Manufacturing cost calculation method in ERP software
Infor ERP - Effective Cost Management
One of the important things is the difference between direct and indirect costs. With direct costs, you can link costs back to direct products. In contrast, indirect costs cannot be linked back to direct products. The method of calculating production costs in the ERP system is effective and is synthesized instantly when data is recorded in the system. The calculation method has been configured in detail by the ERP system and the calculation formula has been set up, allocated according to management needs. Business owners will not have to be "blind" about production costs like conventional software that is summing all costs into one and allocating them based on inaccurate feelings like the current way of doing things, but in the ERP software, you can detail the cost items and answer you whether the production and business status is effective or not.
Direct costs:
- Direct costs vary depending on the production period and the number of products you produce. These costs typically include materials and labor, which vary depending on many factors. Direct materials are calculated by subtracting from the standard, at the end of the period, the remaining direct materials recorded as consumed in excess of the standard can be deducted and allocated based on the total products produced.
- Direct manufacturing labor costs include employee wages, benefits, labor taxes and insurance, and workers' compensation. You can calculate labor costs in several ways, such as by the hour or by the piece.
- Cost of machinery, equipment, tools and instruments directly serving the production process. This cost is calculated based on depreciation per running hour or based on capacity and quantity of products created, from which the cost of using machinery, equipment, etc. for each product created is calculated in reverse.
- Transportation costs and other costs that may arise directly related to the production process such as costs incurred in transferring goods from one warehouse to another to serve production are directly related to the product.
Indirect costs:
- Indirect costs are not directly related to production, and may include rent or other indirect materials that are not used to make the final product, such as water or cleaning supplies. Other indirect costs may include indirect labor, such as janitors or executives who do not contribute directly to production. Or other indirect machinery, equipment, and tools such as printers and photocopying machines for production records.
General manufacturing costs:
- Manufacturing overhead is considered an indirect cost because it is not directly related to the product. However, it is classified as an indirect cost because the production of the product cannot take place without these costs. These costs can also be allocated as a percentage to the product based on the revenue for the period.
Total production cost = (Total direct costs + Total indirect costs) is calculated for 01 unit of product.
With an ERP system, these costs must be defined and determined from the beginning so that the cost is recorded accurately and specifically for each unit of product produced. Indirect costs will be aggregated at the end of the period and allocated based on the completed output or revenue recorded during the period for each type of cost. Understanding the total cost of production can provide valuable insights into the production process and related costs. Production costs provide the baseline data for other formulas to measure profit and productivity. Therefore, businesses can make adjustments to improve efficiency, reduce waste and increase profits.
The production management subsystem in ERP software can:
Although manufacturing costs are often used interchangeably, they are not the same. Direct manufacturing costs are only related to creating a product, while indirect manufacturing costs can include all other operating costs, such as external costs such as marketing and office supplies. Basically, manufacturing costs include all direct and indirect costs of running a business.
Total production cost = Cost of production materials + Cost of production labor + Cost of production machinery and equipment + Transportation cost + Production management cost + Other costs
Total production cost: is an important metric to provide insight into an organization's financial health, especially when used with other formulas. Other similar and important retail KPIs include COGM and COGS.
- Cost of goods manufactured (COGM) includes all costs for finished goods produced during a given period. Any unfinished products or work in progress (WIP) inventory are not included in the COGM calculation. However, in the case of using all materials, the COGM and total cost of production will be the same.
COGM = (Beginning WIP Inventory + Total Manufacturing Cost) – Ending WIP Inventory
- Cost of goods sold (COGS) is the direct cost of producing goods, excluding overhead costs. This metric is important because it shows how many products you must sell to break even or make a profit. In contrast, the total cost of goods sold formula includes overhead costs.
COGS = (Beginning Inventory + Purchases) – Ending Inventory
