🏗 What is a BoM and How Does It Affect Product Costs?

If you've ever struggled to set the right price, understand your profit margin, or explain production costs, you're not alone. Whether you're just starting with ERP or looking to improve your cost tracking, it all starts with a key concept: the Bill of Materials, or BoM.

In this post, we’ll explore what a BoM is, how BoM Cost differs from Product Cost, and how terms like COGS, FIFO, LIFO, and Average Cost affect your numbers — and your decisions.

---

🔧 What is a Bill of Materials (BoM)?

A Bill of Materials (BoM) is like a recipe for your product. It includes everything you need to build a finished item — from raw materials to components and even operational steps.

Think of it like this:

• The finished product = your final dish

• Materials & parts = the ingredients

• Operations = the cooking steps and tools used

Some systems keep it simple, listing only the parts, while others let you define the full process — including machines, labor, and time.

---

💰 What is BoM Cost?

BoM Cost is your estimated cost to produce one unit of product, based on the BoM. It includes:

• Component prices

• Labor and machine time

• Subcontracted services (if any)

This gives you a forecast — a useful reference when planning production or setting initial pricing.

---

🧮 BoM Cost vs Product Cost

These two often get confused, but they serve different purposes:

While BoM Cost helps you plan, Product Cost reflects the real-world cost based on actual material prices and production conditions.

So your BoM might say $50, but after price changes or delays, the Product Cost could be $54 or $58. That’s the cost that flows into your inventory valuation and COGS.

---

📦 What is COGS?

COGS (Cost of Goods Sold) represents the cost of the items you’ve sold, not just produced. It's calculated at the moment the item leaves your stock — using your inventory valuation method.

COGS is essential to determine real profit margins and analyze business performance. Without tracking it properly, you may end up overestimating your earnings.

---

🧠 FIFO, LIFO, and Average Cost — What Do They Mean?

Your inventory valuation method affects both your Product Cost and your COGS. Here’s how each one works:

1. FIFO (First In, First Out)

You sell the oldest stock first. This mirrors most real-world inventory flows and gives you more current values in your ending stock.

2. LIFO (Last In, First Out)

You sell the most recent stock first. While useful during inflation to lower taxable income, it’s not allowed under IFRS (used globally).

3. Average Cost

Each time you receive new inventory, the cost is averaged. It’s simple and smooths out pricing volatility — a common choice for many ERP users.

---

🧾 Let’s See a Quick Example

You’re producing a chair. Your BoM looks like this:

• Wood: $20

• Screws: $5

• Cushion: $10
  BoM Cost = $35

However, due to recent purchase changes:

• Some wood cost $18

• Some cost $22
  With FIFO, one chair may cost $33, another $37 — depending on the batch used.

Your BoM stays the same, but your Product Cost and COGS change with every inventory movement.

---

🚀 Final Thoughts

When you understand BoM and how costing works, you gain the power to:

• Price your products more accurately

• Forecast your profits with confidence

• Optimize purchasing and production decisions

• Align finance and operations with clarity

ERP systems like Odoo make it possible to track all of this — but only if you set it up with the right understanding and structure.

Interested in implementing an ERP system with Odoo? Let’s build it the right way.
Click the link in our bio to see post detail

#koderstory #odoo