Introduction to Manufacturing Costs 140

additive manufacturing

AM. A process that builds parts by adding material layer by layer. Additive manufacturing is also known as 3D printing and is useful for prototyping and making custom components.

administrative

Work that involves managing and supporting the operations of an organization rather than producing goods or services. Administrative tasks are essential for coordination, recordkeeping, and compliance, helping the business run efficiently.

amortization

A method of spreading out the cost of a large purchase over its useful life. Amortization helps businesses allocate expenses evenly and assess financial performance over time.

assemblers

A person who puts together parts or components to create finished products. Assemblers directly add value to the product and are included in direct labor.

assembly

A group of parts put together to form a larger component or product. An assembly may include both manufactured and purchased parts.

base wages

The fixed amount of compensation paid to employees before any bonuses, overtime, or benefits. Base wages form the foundation of an employee’s total earnings.

benefits

Non-wage compensation provided to employees, such as health insurance coverage, retirement plans, and paid time off. Benefits must be included in labor cost calculations to reflect the true cost of employment.

bill of materials

BOM. A document that lists all parts, raw materials, and quantities needed to produce one unit of a product. A bill of materials helps ensure accurate production planning and cost tracking.

bonus

A payment given to employees in addition to their regular wages or salary, often as a reward for performance or meeting targets. Bonuses are used to incentivize productivity, retain talent, and recognize achievements.

certifications

A formal recognition that a person, product, or process meets defined standards or qualifications set by an authority or organization. Certifications enhance credibility and often serve as a requirement for compliance or market access.

CNC

Computer numerical control. A programmable machine tool that uses computer-controlled instructions to cut, drill, or shape materials. CNC machines improve precision and repeatability in manufacturing processes.

computer numerical control

CNC. A programmable machine tool that uses computer-controlled instructions to cut, drill, or shape materials. Computer numerical control machines improve precision and repeatability in manufacturing processes.

contractors

A person hired for a specific task or project rather than as a full-time employee. Contractors may be included in direct labor if their work directly contributes to making a product.

cutting tools

A tool used to remove material from a workpiece during machining. Cutting tools include drills, inserts, and end mills.

depreciation

The gradual reduction of a tangible asset’s value over time. Depreciation occurs due to use, wear, or obsolescence.

direct costs

A cost that is clearly associated with the manufacture of a specific product. Direct costs include things like labor and materials used to make a part.

direct labor

The work of employees who physically create a product. Direct labor includes tasks like assembling, welding, and machining parts.

direct labor cost

The combined wages, benefits, and tax expenses for employees whose work directly contributes to a product. Direct labor cost is calculated by multiplying each employee’s total hourly cost by the number of hours that employee spends working on the part and adding the result for each employee together.

direct material cost

The combined expenses of all materials used to produce a specific number of products. Direct material cost is calculated by subtracting the ending inventory value from the initial inventory cost.

direct materials

Any material or component that becomes part of the finished product. Direct materials include items such as metal, plastic, and fasteners.

downtime

Any period of time during which equipment is not running, often due to breakdowns and maintenance needs. Downtime reduces productivity and increases the cost of production.

efficiency

The ability to produce parts using the least amount of time, effort, and resources. Improving efficiency reduces costs and increases output.

employee insurance

A type of employee benefit that helps cover medical expenses or provides financial protection. Employee insurance costs are part of the total hourly cost of labor.

employee relations

The management of relationships between an organization and its employees with the goal of maintaining a positive, productive work environment. Employee relations focuses on resolving conflicts, improving communication, and fostering engagement and satisfaction.

employee retention

Keeping trained employees from leaving a company. High employee retention saves money and improves productivity by reducing turnover and training needs.

ending inventory value

The total value of unused materials remaining after a production run. Ending inventory value is subtracted from initial inventory cost to determine direct material cost for a part run.

engineer

A person who uses scientific and mathematical principles to design, build, and maintain machines, structures, and systems, or to solve technical problems. Engineers may perform both direct and indirect labor.

environmental regulations

A rule created by a government to limit pollution and protect the environment. Environmental regulations affect how businesses handle materials, emissions, and waste disposal.

fasteners

A device used to mechanically join two or more components. Fasteners include screws, bolts, rivets, and similar hardware.

filament

A long, thin strand of material used as an input for some 3D printers. Filament is typically made of plastic and melts during the printing process to form a part.

fixed costs

An expense that does not change based on production volume. Fixed costs, like facility rent or property taxes, stay the same whether a factory makes one part or thousands.

fixtures

A custom-designed device used to securely hold and position a workpiece during manufacturing operations. Fixtures ensure accuracy, repeatability, and safety throughout the machining or assembly process.

gaskets

A shaped piece or ring of rubber or other material used to seal the junction between two surfaces. Gaskets are commonly used in engines, pumps, and piping systems.

gear

A round or cylindrical mechanical component with teeth that is used to transmit power. A gear is designed to mesh with another gear and can alter the speed, torque, or direction of mechanical energy.

gross pay

The total earnings an employee receives before deductions like taxes or retirement contributions. Gross pay includes base wages as well as benefits and tax.

human error

A mistake made by a person that causes a deviation from intended actions, processes, or outcomes. Human error can be minimized by adopting smart technology.

human resources

HR. The department within an organization that is responsible for managing employee-related functions such as hiring, training, and compensation. Human resources supports workforce needs and ensures legal and organizational policies are followed.

indirect costs

A cost that supports production but is not directly associated with the manufacture of a specific product. Indirect costs include things like lubricants and maintenance labor.

indirect labor

The work of employees who support production but do not physically create a product. Indirect labor includes roles like maintenance and inspection.

indirect labor costs

The combined wages, benefits, and tax expenses related to employees who support production but do not work directly on the product. Indirect labor costs account for the work of supervisors, maintenance staff, and many other roles.

indirect material cost

The expense of materials used in production that cannot be directly linked to a specific product. Indirect material cost is grouped with other general production expenses and supports the overall manufacturing process.

indirect materials

Any material or component used during manufacturing that does not become part of the final product. Indirect materials include things like machine tools and lubricants.

initial inventory cost

The total cost of materials available before a production run begins. Initial inventory cost includes the value of existing stock and the cost of newly purchased materials.

inserts

A replaceable cutting tip made from hard materials used in machining. Inserts fit into tool holders and are used in operations like turning and milling.

inspection

A systematic examination of products, processes, or materials to verify compliance with quality standards. Inspection helps ensure that finished products meet customer and regulatory requirements.

inventory

The stock of raw materials, components, and finished goods that a company has on hand. Inventory is a key factor in cost management and production planning.

invoices

A commercial document issued by a seller requesting payment for goods or services provided to a buyer. An invoice includes details such as quantities, prices, and payment terms to facilitate accurate transactions.

lean manufacturing

An approach to manufacturing that seeks to improve quality and productivity, reduce cost, and eliminate waste. Lean manufacturing helps to eliminate waste in all its forms.

liability insurance

A policy that provides financial protection against claims of injury or damage caused to others by a business or individual. Liability insurance helps cover legal costs and settlements, reducing the financial risk of lawsuits.

lubricants

A substance used to reduce friction between moving parts. Lubricants help prevent equipment wear and ensure smoother, longer-lasting operation.

machine operators

A person trained to control and monitor a specific machine used in manufacturing. Machine operators are typically classified as direct labor because their work physically transforms materials into products.

machine tools

A power-driven device used to shape or form materials by cutting, grinding, shearing, or other deformation methods. A machine tool provides the precision and force needed to manufacture parts with specific dimensions and surface finishes.

machining

A subtractive manufacturing process that removes material from a workpiece to shape it into a desired form. Machining is commonly used to create precision metal or plastic parts.

management

The process of planning, organizing, leading, and controlling resources to achieve specific goals. Management labor is an overhead cost for manufacturing operations.

metal cutting fluid

A substance applied to cutting tools and workpieces to reduce heat and friction during machining. Metal cutting fluid extends tool life and improves surface finish.

metal stock

Raw, unprocessed metal in a specific shape and size. Metal stock is used as material for manufacturing parts and products.

molding

A manufacturing process in which heated or liquid material is shaped by a mold. Molding is often used to create complex plastic shapes.

monitoring systems

A set of tools and processes used to observe, track, and analyze the performance or condition of equipment, processes, or environments. Monitoring systems help detect issues early, ensure compliance, and support decision-making in operations.

mortgage

A loan secured for real estate in which the property serves as collateral until the debt is repaid. Mortgages allow individuals or businesses to finance property purchases while spreading payments over time.

overhead

The ongoing expenses required to operate a business that are not tied to specific production activities. Overhead includes costs such as rent, utilities, and administrative salaries that support the business regardless of manufacturing output.

part run

A sequence of identical parts produced consecutively during a manufacturing process. Part run length impacts efficiency, tooling wear, and production planning in machining operations.

payroll taxes

Tax that employers must pay based on employee wages. Payroll taxes contribute to the overall cost of labor and must be included in direct labor cost calculations.

predictive maintenance

A maintenance approach that involves collecting data in order to anticipate and correct potential issues before they arise. A predictive maintenance approach involves performing maintenance before failures occur to prevent unscheduled downtime and reduce the labor, cost, and time needed for repairs.

pricing

The process of determining how much to charge for a product or service. Pricing decisions are influenced by production costs, competition, and market demand.

property taxes

Tax paid to local or regional governments based on the value of owned property. Property taxes are a fixed cost and are part of overhead for businesses that own their buildings or land.

purchase orders

POs. A formal document issued by a buyer to request goods or services from a supplier. Purchase orders serve as a legal agreement and help track purchasing and costs.

quality assurance

QA. A system of managing product quality by regulating the quality of materials, processes, and components. Quality assurance is a proactive approach to ensuring product quality.

quality control

QC. A system of managing quality by inspecting finished products to make sure they meet specifications. Quality control relies on error detection and correction.

quality inspector

A person responsible for examining products or processes to ensure they meet specified standards and requirements. Quality inspectors help prevent defects by identifying issues during or after production.

quoting

The process of providing a detailed price estimate for goods or services before a sale is finalized. Quoting helps businesses and customers agree on costs and terms in advance.

raw materials

A basic, unprocessed substance used to create finished goods. Raw materials include items like metal bars, plastic pellets, or wood.

recruitment

The process of identifying, attracting, and hiring qualified candidates to fill job openings within an organization. Recruitment supports workforce planning and ensures the business has the necessary skills to meet its goals.

rework

Any unplanned additional processing required for a nonconforming product to meet specifications. Rework is necessary when a part does not meet requirements and increases production time and cost.

robots

An automated machine programmed to perform repetitive or precise tasks. Robots increase efficiency, consistency, and safety in production processes.

salary

A fixed, regular payment, typically expressed as an annual amount, made to an employee regardless of hours worked. Salary compensation provides stable income and often applies to professional or managerial roles.

scrap

Unusable material produced during a manufacturing process. Scrap is a waste product of manufacturing that can increase overall production costs.

security

Any measure or system put in place to protect people, property, and information from harm or unauthorized access. Security in a business context can include physical safeguards, surveillance, and cybersecurity to reduce risks and losses.

semi-variable costs

An expense that includes both fixed and variable components. Semi-variable costs change with production volume but also include a fixed portion that remains constant regardless of activity level.

sensors

A device that detects a change in a physical stimulus and turns it into a signal that can be measured and recorded. Sensors may be connected to a machine or system in order to collect operational data that is later analyzed.

service life

The period during which a product, machine, or component is expected to perform its intended function reliably. Service life helps businesses plan maintenance and account for equipment costs.

smart technology

An advanced tool like a sensor, robot, or software that improves production by performing digital processes autonomously. Smart technology helps reduce mistakes and increase efficiency.

sourcing

The process of finding and purchasing materials or components from suppliers. Sourcing impacts cost and lead time.

step-variable costs

An expense that remains fixed within a certain range of activity but increases in “steps” when production exceeds that range. Common step-variable costs include the labor and equipment that must be added in increments to increase production.

supply chain optimization

Improving how materials and products move from suppliers to customers. Supply chain optimization reduces costs, delays, and inventory problems.

total cost of ownership

TCO. The full cost of owning and using a piece of equipment. Total cost of ownership includes the costs of purchasing, powering, maintaining, and repairing equipment, as well as the cost of downtime.

variable costs

An expense that increases or decreases depending on production volume. Variable costs include things like materials, energy, and labor hours.

waste

Any output from a manufacturing process that does not add value to the final product. Waste includes excess resources, time, or energy and is typically reduced to improve efficiency and lower costs.

waste disposal

The process of removing and managing unwanted materials, byproducts, or hazardous substances from a facility. Proper waste disposal ensures compliance with environmental regulations and maintains safe, efficient operations.

welders

A person who joins metal parts together using heat and filler materials. Welders are considered direct labor because their work becomes part of the final product.

workholding devices

A mechanical component used to securely position a workpiece during manufacturing operations. Workholding devices ensure accuracy and repeatability in machining and assembly.