How software rolls up cost from a BOM

A product's cost comes from adding up what's in its list. Raw parts first, then the sub-assemblies they make, then the work done on them. The software does the adding. You supply the prices.

The result is only as good as those prices. Stale in, stale out.

The roll-up, step by step

Remember that a multi-level BOM is a parent-child list, top-down.¹ Costing runs the other way, bottom-up.

1. Each bought part has a unit cost.
2. A sub-assembly's cost comes from the parts in its own list.
3. The finished product's cost comes from its parts and sub-assemblies.
4. Work on the parts, if you track it, gets added.

The ERPNext manual says the costing is calculated from the valuation rate of the raw materials and sub-assemblies involved, plus the operation costs.² [fig:cost-rollup]

Where the unit price comes from

A cost is only a number someone chose. The manual says the rate of raw materials can be calculated from different parameters.² It lists three in that setting: the valuation rate on the item record, the last purchase rate, or a price list.²

That choice changes your answer. A last-paid price can jump after one odd order. A price list may lag behind what suppliers charge now. Know which one your tool is using before you quote anyone.

Sub-assemblies

For a sub-assembly, the cost can come from its own list or from a stored rate. In the manual, one option sets the rate of sub-assembly items based on their BOMs. If it's off, the rate comes from the item's valuation rate.²

Either can be fine. Just don't let the two drift apart without noticing.

Operations

Parts aren't the only cost. For a BOM with operations, the manual has you enter an hourly rate, the time an operation takes in minutes, and the batch size. The operating cost is worked out from those values.²

If you leave operations out, the roll-up shows parts only. Be clear about that when someone asks what a product costs.

Keeping the number fresh

Prices change. The manual notes that if a BOM was submitted before costs were updated, you can use the Update Cost button to fetch the latest price and costs.² It also says the cost can be set to update automatically in the manufacturing settings.²

Other tools do this their own way. Check the help pages.

Read the result with care

The manual calls the result an approximate cost of manufacturing the item.² Treat it that way.

A roll-up only counts what's in the list: the parts, and the operations if you entered them. Anything you didn't enter isn't in the number. It's a starting point for a price, not the price.

Accounting questions belong with your accountant. How to value stock for a tax return is one. Ask the official tax body for your country too, such as the IRS, HMRC or the ATO. A BOM tool won't settle them.

The same list also feeds buying, which is covered in the stock and purchasing page.