How Much Does That Item Cost?

How do you value your inventory?  Are you calculating your actual inventory or running a periodic calculation?  Can you with any degree of certainty pick an item in your warehouse and know what it cost to produce?

For many small to mid-size enterprises, it is very difficult and time consuming to track the real cost of manufacturing an inventory item.  The typical solution to this common problem is to run some variation of a periodic calculation to approximate inventory value.

The periodic calculation takes the beginning balance of inventory less what was sold during the month to arrive at the ending balance of inventory.  Typically allocations are performed within the periodic calculation to apply labor or some other variable costs such as machine costs to the inventory value.  An allocation such as this can sometimes be wildly inaccurate if you are not tracking the actual time (both labor and machine).

 

Beginning Balance of Inventory:                 $ 1,000,000

Add Purchases/Manufacturing:                   $    850,000

Less Ending Inventory:                               $ 1,100,000

Inventory Sold during month:                      $   750,000

 

The calculation above does not provide much insight into which items are most profitable, which items are losing money and where you as a business owner should focus your efforts.  If this is something you struggle with, there is great news for your company.  Now there are systems which can help manage and accurately calculate the actual cost of inventory items, without breaking the bank.

NetSuite is the most deployed cloud based business management system in the world.  That means you can access your business information system from anywhere, anytime.  With NetSuite’s manufacturing suite you can accurately project, analyze and control the cost of production.  NetSuite can plan work orders to produce items to stock or to order, can be tied to purchase orders to procure inventory and all tied to accurate costing of items.

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By adding components items and linking them to the actual cost of producing or procuring an item you can accurately reflect costs to ensure you appropriately manage item profitability.  Additionally NetSuite allows companies to track the labor or time to build a particular item.  This means that the cost of the labor to produce an item is included in the built item’s cost.  The allocation of actual labor provides a more accurate representation of the cost to create an item for sale.

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A complete understanding of the costs associated with an item provide a business owner with better decision making abilities.  It will allow managers to focus on increasing gross profit on unprofitable items and selling more of the most profitable items.  Combined with the multi-channel management capabilities (e-Commerce and Retail) and promotion management NetSuite provides a platform to dramatically improve profitability and performance of manufacturing operations.