If You Make What You Sell, You're Probably Guessing Your Costs

Ask a workshop owner what one of their tables costs to make and you'll usually get a confident number. Ask how it was worked out and you'll hear that somebody sat down with a calculator — once, a while back, when timber was cheaper.

This is the quiet problem in every business that makes what it sells. Buying and reselling gives you a cost price on the invoice. Making something gives you nothing automatic at all: your cost is spread across a dozen components whose prices have all moved since you last looked.

A bill of materials is just an honest recipe

The fix isn't complicated. Write down what actually goes into a batch — every component and how much of it — and how many units that batch produces. Then let the cost be calculated from what those components cost today, rather than what you assumed they cost.

1. List each component and the quantity one batch needs.
2. Set the batch size — what the recipe actually yields.
3. Total the components at their real cost and divide by the yield.

That last step is where the surprises live. Most producers find their true cost is higher than the number they've been pricing against, usually because two or three inputs quietly went up and nobody re-did the maths.

Don't forget what you lose in the making

Every process loses material. Powder left in the mortar, offcuts from a board, labels that print crooked, dough that sticks to the bowl. If your costing assumes a batch uses exactly what the recipe says, it's understating your cost on every single unit.

Multi-stage products compound the error

If you make a component and then use it in something else, guessing once becomes guessing twice. A component that's made in-house should be costed from its own recipe, so the finished product's cost is built up correctly all the way down instead of resting on an estimate of an estimate.

Producing should move stock by itself

The other half of the problem is stock. When a batch is made, components should come off and finished goods should go on — together, as one thing that either happens or doesn't. Otherwise you end up with the components gone and nothing recorded as produced, and neither number can be trusted.

Then you can plan what to buy

Once your planned production is written down, working out what to order stops being a guess. Compare what the queued batches need against what's on the shelf and what suppliers already owe you, and the shortfall is a list rather than an instinct.

You can't price properly on a cost you worked out once. Inputs move; your costing has to move with them.

MerxumOS handles bills of materials, scrap allowance, multi-level costing, production orders that move stock in one step, and material planning across queued runs. Read the guide at merxumos.com/help/industries/manufacturing-bom-and-production.