How do you use your bill of materials to estimate product costs accurately and efficiently?

1 Define your cost categories

To begin, you need to define the cost categories that you want to include in your BOM. These can range from material costs (raw materials, parts, and supplies) to labor costs (wages, salaries, and benefits) and overhead costs (indirect expenses such as rent and utilities). Additionally, you should consider markup costs (the cost of adding a profit margin to your product price). All of these cost categories should be used to assign a unit cost to each item in your BOM, which could be based on the market price, supplier quotes, or historical data.

2 Calculate your direct costs

The next step is to calculate your direct costs, which are the costs that can be directly traced to your product. These include material costs and labor costs, which are usually variable and depend on the quantity and quality of your output. To calculate your direct costs, you need to multiply the unit cost of each item in your BOM by the quantity required for one unit of your product. Then, you need to add up all the direct costs for each item to get the total direct cost for one unit of your product.

3 Calculate your indirect costs

The third step is to calculate your indirect costs, which are the costs that cannot be directly traced to your product. These include overhead costs, which are usually fixed and do not change with the quantity or quality of your output. To calculate your indirect costs, you need to use a cost allocation method, such as activity-based costing, absorption costing, or standard costing, to assign a proportion of your overhead costs to each unit of your product. This proportion can be based on factors such as labor hours, machine hours, or production volume.

4 Calculate your total costs and markup

The final step is to calculate your total costs and markup, which are the costs that determine your product price and profit. To calculate your total costs, you need to add up your direct costs and your indirect costs for one unit of your product. To calculate your markup, you need to multiply your total costs by a percentage that reflects your desired profit margin. Then, you need to add your markup to your total costs to get your product price.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?