Knowing the True Cost of One Square Foot

How shared manufacturing overheads were allocated fairly across product lines to reveal the real production cost.

Introduction

Early in the project, the owner asked a simple question: what does it really cost to manufacture one square foot of compound wall?

Nobody could give a reliable answer. Not because the data was missing, but because most factory expenses are shared across multiple product lines.

Raw materials such as cement and aggregate are easy to track because they directly belong to a specific product. But factory rent, electricity, diesel, salaries, insurance, machine servicing, vehicle running expenses and other overheads are shared.

Without proper manufacturing cost allocation, the true production cost per square foot could not be calculated accurately.

Problem Statement

1. Most factory costs belonged to no single product.

Diesel, supervisor salaries, factory rent, electricity, insurance, machine maintenance, road tax and professional expenses supported several product lines. These were genuine manufacturing costs but were not properly allocated to individual products.

2. Product pricing was based mainly on experience.

Without accurate product costing, management could not confidently determine whether a product was profitable or being sold below its actual manufacturing cost.

3. Cost allocation was inconsistent.

Some expense transactions supported cost splitting while others did not. This resulted in incomplete and fragmented production costing.

4. Important overhead costs were missed.

Vehicle running expenses, insurance, permits and annual charges did not always appear in normal ledger-based reports. As a result, the reported production cost was lower than the actual cost.

5. Cost reports lacked transparency.

Users could see cost figures but could not easily identify the source documents behind them. Without traceability, costing reports were difficult to trust.

Solution Implemented

a. Percentage-based cost allocation at the time of entry.

Split percentage fields were added to transactions such as Purchase Invoices, Journal Entries, Stock Entries, Vehicle Logs, salary-related entries and annual or one-time expenses. Shared manufacturing overheads are now allocated when the information is still known.

b. Machine-level costing where required.

For product groups where machine usage affects production cost, workstation-level percentage allocation was made mandatory.

c. Percentage allocation instead of equal splitting.

Shared costs are allocated based on actual usage percentages rather than divided equally. This provides more realistic and auditable manufacturing cost calculations.

d. Automatic setup for new product lines.

When a new item group is created, the required cost allocation fields are automatically extended to relevant transactions. No manual changes are required across multiple screens.

e. One consolidated manufacturing expense report.

The SGP Expenses Report combines expenses from all relevant sources, including costs that may not directly appear in the general ledger. Expenses are grouped using the existing Chart of Accounts structure.

f. Full drill-down to source documents.

Users can double-click any cost figure and view the original transaction behind it.

g. Overhead costing connected directly with production.

Production reports now show raw material cost, labour cost, operator cost and allocated factory overhead together, helping calculate the true manufacturing cost per square foot.

Outcomes & Benefits

✓ True manufacturing cost is available per product and per month.

✓ Factory overheads such as electricity, diesel, insurance and vehicle expenses are included in product costing.

✓ Every cost figure can be traced back to its source document.

✓ Shared expenses are allocated when the responsible person still knows how the cost was used.

✓ Pricing decisions are now based on actual production cost instead of assumptions.

✓ New product lines automatically become part of the manufacturing costing structure.

✓ Direct costs and indirect factory overheads are available together for better profitability analysis.

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