BOM cost rollup and job costing: a worked example

"What does this cost us to make?" has two answers, and a shop needs both. The rollup is what a unit should cost, built from the bill of materials and the routing at today's prices. Job costing is what a particular work order did cost. The distance between them is the number that tells you where the money goes.

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1.The short answer

A rollup adds four things for one unit of the product:

• Material: for each component, the quantity the product needs, divided by one minus the scrap rate, at the component's current cost.
• Sub-assemblies: anything you also make, at its own rolled cost — so the rollup is recursive.
• Labor: for each routing step, setup minutes plus run minutes per unit times the batch, at the step's labor rate, spread over the batch.
• Overhead: the same minutes at the step's overhead rate.

Job costing takes the rollup that was frozen when a work order was released and compares it with what the order consumed: components actually issued, scrap actually recorded, minutes actually elapsed.

2.A worked example

A shop makes a steel shelf unit. Its bill of materials is one batch of ten units, with three component lines and two routing steps. Prices are current; the bracket set is something the shop also makes, so it arrives with a rolled cost of its own.

Material

The sheet line is the one to notice. The product needs two sheets, but 8% of what goes into the cutter comes out as offcuts, so to end with two good sheets' worth you start with 2 ÷ 0.92 = 2.174. The rollup consumes 2.174, and so does the work order when it issues material. Multiplying by 1.08 instead would give 2.16, which is not the same thing: it understates consumption by a little on every build, and the difference turns up months later as sheets the system thinks you have and the rack does not.

Labor and overhead

At a labor rate of $28/hour and an overhead rate of $14/hour, the batch carries $95.67 of labor and $47.83 of overhead.

The rollup

$81.18 is what a shelf unit should cost to make, today, in batches of ten. It is the number finished goods enter stock at when a work order for ten completes, the number a quote should be built on, and the number the job is measured against afterwards.

3.Why the batch size is part of the cost

Build one shelf unit on its own and the material is the same $66.83, but the routing is 15 + 6 and 10 + 12 minutes — 43 minutes, or 0.717 hours — so labor is $20.07 and overhead $10.03. The unit costs $96.93, nineteen percent more than in the batch of ten, and nothing about the product changed. Setup is spent once per batch; a rollup that ignores it makes every small run look profitable and every quote for one-offs too cheap.

4.Where each number comes from, and when it moves

Raw materials: the current weighted average

The $18.00 for sheet steel is not a price someone typed in. It is the weighted average of what the shop has actually paid for the sheet it has on hand, landed cost included, recalculated on every receipt. A dearer delivery raises it; the next rollup picks the new figure up. How that average is kept, and why it will not match a FIFO ledger, is the costing guide's subject.

Sub-assemblies: their own rollup, kept fresh upward

The bracket set's $6.40 is its own BOM rolled up: its steel, its welding minutes, its scrap. Because the shelf unit uses the bracket set's rolled cost rather than a typed figure, a change to the bracket's BOM should change the shelf unit's cost too. A rollup that only recalculates the item you saved leaves every parent stale until someone happens to re-save it — and the stale one is the one that gets quoted. When an active BOM's cost changes, every BOM above it that consumes it is re-rolled, all the way up.

Labor and overhead: rates on steps, not a line on the BOM

A "labor" line added to the parts list at a fixed amount per unit is a guess that never moves. Putting the rate on the routing step means the cost follows the work: change the weld step's run time from 12 to 10 minutes and every product that is welded gets cheaper by exactly the right amount; raise the shop rate and they all move together. Overhead is applied the same way, at its own rate, so the cost of the building and the machines reaches the products in proportion to the time they take.

5.Job costing: what the order actually cost

The rollup is an estimate, and a good one, but the point of tracking work orders is to find out where the estimate is wrong. Four things happen on a work order that make that possible.

1. The estimate is frozen at release. When a work order is released to the floor, it snapshots the active BOM — components, quantities, scrap rates, routing and rolled cost — scaled to the planned quantity. A BOM edit next week does not re-cost a job already in progress, and the job carries the cost it was quoted at.
2. Issues are recorded at the snapshot cost. Components issued to the job, whether picked deliberately or backflushed at completion, are consumed at the cost the snapshot holds, and any extra issue beyond the plan is visible as exactly that.
3. Time is confirmed after completion. The order records when work started and finished. Until someone confirms those actuals, the job carries the routing estimate for labor and overhead; once confirmed, both are recomputed from the elapsed minutes at the blended rate of the job's steps, and the confirmation sits in the operator's task list until it is done rather than waiting to be remembered.
4. Scrap is recorded with a reason. Material lost beyond the BOM's allowance is logged against the job with a reason code, so a run that used 2.4 sheets per unit instead of 2.174 says why.

Put together, the job's actual cost — material issued, scrap recorded, confirmed time at the rates — sits next to the estimate it was released with. The comparison is by job, by product and by step, and it is the answer to the questions that matter: is the 8% scrap rate real or optimistic; does welding take twelve minutes or eighteen; which product is quietly losing money at the price on the list.

6.What this looks like in the books

The rollup is also what the accountant sees. When components are issued, their material cost moves from inventory into work in process; when units are completed, the finished goods come into stock at the rolled per-unit cost and work in process is relieved. Labor and overhead that the rollup added to the finished goods have to come from somewhere on the ledger too, which the work-in-process guide covers. If QuickBooks is your ledger, the bill of materials guide covers what it can hold of this itself — on QuickBooks Desktop an assembly's cost is one field — and where a manufacturing system takes over.

7.Getting the rollup right

• Set scrap from counts, not hope. Compare issued quantity with the BOM over a few months of jobs; the ratio is your real scrap rate. Then revisit it when the job-costing report says it has moved.
• State the routing for a realistic batch. A BOM stated for one unit makes setup look enormous; stated for a thousand makes it vanish. Use the quantity you normally run, and let the work order scale from there.
• Keep the overhead rate honest. Total the shop's overhead for a period, divide by the productive hours, and use that. A rate set once in 2022 is applying 2022's rent.
• Let raw-material cost move. If the rollup uses a typed standard cost for sheet steel, it will be wrong the first time steel moves. Rolling up from the current weighted average keeps quotes and inventory value on the same footing as what you actually paid.

8.Questions people ask

Is the rolled cost a "standard cost"?

It plays the role of one — the expected cost a job is measured against — but it is rebuilt from current component costs rather than fixed for a year, so it drifts with prices instead of accumulating a variance that gets written off at year-end. If your accountant runs standard costing with periodic revisions, the rollup at the revision date is the standard.

What if a sub-assembly is sometimes bought instead of made?

Its cost is whichever applies: the active BOM's rolled cost when it is made, the weighted average of receipts when it is bought. The parent rollup does not care which, as long as the item's cost is the current one.

Can I put a fixed cost on an item instead?

You can, as a fallback for an item with no receipts and no BOM yet. Once it has either, the real figure takes over, because a typed cost is the one nobody remembers to update.

Do I need routings at all if I don't track labor?

Not to start. A BOM with components and scrap alone gives a material rollup, and that is already more than most small shops have. Add a single step with a run time and the shop rate when you want the quote to include the work; add setup when small batches start to look too cheap.