How to Calculate Fixed Manufacturing Cost

Manufacturing involves various expenses that businesses track to manage profitability and make informed decisions. These costs fall into two main categories: fixed and variable. Understanding fixed manufacturing costs is essential for any company producing goods. Accurate calculation helps in setting appropriate prices, managing budgets, and assessing overall financial health.

Defining Fixed Manufacturing Costs

Fixed manufacturing costs are expenses that do not change in total, regardless of the volume of goods produced. This means that whether a factory produces one unit or a thousand units, the total amount of these costs remains constant. They are often referred to as overhead costs because they are not directly tied to the production of individual items. These costs are incurred to maintain the operational capacity of the manufacturing facility itself, even if no production occurs. Unlike variable costs, which fluctuate in direct proportion to production volume, fixed costs provide a stable financial base for operations.

Identifying Fixed Manufacturing Cost Components

Several common expenses constitute fixed manufacturing costs. Factory rent, for instance, remains constant each month, irrespective of production levels. Depreciation of manufacturing equipment is another fixed cost, as its cost is spread over its useful life, regardless of how much it is used. Salaries for production supervisors or quality control managers, who receive a consistent wage regardless of output, are also considered fixed. Property taxes levied on the manufacturing facility and insurance premiums for the plant and equipment represent additional fixed expenses.

Steps for Calculating Fixed Manufacturing Costs

Calculating total fixed manufacturing costs involves identifying and summing all relevant expenses. First, gather all financial data for the specific accounting period, such as a month or a quarter. This data includes invoices, payroll records, and depreciation schedules. Businesses must review each expense to determine whether it behaves as a fixed or variable cost. Accurately categorizing expenses is important, distinguishing between costs that remain constant and those that change with production volume. Once all fixed manufacturing costs have been identified, the final step is to sum these amounts to arrive at the total fixed manufacturing cost for the period.

Practical Calculation Example

Consider a hypothetical manufacturing company, “Widgets Inc.,” for the month of July. The company needs to determine its total fixed manufacturing costs. The company incurred the following expenses: factory rent of $8,000, depreciation on machinery of $4,500, salaries for production supervisors totaling $12,000, property taxes on the factory amounting to $1,500, and manufacturing facility insurance premiums of $1,000. Additionally, the company had costs for direct materials of $25,000 and direct labor wages of $18,000, which are variable costs.

To calculate the total fixed manufacturing costs, Widgets Inc. would focus only on the expenses that do not fluctuate with production volume. These include the factory rent ($8,000), machinery depreciation ($4,500), production supervisor salaries ($12,000), property taxes ($1,500), and insurance premiums ($1,000). Summing these amounts yields the total fixed manufacturing cost for July. Therefore, $8,000 (Rent) + $4,500 (Depreciation) + $12,000 (Salaries) + $1,500 (Property Taxes) + $1,000 (Insurance) equals a total fixed manufacturing cost of $27,000 for the month. This $27,000 represents the overhead required to keep the factory ready for production, regardless of how many widgets were actually manufactured.