The Value of Accurate Inventory Costing in Manufacturing

Manufacturers can benefit from reliable inventory costing and technology solutions such as NetSuite enterprise resource planning (ERP) software in a number of ways, including:

• Understanding direct costs and inventory value

  Direct costs, such as labor and overhead, go beyond raw materials to offer a complete picture of an item’s value. By incorporating these costs, manufacturers can better understand if a product is viable and price it accordingly.

  For example, capturing both machine time and employee labor costs provides a more accurate representation of total inventory value, which can help manufacturers make informed decisions about production and pricing.

• Enhancing financial accuracy and decision-making

  Inventory costing directly influences the accuracy of financial statements. For example, when the cost of goods sold matches the actual inventory value, a manufacturer’s profit margins will reflect true costs.

  This level of costing precision enhances the credibility of profit and loss statements, which is crucial for budgeting, forecasting, and maintaining the company’s financial health.

• Preventing write-offs and improving profitability

  An accurate approach to inventory costing can help manufacturers reduce unexpected write-offs. With better visibility into inventory costs, manufacturers can make informed and proactive decisions about production, inventory purchases, and pricing.

  In short, knowing the cost-to-profit ratio of each product helps manufacturing leaders avoid overstocking less profitable items.

• Achieving operational efficiency

  Operational efficiency improves when inventory costing is precise. By knowing which items are most cost effective, manufacturers can streamline production, reduce waste, and allocate resources more effectively.

  Calculating the labor and machine costs associated with each product, for example, can reveal opportunities to optimize and enhance workflows.

• Supporting long-term planning and budgeting

  A clear understanding of costs helps with day-to-day operations and long-term planning.

  Reliable inventory costing allows manufacturers to accurately project expenses, plan future budgets, and manage resources more effectively as the business grows. With this foundation, manufacturers can set sustainable goals and maintain operational resilience.

Manufacturing leaders that want to enhance inventory costing can consider strategies such as:

• Using ERP tools. ERP systems like the NetSuite platform can automate and refine inventory costing.
• Measuring and tracking costs. Monitoring costs associated with each item, including direct labor and overhead, supports more informed decision-making.
• Regularly reviewing costing models. Updating costing models regularly helps keep them aligned with operational changes and market conditions.

By implementing these strategies, manufacturers can establish a foundation for accurate inventory costing that supports growth and financial stability.