ERP Manufacturing Software: Gaining Complete Visibility to the True Cost of Manufactured Items

A key functional requirement for ERP manufacturing software systems is the ability to associate a variety of costs to a manufactured item. In order to achieve the most accurate view of the total cost to produce a given item, manufacturers must look well beyond the purchase cost of each of the item’s raw material components; it must account for all material costs as well as all labor, burden, and commission costs associated with the production and sale of each item. In doing so, manufacturers will be armed with the necessary information to price their products appropriately to meet desired sales margins.

When manufacturers engage in an ERP software selection project, they should require each ERP vendor to demonstrate how all material, labor, burden, and commission costs are associated with the production of finished goods. Some ERP systems, such as TGI’s Enterprise 21 ERP software, allow for all labor and burden to be associated with a given bill of materials. The system should also account for variances in the purchase price of a raw material component and have that cost rolled into the cost of the item. When an item is produced, a given material that is used may have cost the organization one price two months ago but cost the organization a different price today. The ERP system should be able to associate the cost of the raw material component that was used to produce a finished good when it calculates the cumulative cost of the final product. Going one step further, should an item be returned, the ERP system should be able to account for the cost of the item at the time when it was produced, not what the cost of the item may be today should the two costs differ from one another. This provides the organization with an accurate view of its true inventory value.

So, what does all of this mean for the manufacturer? Often times, when an organization migrates to an ERP solution and begins associating all material, labor, burden, and commission costs with a manufactured item, it will see a decline in its average sales margin for that particular item. This is not a bad thing. This simply means that the organization has a more accurate picture of what its cost was to produce the item all along, and the business is now merely seeing this cost reflected in its sales margins. The organization is then in a better position to make strategic business decisions as to how it should price the item in the future based on accurate product costing data.