Why manufacturing is harder than retail.
A retailer buys a product at one cost and sells it at another. COGS is straightforward. A manufacturer buys raw materials, transforms them through labor and machine time, and produces finished goods. The cost of a finished unit includes raw material, direct labor for the workers who built it, and allocated overhead (factory rent, supervisor salary, machine depreciation, utilities). Tracking all three categories per finished SKU per production run is genuinely complicated.
A small furniture manufacturer in Lahore producing dining tables at PKR 28,000 retail cost has roughly PKR 11,500 material, PKR 4,200 direct labor, and PKR 6,800 allocated overhead, totaling PKR 22,500 manufactured cost. Gross margin 19.6 percent. Skip the overhead allocation and the cost looks like PKR 15,700, margin 44 percent. The owner expands aggressively based on the fictitious margin, hires more, raises prices below the true cost, and runs out of cash in 14 months.
Feature one: bill of materials.
A bill of materials (BOM) defines what goes into one unit of a finished product: raw materials, components, sub-assemblies, quantities, scrap allowances. A multi-level BOM has sub-assemblies that themselves have BOMs. A 200-litre water heater might have a BOM of 35 components, including a heating element sub-assembly with its own BOM of 12 components. The system must support multi-level explosion and roll up costs from the bottom.
For a Faisalabad textile mill, the BOM for one bedsheet is: 4.2 metres of fabric at PKR 280 per metre = 1,176, thread 0.15 spool at PKR 320 = 48, label 1 at PKR 12, packaging 1 at PKR 65, total material PKR 1,301. Plus direct labor of 18 minutes at PKR 6 per minute = 108. Plus overhead allocation based on minutes at PKR 4 per minute = 72. Total manufactured cost PKR 1,481 per sheet. Retail price PKR 2,100. Margin 29.5 percent. Defendable, scalable.
Feature two: work in process accounting.
Work in process (WIP) is inventory that has started production but is not yet finished. The accounting must track WIP separately from raw materials and finished goods. When you issue raw materials to a production order, the journal entry is DR WIP / CR Raw Materials. As direct labor is recorded, DR WIP / CR Wages Payable. As overhead is applied, DR WIP / CR Overhead Allocated. When the unit completes, DR Finished Goods / CR WIP.
Most spreadsheet-based manufacturers ignore WIP entirely. They expense raw materials at issue and book the finished goods at retail value, which destroys both the balance sheet and the P&L. A real manufacturing system keeps a WIP ledger per production order, with the cost building up as material, labor, and overhead post against the order. When the order completes, the unit cost is the sum of those three. Nonari manufacturing module handles WIP per production order natively.
Feature three: standard vs actual costing.
Standard costing sets a budgeted cost per unit (based on planned material, labor, and overhead) and tracks variances when actual is different. Actual costing records the true cost of each production run. Both have trade-offs. Standard costing produces stable P&L and clear variance analysis (material price variance, labor efficiency variance, overhead absorption variance). Actual costing produces wobbly P&L but defensible inventory values.
Most small manufacturers should use actual costing because the volume does not justify the variance accounting overhead. Above USD 5-10 million revenue, standard costing becomes useful because it isolates whether margin variance is a price problem, an efficiency problem, or an overhead problem. The decision is policy. The software must support whichever method you pick. Nonari supports both at the SKU level.
Feature four: overhead allocation.
Manufacturing overhead is all factory cost that is not direct material or direct labor: factory rent, supervisor salary, machine depreciation, factory utilities, indirect materials (lubricants, cleaning supplies). The overhead pool must allocate to products via a driver: machine hours, labor hours, direct labor cost, or units produced. Each driver gives different per-unit overhead. Picking the right driver matters; using the wrong one distorts product costing.
A US machine shop allocates overhead at USD 18 per machine hour. A 90-minute job consumes 1.5 machine hours, so overhead allocation is USD 27. Add USD 35 direct material and USD 22 direct labor and the total job cost is USD 84. Customer pays USD 110. Gross margin USD 26, 24 percent. If overhead were allocated on labor cost instead of machine hours, the per-job allocation would be different and margin would be off by USD 4-8. Reasonable people pick reasonable drivers; the principle is consistency.
- Multi-level BOM with cost rollup.
- WIP accounting per production order.
- Standard or actual costing (or both).
- Overhead allocation by machine hour or labor.
- Production order scheduling and routing.
- Yield and scrap tracking per operation.
- Variance reporting: material, labor, overhead.
Feature five: production order management.
A production order ties together what is being made, in what quantity, by which routing (sequence of operations), starting when, expected to finish when. The system tracks status (released, in process, completed), records material issues and labor hours against the order, and calculates the unit cost on completion. Without production order discipline, raw material issues become untraceable and unit costs become guesses.
A Karachi pharmaceutical manufacturer running a 50,000-unit batch of a generic medicine creates a production order, releases the BOM, issues raw materials from the warehouse to the order, records 320 hours of direct labor over 8 days, applies overhead, and completes the order. Total cost PKR 4.2 million for 50,000 units = PKR 84 per unit. The order documentation is required for DRAP batch records and for any product recall traceability.
Feature six: variance analysis.
Variance analysis compares actual cost to standard cost and isolates where the difference lives. Material price variance: did we pay more for raw materials than expected? Material usage variance: did we consume more raw materials per unit than expected? Labor rate variance: did the workforce cost more than budgeted? Labor efficiency variance: did the workforce take longer than expected? Overhead variance: did overhead absorb correctly? Each variance answers a different management question.
For a mid-size manufacturer with 5-15 percent gross margin, variance analysis is often the difference between profitable and unprofitable months. A 2 percent material price variance on PKR 200 million of revenue is PKR 4 million in absorbed cost that should have been challenged or passed to customers. Without variance reporting the loss disappears into the P&L as "things cost a bit more this month."
How to evaluate manufacturing software.
Three demos with your real BOM and real cost data. The first demo will surface that one product has 35 components with multi-level sub-assemblies and the candidate software cannot handle multi-level. Eliminate it. The second demo will reveal that overhead allocation is rigid (only one driver allowed). Eliminate it. The third demo will show that WIP accounting is bolted on with workarounds. Eliminate it. The winner is the one that handles your messy real data without violence.
For Pakistani manufacturers in the PKR 50-500 million revenue range, the practical 2026 choices are Nonari (cloud, multi-level BOM, FBR-native), Tally Prime with manufacturing modules (desktop, deep wholesale features), and SAP Business One with manufacturing module (overkill below 100 million). Below PKR 50 million, Manager.io plus disciplined production tracking in a separate spreadsheet works but is fragile.