Costing a production batch: materials, scrap, labour and overhead
A worked example of costing a batch from a bill of materials with scrap allowances and labour and overhead charges, and why actual cost should feed your average cost.
Stokrio Team · · 7 min read
If you make what you sell, your cost of goods is not a number on a supplier invoice; it is the sum of materials, the waste you absorb, and the labour and overhead of the run. Getting that sum right per batch is what makes your margin figures trustworthy.
Key takeaways
- A bill of materials (BOM) is defined per batch: the quantity of each material needed for a stated batch size.
- Include scrap as a percentage on materials that are wasted in making.
- Add charges for labour, machine time and overhead as separate lines.
- Use actual consumption at completion to set the finished product's average cost.
A worked example
A candle is made in batches of 100. The invented numbers below are for the arithmetic only.
| Line | Quantity per batch | Unit cost | Cost |
|---|---|---|---|
| Wax (kg) | 20, plus 5% scrap = 21 | 6.00 | 126.00 |
| Wick | 100 | 0.10 | 10.00 |
| Jar | 100 | 0.80 | 80.00 |
| Labour (hours) | 3 | 30.00 | 90.00 |
| Overhead (run) | 1 | 25.00 | 25.00 |
| Batch total | 331.00 |
Per unit: 331.00 ÷ 100 = 3.31. Materials alone come to 2.16 a unit (216 ÷ 100). Leaving out only scrap and overhead gives 3.00 (120 + 10 + 80 + 90 = 300 ÷ 100), which under-prices the unit by roughly 9%.
Versions and sub-assemblies
Formulas change. Keep versions of a BOM and mark one as the default, used by planning and new work orders. A component can itself be made from a BOM (a sub-assembly), but a product can never be a component of itself, directly or through its materials.
Completing a work order
In Stokrio a work order moves from draft to in progress to completed. Completing it, in one step:
- Consumes the materials, taking the earliest-expiring lots first.
- Adds the finished goods with their own lot number and expiry.
- Records the actual cost and updates the finished product's average cost.
It is all or nothing: if any material is short in the work order's warehouse, nothing happens and you see the shortages.
Reversing a mistake
A completed work order can be reversed: the finished goods are removed and the materials restored. This is safer than editing quantities by hand because every step is a ledger line.
Ordering what is short
A work order can turn its shortages into draft purchase orders, one per supplier, without sending anything.
Read more on production work orders and raw-material planning.