How Is BOM Cost Calculated

RAYMING PCB & ASSEMBLY
How is BOM cost calculated

The bill of materials (BOM) is a critical component of manufacturing
that lists all the parts and components needed to build a product. The
total cost of the BOM determines the direct production costs for the
product and has a large impact on the final pricing. Therefore,
accurately calculating BOM costs is essential for manufacturers to
understand profitability and make sound business decisions when
bringing a product to market.
This article provides a comprehensive overview of how BOM cost is
calculated for electronic and technical products. We’ll examine the
factors involved in estimating the costs of material items, component
pricing considerations, handling overhead expenses, and best practices
for optimizing BOM cost analysis.
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What is a bill of materials (BOM)?
A bill of materials is a structured list of all the parts and components
that go into manufacturing a particular product. The BOM details the
materials required to assemble each higher level component,
subsystem, and ultimately the finished product itself.
For electronic products, the BOM encompasses:
 Active components – Integrated circuits, transistors, diodes, LEDs,
etc.
 Passive components – Resistors, capacitors, inductors,
transformers, etc.
 Electromechanical parts – Connectors, switches, sensors, motors,
etc.
 PCBs – Bare printed circuit boards and assemblies.
 Miscellaneous – Hardware, terminals, standoffs, fasteners, wiring,
etc.

The BOM is much more than just a parts list. It also provides key
information needed for costing analysis including:
 Part numbers – Unique identifiers for each item
 Descriptions – Details on the specific component
 Quantities – How many of each item are required
 Manufacturers – Vendor source for procuring each item
 Unit pricing – Cost per item (a key input to total BOM costing)
Why BOM costing matters
Calculating an accurate BOM cost is critical for several reasons:
 Determines production costs – The total BOM cost largely defines
the direct manufacturing costs to build the product.
 Enables accurate pricing – Pricing to distributors or end
customers must cover total production costs plus margin.
Undercosting the BOM results in losing money.
 Aids sourcing decisions – Understanding material costs helps
assess different supplier options during procurement and
contracting.

 Allows cost reduction – Detailed BOM analysis identifies
opportunities to reduce costs through part substitution, design
changes, different vendors, etc.
 Supports cost tracking – BOM cost models provide the baseline
for monitoring actual material costs as production ramps up.
 Identifies cost risks – High cost items or uncertain estimates are
visible for contingency planning or management attention.
In summary, solid BOM cost knowledge is required to make sound
financial decisions as a product transitions from design to mass
production. Both upfront accuracy and continuous cost management
relies on robust BOM costing mechanisms.
The prices paid for the thousands of specific parts and materials
that make up the BOM have the biggest influence on its total cost.
Several techniques are used to estimate component costs:
Historical data – Costs paid in the past for the same or similar
parts provides a good starting point estimate, adjusted for any
known price trends.

Supplier quotes – Contacting component vendors and getting
current price quotes on the required volumes delivers highly
accurate estimates.
Industry data – Published electronic component price indexes and
reports provide guidance on pricing trends for different
commodities.
Parametric models – Cost models based on technical attributes
like part type, tolerance, rating, and packaging can estimate costs
when no direct data is available.
Design data – Information on required materials and processing
can provide rough estimates based on market prices for those
material stocks or processes.
Comparable analysis – Sometimes component pricing is
estimated by comparison to another part of known price with
similar attributes.
In most cases, a combination of these techniques produces the
most reliable component cost estimates, cross-checked against
multiple sources. Detailed quotes from vendors should be used to
finalize pricing for volume forecasts.

Handling overhead rates

In addition to direct material costs, an allocated share of
manufacturing overhead expenses is added to the BOM costs.
This covers the infrastructure required to physically handle and
process the materials into products.
Typical overhead costs charged to production include:

 Facility costs – Rent, utilities, property tax, insurance,
maintenance, etc.
 Support labor – Supervisors, material handlers, quality
inspectors, facilities staff, management
 Depreciation – Equipment, tools, information systems
 Supplies – Cleaning chemicals, lubricants, office items, small
tools, etc.
 Logistics – Warehousing costs, inbound/outbound
transportation
To allocate these overhead costs, manufacturers calculate a
handling rate per hour or per unit based on the capacity
utilization by each product. Higher usage drives more overhead
allocation. Rates are based on budgets and activity-based costing
models.
Best practices for optimizing BOM costing
To achieve the most value from BOM costing analysis for making
sound financial decisions, companies should follow these best
practices:

 Involve sourcing/procurement early – Work with the team
responsible for purchasing and supplier contracting during
initial BOM analysis to get realistic pricing.
 Leverage design data – Work jointly with engineering teams
to understand design factors that drive material selection
and specifications to inform cost estimates.
 Use standard component classifications – Assign standard
material categories or grades to each component to aid in
consistent cost rollups.
 Perform risk analysis – Identify high cost components and
items with uncertain or volatile pricing for management
focus.
 Link to ERP/MRP systems – Integrate BOM data with
enterprise systems used for inventory, orders, and
production planning to enable seamless cost analysis.
 Regularly update for changes – Review component costs
against quotes or market pricing continually throughout
product lifecycles to maintain accuracy.

 Analyze cost reduction opportunities – Dig into detailed
BOM data to find areas for reduced material usage,
alternate components, or lower cost suppliers.
 Monitor and report actuals – Compare actual material costs
booked during production to BOM forecasts to identify
discrepancies and improve future estimates.
 Use software tools – Modern platforms like Arena and
FactoryLogix offer robust BOM cost management
capabilities to eliminate spreadsheets.
By following these guidelines, organizations gain tremendous
visibility into product cost structures and drivers. This allows
smart decisions on pricing, sourcing, investments, and product
direction to ultimately maximize profitability.
BOM Costing Case Study
Here is an example demonstrating real-world application of BOM
costing analysis:
Acme Electronics was preparing to launch a new wireless
security camera product for the consumer market. Engineering

provided the BOM with 250 different components sourced from a
mix of global suppliers.
The operations team imported the BOM data into the company’s
cost management platform. Component costs were estimated
using market price benchmarks and supplier quotes where
available. Overhead rates were applied based on production line
utilization.
The full analysis showed a total BOM cost of $42 per unit in 10k
unit volumes. However the team identified two very high cost
image processing ICs driving 15% of the total cost. A design
change was approved to replace these with a lower cost standard
part, dropping the BOM to $38.
This enabled Acme to reduce the retail price from $99 to $89
while maintaining margins. At an anticipated 100k unit volume
over 2 years, the $11 reduction results in $1.1M additional profit.
This demonstrates the power of detailed BOM analysis to impact
the bottom line.
Performing robust and accurate bill of materials costing provides
manufacturers critical insights into product profitability as they
prepare to ramp from design into production. By following

structured cost estimation approaches and continuous analysis
best practices, companies make fully informed supply chain,
pricing, and new product decisions.
Well managed BOM cost processes link design, procurement,
finance, and operations functions to optimize production costs. As
product complexities increase, capable BOM software tools
deliver the modeling flexibility and rapid analysis required to
maximize earnings in competitive markets. With proactive cost
focus starting early in development, firms can accelerate new
product introduction while ensuring each product delivers against
financial targets.
What are some warning signs of inaccurate BOM cost estimates?
Indicators of potential errors in BOM estimates include:

 Component pricing outliers deviating widely from industry norms
or experience
 Excessive usage of “guesstimates” rather than actual data
 Labor/overhead rates inconsistent with accounting records
 Frequent large discrepancies between estimates and actual costs
 Lack of supporting documentation for pricing assumptions
 Minimal involvement from procurement/sourcing teams
 Using old estimates without updating for current prices
What data sources provide the most accurate component pricing information?
The pricing data hierarchy from most to least accurate includes:
 Direct supplier quotes based on required volumes
 Recent purchasing history for the same components and
volumes
 Sourcing team market research and negotiated contracts
 Published market pricing indexes validated by multiple sources

 Parametric models based on technical attributes like materials,
tolerances, packaging, etc.
 Rough estimates by engineers based on specifications and
materials
What are some common strategies used to reduce BOM costs?
Tactics to lower BOM costs include:
 Consolidating designs to use fewer component variants
 Negotiating lower component prices based on higher volumes
 Substituting commodity grades for costly high-performance
grades where possible
 Choosing suppliers with lower cost structures
 Adjusting designs to reduce quantity requirements through
strategies like component sharing
 Targeting high cost components for redesign or substitution
 Identifying and eliminating unnecessary requirements driving
overspecification

 Value engineering reviews to simplify or streamline product
architectures
What problems can inaccurate BOM costs cause during production?
Underestimating component prices leads to negative margins once in
volume production. Overestimating BOM costs causes inflated pricing
that can result in lost sales compared to the competition. Both
outcomes lead to financial losses and potential product failures in the
market.
How should BOM cost estimates be documented for future analysis?
BOM estimates should capture details like:
 Reference sources for all component pricing like quotes, indexes,
models, etc.
 Assumptions on volumes ordered for each component
 Allowances made for rises in future component prices
 Basis for overhead rates applied and allocation methodology
 Contingencies included for high risk or uncertain cost items

 Descriptions of any product redesign iterations impacting the
BOM
This documentation enables future review of the logic behind
estimates.
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How Is BOM Cost Calculated

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RAYMING PCB & ASSEMBLY

How is BOM cost calculated

product and has a large impact on the final pricing. Therefore,

accurately calculating BOM costs is essential for manufacturers to

understand profitability and make sound business decisions when

bringing a product to market.

This article provides a comprehensive overview of how BOM cost is

calculated for electronic and technical products. We’ll examine the

factors involved in estimating the costs of material items, component

pricing considerations, handling overhead expenses, and best practices

for optimizing BOM cost analysis.

PCB Manufacturing & Assembly Services https://www.raypcb.com/

Estimate Bom List Cost Now

What is a bill of materials (BOM)?

A bill of materials is a structured list of all the parts and components

that go into manufacturing a particular product. The BOM details the

materials required to assemble each higher level component,

subsystem, and ultimately the finished product itself.

For electronic products, the BOM encompasses:

 Active components – Integrated circuits, transistors, diodes, LEDs,

 Passive components – Resistors, capacitors, inductors,

 Electromechanical parts – Connectors, switches, sensors, motors,

 PCBs – Bare printed circuit boards and assemblies.

 Miscellaneous – Hardware, terminals, standoffs, fasteners, wiring,

PCB Manufacturing & Assembly Services https://www.raypcb.com/

information needed for costing analysis including:

 Part numbers – Unique identifiers for each item

 Descriptions – Details on the specific component

 Quantities – How many of each item are required

 Manufacturers – Vendor source for procuring each item

Why BOM costing matters

Calculating an accurate BOM cost is critical for several reasons:

 Determines production costs – The total BOM cost largely defines

the direct manufacturing costs to build the product.

 Enables accurate pricing – Pricing to distributors or end

customers must cover total production costs plus margin.

Undercosting the BOM results in losing money.

 Aids sourcing decisions – Understanding material costs helps

assess different supplier options during procurement and

PCB Manufacturing & Assembly Services https://www.raypcb.com/

 Allows cost reduction – Detailed BOM analysis identifies

opportunities to reduce costs through part substitution, design

changes, different vendors, etc.

 Supports cost tracking – BOM cost models provide the baseline

for monitoring actual material costs as production ramps up.

 Identifies cost risks – High cost items or uncertain estimates are

visible for contingency planning or management attention.

In summary, solid BOM cost knowledge is required to make sound

financial decisions as a product transitions from design to mass

production. Both upfront accuracy and continuous cost management

relies on robust BOM costing mechanisms.

Several techniques are used to estimate component costs:

parts provides a good starting point estimate, adjusted for any

known price trends.

PCB Manufacturing & Assembly Services https://www.raypcb.com/

Supplier quotes – Contacting component vendors and getting

current price quotes on the required volumes delivers highly

Industry data – Published electronic component price indexes and

reports provide guidance on pricing trends for different

Parametric models – Cost models based on technical attributes

when no direct data is available.

Design data – Information on required materials and processing

can provide rough estimates based on market prices for those