Know the real cost of each product you make
Updated
The real cost of a product is the material actually used, at what you paid, plus the batch's labour, power and other overheads, less what scrap and by-products are worth, divided by what you actually made. Work it out from each batch, not from last year's sheet.
Why the price list cost is wrong
Most small factories know a product’s cost from a sheet made when it was first priced: so many kilos of material at last year’s rate, a figure for labour, and a margin on top. Then the material rate rises, the machine wastes more than planned, freight is billed separately, and the sheet still says the product makes money. Often the only place the truth shows is the year-end profit, when it’s too late to change a price.
The fix is to cost each batch from what actually happened.
1. Write down what one batch should take
A bill of materials lists the material for one batch and the quantity of each, the loss you expect as scrap, any by-products, and the labour, power and machine time per unit or per batch. That’s the plan. It’s needed, but it isn’t the cost.
2. Issue material against the batch
When work starts, record the material that actually leaves the store for that batch, at what it cost you. That’s FIFO or weighted average, with freight and clearing added to the material they brought in. If the floor asks for more, issue more against the same batch. The cost now follows what was really used.
3. Add the overheads
Labour, power and machine time belong to the batch too. Put them on per unit or per batch. Leaving them out makes every product look better than it is, and the ones that use the most machine time look best of all.
4. Count good output, scrap and by-products
Divide by what was actually made, not by what was planned. Scrap with no value raises the cost of each good unit. Scrap or by-products you can sell take their share of the cost with them.
5. Compare planned with actual
Look at every batch: material planned against material used, output planned against output made. A product that keeps using 8% more than its bill of materials either has the wrong bill or a problem on the floor, and both are worth knowing before you quote the next order.
How EaseDesk helps
In EaseDesk a bill of materials holds the materials with their scrap %, by-products with their share of cost, and overheads per unit or per batch. A production order issues the material from the store, valued on FIFO or weighted average. Output received comes into stock at the cost built up so far, so each batch shows what its units really cost. Production summary shows planned against actual and the yield. Landed cost adds freight from a separate bill to the material it brought in. See manufacturing and how to plan production.
Questions
What goes into the cost of a manufactured product?
The materials actually used, at what they cost you; direct labour; power, machine time and other overheads of the batch; and freight or clearing charges on the materials. Scrap and by-products that can be sold reduce it.
Why does my costing sheet never match my profit?
Because the sheet uses standard quantities and old prices, while the factory uses more material than planned, buys at today's prices and loses some to scrap. Cost each batch from what was actually issued and made, and the two agree.
Should I value material on FIFO or weighted average?
Either is accepted for accounts. Weighted average smooths price changes; FIFO follows the order goods were bought in. Choose one and stay with it, so batches can be compared month to month.
How do I price a product from its cost?
Start from the real batch cost per unit, add your selling and office costs spread over a month's output, then your margin. A price set from the bill of materials alone usually forgets scrap, freight and idle time.