The Value of Accurate Inventory Costing in Manufacturing

Why accurate inventory costing matters

In the competitive and fast-moving manufacturing landscape, industry leaders need clear insight into their true inventory costs to maintain profitability. When inventory costing accurately captures all expenses – including materials, labor, and overhead – manufacturers can make data-driven decisions that align with business goals.

Accurate inventory costing is no longer just an accounting function; it plays a central role in strategic decision-making. In an environment marked by fluctuating input costs and margin pressures, leaders must rely on cost data that reflects operational reality. Foundational inventory practices, such as disciplined cycle counting, help companies achieve an accurate view by grounding cost data in reliable, up-to-date inventory records. Without that alignment, organizations risk unexpected write-offs, inconsistent financial reporting, and decisions based on incomplete information.

The benefits of accurate inventory costing

Manufacturers can benefit from reliable inventory costing and technology solutions such as NetSuite enterprise resource planning (ERP) software in a number of ways, including:

• Understanding direct costs and inventory value

  Direct costs, such as labor and overhead, go beyond raw materials to offer a complete picture of an item’s value. By incorporating these costs, manufacturers can better understand if a product is viable and price it accordingly.

  For example, capturing both machine time and employee labor costs provides a more accurate representation of total inventory value, which can help manufacturers make informed decisions about production and pricing.

• Enhancing financial accuracy and decision-making

  Inventory costing directly influences the accuracy of financial statements. For example, when the cost of goods sold matches the actual inventory value, a manufacturer’s profit margins will reflect true costs.

  This level of costing precision enhances the credibility of profit and loss statements, which is crucial for budgeting, forecasting, and maintaining the company’s financial health.

• Preventing write-offs and improving profitability

  An accurate approach to inventory costing can help manufacturers reduce unexpected write-offs. With better visibility into inventory costs, manufacturers can make informed and proactive decisions about production, inventory purchases, and pricing.

  In short, knowing the cost-to-profit ratio of each product helps manufacturing leaders avoid overstocking less profitable items.

• Achieving operational efficiency

  Operational efficiency improves when inventory costing is precise. By knowing which items are most cost effective, manufacturers can streamline production, reduce waste, and allocate resources more effectively.

  Calculating the labor and machine costs associated with each product, for example, can reveal opportunities to optimize and enhance workflows.

• Supporting long-term planning and budgeting

  A clear understanding of costs helps with day-to-day operations and long-term planning.

  Reliable inventory costing allows manufacturers to accurately project expenses, plan future budgets, and manage resources more effectively as the business grows. With this foundation, manufacturers can set sustainable goals and maintain operational resilience.

Strategies for accurate inventory costing

Manufacturing leaders that want to enhance inventory costing can consider strategies such as:

• Using ERP tools. Modern ERP systems like the NetSuite platform can automate and refine inventory costing.
• Measuring and tracking costs. Monitoring costs associated with each item, including direct labor and overhead, supports more informed decision-making.
• Regularly reviewing costing models. Updating costing models regularly helps keep them aligned with operational changes and market conditions.
• Using intelligent automation. Embedded AI and predictive analytics can reconcile cost data, detect anomalies early, and dynamically adjust costing models as conditions evolve. 

By implementing these strategies, manufacturers can transform inventory costing into a proactive, insight-driven discipline that strengthens financial accuracy, supports better decision-making, and enhances long-term profitability.

How NetSuite ERP solutions help manufacturers with inventory costing

NetSuite ERP tools help manufacturers track costs at every step of production, from individual tasks to work centers. Taking a detailed and transparent approach to inventory costing with NetSuite ERP solutions can help manufacturing leaders see exactly where their money is going, strengthen financial accuracy, and inform their decision-making.

In addition to granular cost tracking, NetSuite ERP solutions incorporate AI-powered anomaly detection and predictive insights. Intelligent automation helps identify cost factors, flag variances before they affect financial performance, and recommend process improvements in real time. This visibility strengthens alignment between operations and finance while supporting consistent profitability across product portfolios.

This article was originally published on Jan. 6, 2025, and was reviewed and updated.