee, and sales information.

Other technologies you’ll want to investigate are security, private networking, and software to store business data.

By availing yourself of technology, you free up time for advertising and marketing and reduce personal stress.

Optimize space

If you rent space, there’s no reason you can’t negotiate lease terms with the landlord.

Depending on zoning requirements, it may be possible to operate a portion of your business from home to save rent, utilities, and insurance costs.

Maximize employees’ skills

Happy employees translate to increased performance with less chance of turnover.

Increase vacation, and other paid leave, offer a retirement plan, or use a performance management system to increase productivity.

Prioritize quality over quantity

Keeping a large inventory of less-than-stellar products does nothing toward sustained sales and longevity.

Buyers keep coming back because superior products always win out over the competition.

Reduce vehicle expenses

New vehicles depreciate as soon as they leave the premises.

Buying used vehicles in good working order can save you thousands, not to mention lower insurance premiums.

Fuel-efficient vehicles save you money and are generally more maintenance-free.

Some business owners lease a vehicle for a set amount of time.

It’s up to you whether you lease another vehicle at the end of the term or decide to purchase it.

Keep production costs on a spreadsheet

Update all your production costs regularly so you know at a glance exactly what you’re spending and analyze the data.

Once you insert formulas into your spreadsheet, the document does all the monthly computations as you input new data.

Now that you’ve learned the significance of getting a handle on costs, you can enjoy the perks of streamlining your day-to-day operation.

Difference Between Production and Manufacturing Costs

As you’ve already learned, production costs include fixed and variable costs. Fixed costs remain fairly constant while variable costs go up and down depending on production volume.

Manufacturing costs are restricted to the actual costs involved in turning raw materials into a sellable product.

Direct costs include the cost of materials, labor costs to produce the specific product, and indirect costs such as factory overhead incurred during the manufacturing process.

Production Costs During the COVID-19 Pandemic

The coronavirus pandemic affected every single business in the world, but some of the most affected are those that produce products, as most have had to close temporarily, and social distancing guides prevent people from being too close to each other.

During difficult times like these, your finances might be hurting, and it’s a great idea to cut as many production costs as possible during the foreseeable future.

This will allow you to save capital for emergencies, pay employees, and plan for the future.

But, of course, many businesses cannot have the luxury of cutting too many production costs.

Here’s where a small business loan could come in handy to improve your cash flow and allow you to keep spending as much as you need on your production.

Get the financing you need to accomplish your business's next steps to succeed

FAQs

Does the product cost the same as the manufacturing cost?

Businesses use these figures to evaluate the total cost of production in a manufacturing business, but they are not the same.

Production costs reflect all expenses associated with operating and running a business (rent, advertising and marketing, equipment, and supplies).

On the other hand, manufacturing costs represent only the direct expenses necessary to make the product (materials, labor, and overhead).

These costs are variable, meaning that they will increase or decrease depending on the changes in production volume.

How do you calculate your cost of production?

You can calculate your total production costs by adding the fixed and variable costs. To determine the cost of production per unit, divide this sum by the number of units manufactured in the period covered by those costs.

How do lower production costs?

There are a few ways to lower production costs: improve process efficiencies, negotiate better pricing with suppliers, and find less expensive materials or labor.

You can improve process efficiencies by streamlining operations, automating tasks, and reducing waste.

You can negotiate better pricing with suppliers by forming long-term partnerships or working with multiple suppliers to get the best price.

What are the two specific manufacturing costs which can be reduced?

You can reduce many manufacturing costs. However, the cost of raw materials and labor is the most important.

To reduce the cost of raw materials, you can find cheaper suppliers or develop new processes that use less material.

To reduce the cost of labor, you can automate tasks or move production to lower-cost countries.

What are the non-manufacturing costs?

There are a variety of non-manufacturing costs that businesses may incur.

These can include costs associated with advertising and marketing, research and development, administrative costs, and debt service.

It’s important for businesses to be aware of all of the potential expenses they may face in order to make informed decisions about their operations.

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