Tracking production costs can be an incredibly complex process for manufacturers.
Luckily, Xero's cloud-based accounting software is specifically designed to help streamline manufacturing expenses with features like standard costing, bill of materials tracking, and integrations with inventory management tools.
In this post, we'll explore how manufacturers can leverage Xero to gain real-time insights into production costs, efficiently scale operations, and implement lean practices to boost profit margins.
Streamlining Production Costs with Xero's Manufacturing Accounting Software
Xero provides a cloud-based accounting software solution designed to meet the unique needs of manufacturing businesses. With features tailored for inventory, bill of materials, and production cost management, Xero aims to help manufacturers streamline operations and gain insights into the true costs behind production.
Specifically, Xero offers the following key capabilities to help manufacturers optimize production costs:
- Inventory management: Track raw materials, WIP, and finished goods. Manage stock levels, record inventory valuations, and set reorder points for streamlined purchasing.
- Bill of materials: Define recipes and components for manufactured items. Get real-time visibility into material requirements and costs as production levels change.
- MRPeasy integration: Connect Xero to the manufacturing ERP platform MRPeasy for automated syncing of BOMs, inventory, and production costs. Avoid duplicate data entry between systems.
- Reporting: Gain visibility into the full cost behind production with reports on material costs, labor costs, manufacturing variances, and profitability by product line or job.
- Mobile access: Manage inventory counts, purchase orders, and other manufacturing workflows on-the-go with native mobile apps. Scan barcodes for faster tracking.
With these features, manufacturers can optimize inventory planning, costing accuracy, and overall efficiency. By connecting real-time production data to the accounting system, Xero empowers smarter decision making to control margins and minimize waste.
For manufacturers struggling with production cost management, Xero delivers the specialized tools needed to streamline processes while unlocking actionable insights. Its cloud-based flexibility also enables scaling as operational needs change. With the right technology foundation, manufacturers can confidently optimize their financial operations.
Can I use Xero for manufacturing?
Xero Inventory can be made to work for most small manufacturing companies, even if certain advanced inventory management features are not available out of the box.
While Xero does not natively support back orders, multiple pricing tiers, or synchronizing stock levels with the dates of bills and invoices, there are a few workarounds:
- Use a separate inventory management system like MRPeasy, and integrate it with Xero to keep accounting records up to date. MRPeasy provides manufacturing-specific inventory features that Xero lacks.
- Use the Notes field in Xero products to track backorders manually.
- Set up multiple inventory items at different price points to simulate a tiered pricing structure.
- Carefully date and reconcile inventory receipts/deliveries with corresponding bills and invoices to align stock levels.
The key is finding the right balance between leveraging Xero's cloud accounting and reporting capabilities, while supplementing with an integrated app to fill inventory management gaps. For most small manufacturers, Xero + MRPeasy gets the job done at an affordable price.
The Xero App Store offers other manufacturing-focused solutions too. It's worthwhile reviewing all options to find the best fit for each manufacturer's needs - whether that's production control, BOM and routing, MRP, quality control, etc.
While not a complete end-to-end solution out of the box, Xero does provide a solid financial backbone on which to build a digital ecosystem tailored specifically for manufacturing.
Can Xero do bill of materials?
Unfortunately, Xero does not currently have a dedicated bill of materials (BOM) module. This means there is no way to directly create or store bill of materials data within Xero.
However, Xero can still be useful for manufacturers in tracking production costs. Here are a few ways Xero accounting software can help with managing manufacturing finances:
- Record purchase orders for raw materials and component parts
- Track inventory quantities and values
- Log labor hours and associated costs
- Assign overhead costs to production jobs
- Generate job cost reports to analyze profitability
While Xero does not offer a full manufacturing solution out of the box, it can integrate with various manufacturing-focused apps on the Xero App Store. For example, some apps provide advanced production planning, shop floor control, manufacturing resource planning, and more robust BOM capabilities.
So in summary - Xero does not currently have a bill of materials feature. But it can still help manufacturers track finances, costs, and integrate with manufacturing-specific apps to augment functionality. For manufacturers seeking an integrated end-to-end manufacturing software system that includes BOMs, another solution may be preferable over Xero alone.
What inventory method does Xero use?
Xero uses the periodic inventory method for tracking inventory. This means you only update inventory levels at the end of each month or year using inventory adjustments.
The periodic method is well-suited for manufacturers that assemble goods for sale and need to closely track the various components that make up each finished product.
With Xero, you can:
- Set up detailed bills of materials that list all ingredients and components for each product
- Assign costs to each component
- Generate reports to analyze inventory costs and profit margins
This allows you to accurately track inventory costs as products move through the production process. You can then make adjustments manually or import from another system at month-end to account for any inventory changes.
The periodic method balances detailed tracking with simplicity since you don't need to perpetually update Xero. It streamlines your accounting while still providing the inventory analysis you need to control production costs.
How does Xero calculate average cost of inventory?
Xero uses the entire life of a Tracked Inventory item to calculate the Average Cost. This means that all transactions related to that inventory item, from when it was first added as a Tracked Inventory item, are used to determine the average cost over time.
Some key points about Xero's inventory cost calculation:
- Only transactions that occurred after the item was set to Tracked Inventory are included. Any transactions prior to that point are excluded.
- The average cost is dynamic - it changes over time as new transactions occur. Each purchase, sale, adjustment etc. impacts the overall average.
- The calculation uses a weighted average approach. So transactions involving larger quantities have a greater impact on the average cost than those with smaller quantities.
- Every time an inventory transaction posts in Xero, the new average cost is recalculated automatically. You don't need to manually update it.
- Even though it's called "Average Cost", it essentially reflects the current weighted cost at any point in time.
So in summary, Xero takes a lifetime view of all transactions to continually update the average cost as your inventory is bought, sold and adjusted over time. Keeping items set to "Tracked" ensures all relevant transactions are included in the calculation.
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Key Benefits of Cloud-Based Accounting Software for Manufacturing
Cloud-based accounting software like Xero offers several key benefits for manufacturing businesses looking to streamline production costs:
Real-Time Insights Into Manufacturing Costs and Profits
Xero provides real-time reporting on key manufacturing metrics like:
- Materials cost
- Direct labor cost
- Manufacturing overhead
- Profitability by production job
With up-to-date data, manufacturers can make informed decisions to optimize production planning and cost control.
Scalability of Xero for Growing Manufacturing Operations
As manufacturing operations grow in scale and complexity, Xero seamlessly handles the increased transaction volumes. Key features like:
- Robust API and integration capabilities
- Flexible, customizable reporting
- Scalable cloud infrastructure
Allow Xero to scale up to support high-growth manufacturing businesses.
Lean Manufacturing: Streamlining Production Costs with Xero
Xero integrates with shop floor apps like MRPeasy to reduce paperwork and enable lean practices like:
- Paperless shop floor execution
- Real-time job costing
- Just-in-time inventory management
By eliminating waste in documentation and inventory, manufacturers can significantly streamline production costs.
Exploring Key Features of Xero for Manufacturing
This section will provide an overview of some of the key features in Xero that can help manufacturing businesses streamline production costs and operations.
Standard Costing for Streamlined Production Jobs
Xero has built-in standard costing capabilities that can assist manufacturers with accurately costing production jobs. This includes tracking material, labor, and overhead costs against a predefined standard cost model.
Benefits of standard costing in Xero:
- Compare actual production costs to standard costs to reveal inefficiencies
- Tighten inventory controls and reduce waste
- Improve pricing accuracy for products
- Simplify cost control across high-volume production jobs
By leveraging Xero's standard costing, manufacturers can streamline cost accounting processes and identify opportunities to optimize production spend.
Material Requirements Planning with Xero
In addition to costing, Xero also provides material requirements planning (MRP) functionality relevant for manufacturers. This gives visibility into:
- Raw material stock levels
- Production plans and schedules
- Material purchase requirements
With these insights, manufacturers can ensure they have adequate inventory on-hand to fulfill production plans. This prevents costly stock-outs which can delay production.
Key MRP benefits include:
- Optimize inventory holdings
- Increase inventory turns
- Improve production efficiency
- Reduce last-minute material purchases
By connecting inventory and production in Xero, manufacturers can cost-effectively streamline material flows.
Bill of Materials Management in Xero
Xero enables manufacturers to create bill of materials (BOM) for their products, including:
- Formulas for sub-assemblies
- Cost breakdowns of components
- Assigning standard costs for completed items
Tracking BOMs in Xero improves accuracy when costing final products while giving visibility into the discrete costs for materials, labor, etc.
Benefits include:
- Granular cost analysis of specific products
- Compare actuals to standards for production jobs
- Identify expensive components to substitute
- Tighten inventory management for materials
With robust BOM capabilities, manufacturers can closely track true costs of production and uncover savings opportunities.
Integrating Xero with Specialized Manufacturing Apps
This section will explore the Xero App Store and top app integrations to further optimize manufacturing workflows covering inventory, manufacturing execution, quality, and more.
Inventory and Warehouse Management Apps Compatible with Xero
Apps like DEAR Inventory seamlessly connect Xero to advanced warehouse and inventory processes. Here are some key benefits:
- Real-time inventory synchronization between DEAR and Xero
- Barcode scanning for inventory counts and warehouse workflows
- Automated purchase order creation in Xero based on stock levels
- Detailed reporting on inventory valuation and turnover rates
By integrating DEAR Inventory, manufacturers can reduce overhead costs through increased visibility and control over inventory.
MRPeasy: A Manufacturing Execution System Tool for Xero
MES apps like MRPeasy facilitate production monitoring, scheduling, quality control, and more. Key features include:
- Shop floor dashboards for real-time Work in Progress tracking
- Production scheduling based on capacity planning
- Quality control workflows like inspections and corrective actions
- Integrated time tracking and job costing
MRPeasy gives manufacturers the ability to optimize production processes directly from Xero for streamlined workflows.
Quality Control and Traceability Apps Integrated with Xero
Apps like Seikienhance quality control practices and provide manufacturing traceability. Capabilities include:
- Inspections, non-conformances, and corrective action workflows
- Batch and serial number tracking for full supply chain traceability
- Automated data collection via mobile devices on the shop floor
- Real-time quality analytics to identify areas for improvement
By implementing Seiki, manufacturers can reduce scrap and rework while meeting expanding regulatory compliance requirements around traceability.
Implementation Guide: How to Use Xero Accounting Software for Manufacturing
Selecting the Right Xero Plan for Manufacturing Needs
Xero offers three main plans - Standard, Premium, and Enterprise - that provide increasing levels of features and customization for manufacturing businesses. Here are some key considerations when selecting your Xero plan:
- The Standard plan offers core accounting features like invoicing and expense claims. It can suit very small manufacturers with basic needs.
- The Premium plan adds inventory management, bill of materials, and more advanced reporting. It suits most small-medium manufacturers looking for robust accounting.
- The Enterprise plan has API access, custom fields, and unlimited users. It's designed for larger manufacturers that need high customization and complex integrations.
Evaluate your manufacturing workflows, inventory needs, integration requirements, and reporting needs. Then match those to the features in each Xero plan to select the right fit. You can always upgrade later as your manufacturing operations grow.
Configuring Your Xero Manufacturing Account
Once you've selected your Xero plan, the key configuration steps include:
- Set up inventory items for your product catalog and bill of materials. Enable average cost inventory accounting.
- Build bill of materials (BOM) for kits or assembled products to track costs. Connect BOM to inventory items and accounts.
- Set up tracking categories like Location, Class, and Jobs. Use jobs for production batches or work orders.
- Map accounts for raw materials, WIP, and COGS to track manufacturing costs through workflows.
- Enable either standard or custom job costing depending on complexity required.
Following best practices during initial configuration streamlines collecting costs through production and integrating data with other manufacturing systems.
Integrating MRPeasy and Other Production Software with Xero
To connect Xero to production management tools like MRPeasy:
- Use Xero's API to build automated data flows pulling in key manufacturing data.
- Leverage MRPeasy's Xero integration to synchronize inventory, bills, purchasing, sales, and job costing.
- Connect shop floor apps to update WIP and labor costs into Xero for real-time visibility.
- Consolidate financial reporting by bringing together systems like shipping, CRM, and analytics.
Integrating systems eliminates manual data entry and provides comprehensive real-time accounting and operational visibility from the production line through to financials.
Conclusion: Summarizing the Advantages of Xero for Streamlining Manufacturing Costs
To recap, using Xero for manufacturing enables several key benefits:
- Real-time production costing: Xero integrates with manufacturing software like MRPeasy to connect financials with production. This allows manufacturers to track costs in real-time as they are incurred on the shop floor.
- Efficient processes: By eliminating manual data entry and paper-based systems, Xero streamlines production costing workflows. Teams save time and minimize errors by automating previously manual tasks.
- Cross-functional visibility: With all teams using connected systems, everyone from accounting to production has visibility into costs. This breaks down departmental silos for better decision making.
The next step is to request a demo and explore integration options with manufacturing software. Specialized solutions like MRPeasy go beyond basic accounting to provide production costing, MRP, inventory management, and more. Integrating these operational systems with Xero financials enables end-to-end cost control and efficiency gains.
