Identification of the optimal production sequence and allocation of machining tolerance are important activities in process planning for reducing production cost. This paper presents an approach that is capable of determining the optimal production sequence and its optimal process tolerance to achieve the minimum production costs. A new mathematical model, representing the cost–tolerance relationships and showing significant accuracy improvement over existing models, is introduced to allocate process tolerance. Stock allowance constraints on the selected switching tolerance are also considered to yield practical solutions. A prototype system for hole-making components is used to verify and evaluate the effectiveness of the new approach.