Inventory and costing
Bill of materials (BOM)
A bill of materials is a comprehensive list of the raw materials, components, and instructions required to construct, manufacture, or repair a finished product.
What is Bill of materials?
A bill of materials acts as the master recipe for any item your business produces. When you manufacture or assemble goods, you need a precise record of every part, sub-assembly, and raw material that goes into the final product. This document ensures that your production team knows exactly what to pull from inventory and how those parts fit together. Whether you build custom furniture in Dubai or assemble electronics in Mumbai, a well-defined bill of materials keeps your production consistent. It prevents inventory shortages by linking the finished good directly to its underlying components. When you receive a sales order for a manufactured item, you can immediately check if you have enough raw materials in stock to complete the request.
How Bill of materials works
The process begins when an engineer or product designer finalises the specifications for a new item. They document every single component required, noting the exact quantities and unit of measure for each part. This list is then entered into your inventory management system, linking the raw materials to the finished product profile. When a customer places an order, the production team generates a work order based on this list. The warehouse staff uses the document to pick the necessary items from the shelves. As the goods are assembled, the system deducts the raw materials from your stock and increases the inventory count of the finished product. This ensures your stock levels and material costs remain accurate throughout the entire production cycle.
- Identify the finished product you intend to manufacture or assemble.
- List every raw material and component required for the build.
- Specify the exact quantity and unit of measure for each part.
- Include any necessary sub-assemblies if the product involves multiple stages.
- Update your inventory system to link these parts to the final item.
Worked example
Imagine a company called Gulf Woodworks that builds dining tables. Their bill of materials for one standard table includes one wooden tabletop, four wooden legs, 16 steel brackets, and 64 wood screws.
To calculate the material cost, they multiply the quantity of each part by its unit cost. The tabletop costs 40 OMR, each leg costs 5 OMR (total 20 OMR), each bracket costs 0.50 OMR (total 8 OMR), and each screw costs 0.05 OMR (total 3.20 OMR). By adding these amounts together, Gulf Woodworks determines that the total raw material cost to produce one dining table is 71.20 OMR.
Why it matters for your business
Without an accurate bill of materials, your business risks severe production delays and miscalculated costs. If you forget to list a crucial component, your assembly line might halt while you wait for a supplier delivery. This document is also vital for pricing your products correctly. By knowing exactly what goes into a finished good, you can calculate your true cost of goods sold and protect your profit margins. Paper & Pen tracks your stock levels automatically, helping you monitor the raw materials required for your production runs. Maintaining strict control over your component lists ensures you never over-order parts or run out of critical supplies.
See also
Questions
Common questions
What is the difference between a bill of materials and a purchase order?
Can a bill of materials include other manufactured items?
How does a bill of materials impact inventory valuation?
Related terms
- Work order A work order is an internal document that authorises and details the specific tasks, materials and labour required to manufacture a product or complete a service.
- Cost of goods sold Cost of goods sold is the total direct expense incurred to produce or purchase the items that a business successfully sells during a specific accounting period.
- Inventory turnover Inventory turnover is a financial metric that measures how many times a business has sold and replaced its total stock of goods over a specific period, usually a year.
- Stock Keeping Unit A Stock Keeping Unit is a unique alphanumeric code assigned to a specific product variant to track inventory levels, sales and locations within a business.
- Backorder A backorder is a customer request for a product that is currently out of stock but is expected to be replenished and delivered at a later date.
- FIFO First-In, First-Out is an inventory valuation method where the oldest purchased goods are recorded as sold first, leaving the most recently purchased items in your closing stock.