This tool is designed to compute the total expenses incurred during the manufacture of a product or the delivery of a service. It usually incorporates direct materials, direct labor, and manufacturing overhead. For example, a business producing furniture would use such a method to calculate the resources expended on lumber, employee wages for assembly, and factory-related costs like utilities and rent.
Such a calculation holds considerable value as it informs pricing strategies, profitability analysis, and budgeting decisions. Historically, these calculations were performed manually, often involving complex spreadsheets and lengthy processes. The advent of automated systems streamlined this process, providing greater accuracy and efficiency. Accurately determining expenses enables businesses to set competitive prices, identify areas for cost reduction, and make informed investment decisions.