What it means
A bill of materials lists each component, the quantity required per finished unit, the unit cost and often the supplier and the lead time. Larger products use a multi-level structure, in which a sub-assembly carries its own bill of materials nested inside the parent one.
Its first job is production. Manufacturing and purchasing systems explode the bill against the production plan to work out exactly what to order and when, which is the core of material requirements planning.
Its second job is costing. Adding up the components gives the direct material cost per unit, which combines with labour and overhead to produce a standard cost, the benchmark against which actual spending is later compared.
Realistic bills allow for waste. A scrap or yield allowance of 2% to 5% covers offcuts, damaged parts and failed tests, and without it the material cost is understated on every unit produced.
Bills of materials change constantly, which is why version control matters so much. An engineering change that swaps one connector for a cheaper one has to flow through to purchasing, costing and quality records, and a factory still building from last quarter's version will make the wrong thing at the wrong cost.
In practice
Real-world examples
Example 1
A bicycle assembler discovers its bill of materials still lists a $9.00 brake lever that was replaced by a $14.00 part six months ago. Every unit has been under-costed by $5.00, and across 18,000 units that is $90,000 of margin which never existed.
Example 2
A furniture maker uses a multi-level bill of materials in which a drawer unit is a sub-assembly with its own list of runners, screws and panels. When the runner supplier raises prices by 12%, the system recalculates the cost of every product containing that sub-assembly automatically.
Example 3
A contract electronics manufacturer quotes for a new customer by pricing the customer's bill of materials line by line and adding an assembly charge per board. The quote is only as reliable as the component prices behind it, so it is held open for 30 days only.
Think of it
A Bill of Materials is exactly like a chef's recipe. Just as a recipe tells you every ingredient and the exact amount needed to bake a cake, this document tells a manufacturer every single part required to build a product.
Formula
Calculation
Direct material cost per unit = sum of (quantity per unit x unit cost) for every component
Costed material per unit = direct material cost x (1 + scrap allowance)
A workshop builds a powered trolley from five items: one steel frame at $46.00, one electric motor at $88.00, four castor wheels at $7.50 each, one wiring loom at $12.40 and one fastener kit at $3.60. The wheels come to 4 x $7.50 = $30.00, so the components add up to $46.00 + $88.00 + $30.00 + $12.40 + $3.60 = $180.00 per trolley.
The plant applies a 5% scrap allowance, giving a costed material figure of $180.00 x 1.05 = $189.00 per unit. For a production run of 2,000 trolleys the material budget is $189.00 x 2,000 = $378,000, and if each trolley sells for $315.00 the material absorbs $189.00 / $315.00 = 60% of the selling price, leaving $126.00 a unit to cover labour, overhead and profit.Case study
Seen in the real world
The following is an illustrative and fictional case. Halstow Instruments, an invented maker of laboratory equipment, priced its flagship analyser from a bill of materials totalling $2,150 per unit and set a selling price of $4,300, expecting a 50% material margin.
An engineer had quietly upgraded a sensor from $180 to $410 to settle a reliability complaint, but the change never reached the costed bill of materials. Real material cost was therefore $2,150 + $230 = $2,380, and the margin on each analyser was $4,300 - $2,380 = $1,920 rather than the $2,150 shown in the management accounts.
Across 900 units sold that year the fictional company earned $207,000 less than its own reporting suggested. The fix was procedural rather than technical, because no engineering change could afterwards be released until the costed bill of materials had been updated and re-approved.
Watch out
Common mistakes
- Letting the engineering bill of materials and the costed bill of materials drift apart, so the factory builds one product while the accounts cost another.
- Leaving out consumables such as adhesive, solder, packaging and labels, which are individually trivial and collectively significant.
- Ignoring scrap and yield, which quietly understates material cost on every single unit made.
Questions
People also ask
What is the difference between a bill of materials and a routing?
The bill lists what goes into the product, while the routing lists the operations, machines and times needed to build it.
What does a multi-level bill of materials mean?
It means sub-assemblies carry their own component lists nested inside the parent product, so a change deep in the structure flows upwards automatically.
How often should a bill of materials be reviewed?
Whenever an engineering change is released, and at least annually for pricing, because component costs move even when the design does not.