Costing and reports
How manufactured cost is calculated
How materials, labor and overhead collect on a work order, how the finished goods absorb that actual cost, how scrap and by-products are treated, and which journal entries post along the way.
3 min readLast updated
In this article
Rocket ERP costs manufactured products at their actual cost. Everything a work order consumes is collected in a work-in-progress (WIP) account. When the order is completed, the finished goods take that whole balance. The product's average cost is then updated, so the next sale is costed at what production really cost.
What goes into the cost
Element | How it is measured | When it is charged |
|---|---|---|
Materials | Issued quantity × the item's current cost | When materials are issued |
Labor | Operation hours × the routing's labor rate | With each production report, or at completion |
Overhead | Operation hours × the routing's overhead rate | With each production report, or at completion |
Operation hours are the setup time plus the run time for the quantity produced. Labor is part of the product cost. It is never left as a separate expense: the labor cost account, or the supplier's account for an outsourced work center, is credited, and the cost sits in WIP until the finished goods absorb it.
The work order's Cost card shows the estimate and the actual figures. Its note Labor is folded into product cost. states the same rule.
During production
Each production report moves the cost of the newly finished units from WIP to finished goods at the order's planned unit cost, which is the estimated material and labor per unit. This keeps every batch at the same unit cost while the run is in progress. If Post on completion is on in the settings, these entries wait until completion.
At completion
The system adds up everything charged to the order.
It deducts the value of by-products (quantity × the by-product's cost) and of recoverable scrap. Those items enter their warehouses at that value.
The rest is the cost of the good units, less what the production reports already moved to finished goods.
Spoilage:
Normal spoilage stays in the cost of the good units, so each good unit carries a share of the expected loss.
Abnormal spoilage is charged to the abnormal spoilage account. The good units carry only their own share.
The finished product's average cost is recalculated: the value of the stock already held plus the new cost, divided by the total quantity. Scrap and by-product warehouses are left out of this calculation. See How average cost works.
Unused issued materials go back to their source warehouse, and their value goes back with them.
The journal entries
Event | Debit | Credit |
|---|---|---|
Materials issued | Work-in-progress account | Source warehouse's inventory account |
Labor charged | Work-in-progress account | Labor cost account, or the subcontractor's payable |
Overhead charged | Work-in-progress account | Manufacturing overhead account |
Finished goods received | Finished goods account | Work-in-progress account |
Scrap reported | Scrap expense account | Work-in-progress account |
Abnormal spoilage | Abnormal spoilage account | Work-in-progress account |
Unused materials returned | Raw material account | Work-in-progress account |
Cancelling or reversing an order posts the mirror entries.
Common questions
Why did the product's cost change after a work order? The average cost now includes the new batch at its actual cost.
Why is the actual cost different from the BOM cost? The BOM shows the components at today's cost only. The actual cost includes labor, overhead, the real quantities consumed, scrap and the cost of materials at the moment they were issued.