The Ten Manufacturing Cost Categories, in Production Order

Costdown splits the cost of a product into ten categories, in the order a unit actually moves through a plant. This guide explains what each one is, when to fill it in, how it is calculated, and - just as important - what does NOT belong in it.

The whole formula first, before the ten parts

Before reading the categories one by one, look at the final sum. Everything below is just ten terms of a single addition:

Monthly cost = Material + Machinery + Labor + Consumable tooling + Rework + Outsourced processing + Packaging + Logistics + Factory overhead + Scrap

Cost per unit = Monthly cost / Monthly volume

Scrap sits at the END of that addition rather than in production order, and that is deliberate: one bad part loses everything already spent on it, so the system has to total the other nine categories before it knows what a bad part is worth. Leave the “cost per defect” field empty and it uses exactly that figure - the other nine divided by the volume.

To try it on your own numbers right now, no sign-up needed: open the cost calculator and fill in whichever categories you already have figures for.

One example carried through all ten

The whole article uses ONE example so you can watch the number grow: a folded steel bracket, 2,000 pieces a month, a shop running 26 days x 2 shifts x 8 hours at 0.85 efficiency. Each category below adds its part, and the table at the end pulls them into a single figure.

1. Material (MATERIAL)

Raw material bought to make the product — including offcuts, chips and trim, because you paid for those too.

Fill in when the product consumes material. Leave out if you only machine customer-supplied stock and never pay for it. If the customer supplies material but you carry the cost of scrapping it, put that under Scrap instead.

A 2.5 kg steel blank at 45,000/kg, 95% yield (5% lost to trim and chips), 1,500 pieces a month.

Material total = Σ ( (Weight × Unit price ÷ Yield) × Volume )

Yield below 1 INCREASES cost, because you must buy more than ends up in the product.

Not just metal. Use it for plastic pellets, fabric, timber, paper, chemicals, paint, adhesive, coolant, welding gas, packaging — anything bought in that ends up in the product or is consumed making it.

Running example: 1.2 kg x 22,000 / 0.88 x 2,000 = 60,000,000

2. Machinery (MACHINE)

The share of a machine's value consumed by this product. A machine is bought once but used for years, so its cost is spread over time and then charged to the product.

Fill in when the product occupies a machine. Leave out for purely manual steps with no equipment. Fully depreciated machines should still be entered — they still consume power, still need maintenance, and still occupy capacity that could run other work.

A 500,000,000 CNC over 10 years with a 1.2 overhead factor: the machine 'wears' 500,000,000 × 1.2 ÷ (10 × 12) = 5,000,000 a month. A part occupying it 45 seconds × 2,000/month pays its share.

Machine total = Σ ( Machine cost per month × Cycle time × Volume ÷ Effective working time )

Machine cost per month = Machine price × Overhead ÷ (Life in years × 12) If no price is given, the 'cost per month' field is used directly.

Not just machine tools. Use it for molds, fixtures, robots, conveyors, ovens, forklifts, annually licensed software, even floor space if you want to charge rent to this step.

Running example: 800,000,000 x 1.2 / (10 x 12) = 8,000,000; 30s x 2,000 / 1,272,960 -> ~377,000

3. Labor (LABOR)

Wages for people who spend time on this product. Not their whole monthly salary — only the share of their time this product actually consumes.

Fill in whenever a person spends time: running the machine, assembling, inspecting, clearing chips, setting up. Leave out if the step is fully automatic and unattended. If one person watches three machines, still fill it in — the time share is handled by cycle time and volume.

An operator on 10,000,000/month, 60 seconds per part, 1,000 parts a month. The system charges only the share belonging to those 1,000 parts, not the full salary.

Labor total = Σ ( Monthly salary × (Cycle time × Volume) ÷ Effective working time )

Effective working time = Working days × Shifts × Hours per shift × 3600 × Efficiency

Not just machine operators. Use it for setup technicians, QC inspectors, maintenance staff, packers, even a supervisor's time spent on this step's problems. Anyone whose hours are consumed by this product.

Running example: 12,000,000 x 30s x 2,000 / 1,272,960 -> ~566,000

4. Consumable tooling (CONSUMABLE)

Tooling that wears out per piece produced. Unlike machinery, which is consumed by time, tooling is consumed by how many parts it can cut.

Fill in when something wears out and is replaced on a countable schedule. Leave out for tooling that lasts a year and costs little. If it can be reground, enter the regrind cost and count — it reduces per-part cost substantially.

An insert at 1,200,000 lasting 300 parts. If it can be reground 3 times at 150,000 each for another 250 parts, total life becomes 300 + 3×250 = 1,050.

Tooling total = Σ ( (New price + Regrind cost × Regrind count) ÷ Total life × Volume )

Total life = Life when new + (Regrind count × Life per regrind)

Not just cutting inserts. Use it for drills, grinding wheels, welding rods and tips, abrasive paper, nozzles, small dies, saw blades, carbon brushes, filters, gloves — anything bought in that wears down per unit made.

Running example: 24,000,000 / 40,000 x 2,000 = 1,200,000

5. Scrap (SCRAP)

Money lost to defective output. The key point: to ship 100 good parts you must make more than 100, and the extra is pure loss.

Fill in whenever there is a real defect rate, however small. Leave out if defects are reworked and sold — that cost belongs under Rework, not here. Also leave out if defective stock is returned to the supplier for a refund.

2% defect rate, 12,000 lost per bad part (material and labor already spent), 1,000 good parts needed. You must make about 1,020 to ship 1,000.

Scrap total = Σ ( Volume × ( Defect rate ÷ (1 − Defect rate) ) × Cost per defect )

We use r/(1−r), not r: at a 2% defect rate, 100 GOOD parts require 102 made, not 100.

Not just breakage. Use it for out-of-tolerance parts, surface defects, expired stock, customer returns, setup trial pieces, first-off batches that get discarded.

Running example: 2,000 x 2% / 98% x 43,911 (87,822,685 / 2,000) ~ 1,792,000

6. Rework

Parts made wrong but SAVEABLE: touch-up, re-welding, repainting, re-machining. Extra effort, but no replacement part is needed.

Enter it when there is a rework step. It is a separate section from Scrap because the two are mathematically different.

1,000 parts, 10% need touch-up, 5 minutes each at 2,000/minute → 100 × 10,000 = 1,000,000.

Scrap is DISCARDED so a replacement must be made and the formula must gross up. Rework is SAVED so nothing is replaced and only the extra effort is charged. Merging them inflates the cost — at a 50% rate it is double.

Running example: 2,000 x 3% x 8,000 = 480,000

7. Outsourced processing

Steps you do not do in-house but buy from another shop: heat treatment, zinc or chrome plating, coating, dynamic balancing, non-destructive testing. Costed as a unit price per part times volume.

Enter it whenever a step is bought outside. It used to have to go under Materials, but it is not a material — it has no weight and no yield, and putting it there distorts both categories in the statistics.

Heat treating a shaft at 12,000 per part, 3,000 parts a month → 36,000,000 a month.

Also covers subcontracted machining, outsourced printing, outsourced packing and third-party inspection.

Running example: 3,500 x 2,000 = 7,000,000

8. Packaging

Cartons, bags, protective foam, labels, pallets - everything that leaves the plant with the product.

Enter it when packaging is material, or when the improvement touches it (new carton spec, dropping a liner, printing labels directly).

A 12,000 carton holding 20 parts → 600 per part.

A separate section rather than part of Materials: packaging has no weight and no cutting yield, and "how much of the cost is packaging" is a real question on the floor. Same reasoning that split Outsourced processing out earlier.

Running example: 2,000 / 25 = 80 x 15,000 = 1,200,000

9. Logistics

Inbound freight on materials, outbound delivery, and internal transfers between shops.

Enter it when the improvement touches trip count or load per trip - consolidating shipments, shrinking pack volume, moving to a closer supplier.

A 5,000,000 truck run carrying 5,000 parts → 1,000 per part. Double the load per trip and it halves to 500.

Costed per TRIP then amortised, not per part. That is why consolidating trips cuts cost without renegotiating the freight rate.

Running example: 2,000 / 1,000 = 2 x 4,000,000 = 8,000,000

10. Factory overhead (OVERHEAD)

Plant cost not attached to any single machine: building depreciation, lighting, plant compressed air, supervisor and engineering salaries, the store, general maintenance, industrial cleaning.

Fill this in when you want the FULL cost, not just direct cost. Leaving it blank still gives a correct figure — but a direct-cost figure, missing the shared part. Plants typically carry 15-25% of cost this way; without it the number still looks reasonable and is short by exactly that much.

Accounting allocates 40,000,000/month of plant overhead to this part number; 10,000 pieces a month -> 4,000 per piece.

Total overhead = Sum of allocated amounts per month. Not multiplied by volume: this is already a whole-month figure.

This is the rescue field for manual operations. The 'Overhead per machine hour' field under Machine can only allocate by machine running time, so a hand operation carries no overhead at all without this.

Running example: 9,000,000

Adding up: the example across all ten

Here is the whole example in the order the system adds it. The last column shows the figure growing, so the category that eats the most money shows itself without a chart:

Total ~89,615,000 a month for 2,000 pieces - about 44,800 per unit.

After all ten are filled in

Not every case touches all ten — a typical improvement affects only one or two. Leave the rest blank rather than forcing a number into them.

Adding up the relevant categories gives the cost of one unit. That number alone does not say whether an improvement produces real cash — see the bottleneck guide below for that question.

Beyond these ten, six smaller fields are very easy to leave blank with no warning at all, and five of them make the cost look cheaper than it really is — the second guide below lists all six.

To get your own number right now: open the cost calculator, pick the categories you have figures for and type them in - no sign-up, and nothing is saved unless you want it to be.