> For the complete documentation index, see [llms.txt](https://local.docs.ssaudit.com/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://local.docs.ssaudit.com/english-1/inventory-management-module/production-cost-calculation.md). # Production Cost Calculation **Applicable operation:** When a manufacturing company needs to calculate product cost at the end of the period. SmartBooks supports multiple cost calculation methods: by BOM (Bill of Materials), simple method, coefficient method, selling price method, and step-by-step method. Each method is suitable for specific types of manufacturing operations. > **Example:** At month-end, the accountant calculates the production cost of LED lamps — aggregating direct material costs (Account 621), direct labor costs (Account 622), and manufacturing overhead (Account 627) into Account 154, then allocating to each finished product stocked in warehouse (Account 155). *** ### Cost Calculation Methods SmartBooks supports the following methods: | Method | Applied to | Characteristics | | ----------------- | ------------------------------------------------------- | ---------------------------------------------------------------------------- | | **By BOM** | Companies with material norms for each product | Accurately calculates materials per norm, compares actual vs. norm variances | | **Simple** | Simple manufacturing, few products | Divides total costs evenly among manufactured products | | **Coefficient** | Companies producing similar products of different sizes | Converts products to a standard product using coefficients | | **Selling Price** | Companies allocating costs by selling price ratio | Allocates costs to products based on selling price | | **Step-by-Step** | Multi-stage manufacturing (workshops) | Calculates costs by each production stage | *** ### BOM Method (Bill of Materials) Applied to companies that have established a Bill of Materials (BOM) for each product. This method accurately calculates the amount of materials consumed for each product based on norms, while also identifying variances between actual usage and norms. The process consists of 11 steps: **Step 1 — Establish the BOM for each product** Declare the list of materials and quantities required to produce 1 unit of product. Each product may use from 1 to 100 types of materials. > **Example:** LED lamp NIBA-07-CT requires 4 types of materials: 7W LED PCB (0.570 kg), LED E27 CAP (0.758 kg), LED BULB A60 HOUSING 7W (0.852 kg), LED DRIVER 7W (0.570 kg). **Step 2 — Summarize the quantity of finished products received into warehouse during the period** The system consolidates data from finished product warehouse receipt slips entered during the period. **Step 3 — Summarize work-in-progress products and calculate equivalent completed products** Enter the quantity of work-in-progress at period-end and the completion percentage. The system automatically converts to equivalent completed products. > **Note:** A single product code may have multiple WIP percentages (beginning, middle, end of the production process). The system will aggregate into total equivalent completed products for each code. **Step 4 — Calculate the quantity of products manufactured during the period** Using the production balance equation: > Products manufactured in period = Finished products received + WIP ending − WIP beginning **Step 5 — Calculate materials per BOM for manufactured products** Multiply the BOM material norms (Step 1) by the quantity of products manufactured (Step 4) to calculate total material consumption per BOM. **Step 6 — Summarize actual materials issued from warehouse** The system automatically retrieves data from material issue slips. The material issue costing must be completed before this step. **Step 7 — Compare actual vs. norm variance** Identify material variances between actual and norm: * Actual materials > Norm: The variance is directly recorded to COGS (Debit Account 632 / Credit Account 621). * Actual materials < Norm: The accountant may adjust the norms in Step 1. **Step 8 — Determine materials for cost calculation** After processing variances, the material value for cost calculation is either actual or norm value (depending on each material code). **Step 9 — Calculate production cost for each product** Allocate labor costs (Account 622) and manufacturing overhead (Account 627) to each product based on the material cost ratio. Unit cost is calculated as a weighted average including beginning WIP. **Step 10 — Calculate ending WIP value** > Ending WIP value = Equivalent completed products (Step 3) × Unit cost (Step 9) **Step 11 — Determine finished product warehouse receipt value** > Finished product receipt value = Beginning WIP + Production costs incurred during period − Ending WIP > > Unit cost = Total finished product receipt value ÷ Total finished product quantity received (Step 2) *** ### Simple Method Applied to simple manufacturing companies with few product types. This is the simplest method — dividing total costs evenly among total manufactured products. The process consists of 6 steps: 1. Summarize finished products manufactured during the period. 2. Summarize work-in-progress and calculate equivalent completed products. 3. Calculate the quantity of products manufactured during the period. 4. Calculate production cost: Divide total costs by total manufactured products, multiply by the quantity of each type. 5. Calculate ending WIP value. 6. Determine finished product warehouse receipt value. *** ### Coefficient Method Applied to companies manufacturing products with similar characteristics but different sizes (e.g., glass bottles 1L, 0.5L, 250ml). Select one product as the standard and convert other products using coefficients. The process consists of 9 steps: 1. Select the standard product and declare coefficients for each product. 2. Summarize finished products manufactured during the period. 3. Summarize WIP and calculate equivalent completed products. 4. Calculate the quantity of products manufactured during the period. 5. Convert manufactured products to standard products (multiply by coefficient). 6. Calculate production cost for the standard product (weighted average including beginning WIP). 7. Recalculate production cost for each product type (multiply by reverse coefficient). 8. Calculate ending WIP value. 9. Determine finished product warehouse receipt value. *** ### Selling Price Method Applied when the company wants to allocate manufacturing costs to each product based on selling price ratio. Products with higher selling prices will be allocated more costs. The process consists of 7 steps: 1. Declare selling prices for each finished product code. 2. Summarize finished products manufactured during the period. 3. Summarize WIP and calculate equivalent completed products. 4. Calculate the quantity of products manufactured during the period. 5. Calculate production cost for products based on selling price ratio. 6. Calculate ending WIP value. 7. Determine finished product warehouse receipt value. *** ### Step-by-Step Method Applied to companies manufacturing through multiple stages (processes/workshops). Costs are aggregated and allocated by each stage, then production cost is calculated for each product group in each stage. **Initial Setup:** 1. **Create Cost Codes:** Declare cost codes for each group (621/622/627) and assign to stages and allocation methods. * Cost group: 621 (Direct Materials), 622 (Direct Labor), 627 (Manufacturing Overhead). * Stage: Assign costs to a specific stage or "All" if used for multiple stages. * Allocation method: Product-specific, proportional, or custom. 2. **Set up allocation ratios by stage:** Declare cost allocation ratios for each stage and applicable period. 3. **Set up allocation ratios by product group:** Declare allocation coefficients for each finished product group in each stage. 4. **Set up allocation ratios by individual product:** Declare detailed allocation coefficients for each product code. *** ### Executing the Cost Calculation After completing the setup, execute the cost calculation as follows: 1. Enter the **cost calculation period** (From Date — To Date). 2. Enter the **ending WIP quantity** and **equivalent completion percentage** for each cost group (621, 622, 627). 3. Click **Calculate Cost** — the system automatically: * Aggregates material, labor, and overhead costs by each stage. * Allocates costs to product groups and individual products. * Calculates ending WIP value. * Determines unit cost for each product. 4. Review results on the grid and click **Save** to confirm. * **Operational Notes:** * Material issues and material issue costing must be completed before calculating production cost. * Ending WIP quantities must be confirmed through physical inventory count. * Results can be exported to Excel for reconciliation and archiving. > **Note:** The unit production cost after calculation will be used in the **Finished Product Receipt Costing** step (Step 3 in the 5-step inventory processing procedure). 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