How does a bill of materials work?

Definition

A bill of materials is the recipe for one finished unit: each part, and how many of that part the unit takes. On the books, this is a schedule that feeds inventory issues, not an account you debit or credit.

A furniture maker that builds a side table lists one tabletop, four legs, eight screws, and a pint of finish. That list tells the shop what to pull from raw materials inventory when the job starts.

The list is a plan. It is not the wood already on the rack, and it is not the finished table waiting to ship.

Where it shows up

Balance Sheet: Related to the materials it lists in inventory.

P&L: Related to the standard cost built from those quantities.

See also: Direct Materials · Standard Cost · Job Costing

When you look at your Balance Sheet, you will not see a bill-of-materials line. You see the materials the list names, sitting in inventory until they are issued or sold.

When the list is complete and current, issues match what the floor actually needs. When it is stale, the rack is missing a screw size, or the job is charged for parts nobody used.

The Income Statement does not print this schedule. Related cost shows up later as cost of goods sold, once the finished table sells.

On the Statement of Cash Flows, buying the listed parts is the cash event. The list itself does not move cash.

Work in process inventory is where the listed parts sit after they are issued. Finished goods inventory is where the completed table sits until a customer buys it.

How it works

The shop writes one list per unit, or per option of that unit. Each line names a part and a quantity.

When a job is released, the storekeeper uses that list to pull stock. The issue entry takes those quantities out of raw materials and into work in process.

If the floor uses more screws than the list, the extra still has to come from the rack. The books should show the actual issue, and the list may need a revision.

Stay with the recipe when you read this schedule. A purchase order to a lumber yard is how you restock the rack; it is not this list.

A pre-set expected cost per unit is often built by extending each line at an expected price. That expected total is a planning number; the job still posts actual issues.

Do not treat the list as proof the parts are on hand. Safety stock and a reorder point are what keep the rack from going empty.

A stockout on one listed screw can stop the whole table. The list is how you see that dependency before the job starts.

Keep the revision date on the list. A side table that switched from eight screws to twelve will steal from the rack if the old list is still on the traveler.

When the table is finished, the job's actual material cost sits in finished goods. The list does not move; it is ready for the next unit.

After the table sells, that actual cost leaves inventory. The recipe remains for the next build.

Example

A furniture maker builds a side table from this list: one tabletop at $40, four legs at $8 each, eight screws at $0.25 each, and one pint of finish at $6. The planned material pull is $40 + $32 + $2 + $6, or $80.

The shop starts two tables on Monday. The storekeeper pulls $160 of those parts from the rack and issues them to the two jobs.

There is no bill-of-materials account to post. Raw materials fall by $160, and work in process rises by $160, using the actual cost of what left the rack.

One table uses an extra pint of finish after a sanding mistake. The books should show $86 on that job if the extra pint is issued, even though the list still says $80.

The Income Statement does not change until a finished table sells. Until then both jobs are still inventory.

Common mix-ups

A bill of materials is not a purchase order. The list says what one unit needs; the purchase order tells a vendor what to ship to the rack.

A bill of materials is not a ledger account. You do not debit or credit the list when parts are issued.

A bill of materials is not the same thing as the finished unit's actual cost. The list is the plan; scrap, substitutions, and price changes show up in the actual issues.

Related terms

• Direct Materials: Materials that can be traced directly to a finished product.
• Standard Cost: A pre-set expected cost per unit used for planning and comparison.
• Job Costing: Tracking revenue and cost for each individual job, project, or order.
• Work In Process Inventory: Partially completed goods still moving through production.
• Raw Materials Inventory: Purchased materials waiting to enter production.
• Cost Of Goods Sold: The direct cost of the products sold during the period.
• Landed Cost: The full cost of getting a purchased item to your door, including freight and duties.
• Purchase Order: The document authorizing a purchase from a vendor at agreed terms.