The Anatomy of a Standard Costing BOM
2. Dissecting the Components
Now that we know what a standard costing BOM is, let's dissect it to understand its key components. At its core, it's a list, but a very specific and organized list, detailing everything required to produce one unit of a finished product. This list typically includes three main categories: direct materials, direct labor, and manufacturing overhead.
First, you have direct materials. This refers to all the raw materials that go directly into the finished product. For our cookie example, this would be flour, sugar, chocolate chips, butter, eggs, and vanilla extract. The standard costing BOM specifies the quantity of each material required, as well as the standard cost per unit of that material. It answers the question: How much of this ingredient, at this price, do we need for one cookie?
Next up is direct labor. This includes the wages and benefits paid to the workers who are directly involved in the production process. It's the cost of the bakers mixing the dough, shaping the cookies, and putting them in the oven. The standard costing BOM specifies the standard labor hours required to produce one unit, as well as the standard labor rate per hour. In our cookie factory, this is how long it should take to bake a single cookie batch — and how much the cookie chef gets paid.
Finally, there's manufacturing overhead. This is a catch-all category for all the indirect costs associated with production. Think of it as the costs associated with running the kitchen — electricity, rent, depreciation on equipment, and the salaries of supervisors. Manufacturing overhead can be tricky, as it needs to be allocated to each product. The standard costing BOM uses a pre-determined overhead rate, based on factors like machine hours or direct labor hours, to allocate these indirect costs to each unit. This rate reflects the share of factory expenses allocated to each product made.
