Create Costing Components and Select Cost Drivers

This document describes how to create costing components and select cost drivers to retrieve and display different categories of production-related costs.

Outcome

Costing components are defined that represent your company-specific categories of costs, such as labor, material overhead, tools, and subcontracting. For a list of costing components that can be defined and what they represent, see Costing Components and Cost Drivers in M3 Product Costing.

Use these costing components to:

The costing components are stored in the MCCOMP table.

Before you start

Follow these steps

  1. Start 'Costing Component. Open' (PCS010/B).

  2. Enter the predefined ID of the costing component and select Create.

    Note:  To improve performance, create only the costing components that will be used in a costing model. Every time you run a product costing in a costing program, M3 calculates the cost of every costing component that is defined.
  3. On the E panel, enter a name and description of the costing component.

  4. Enter the values of the remaining fields in the panel based on the type of costing component and the field descriptions in the Parameter to Set table. Press Enter.

  5. Repeat these steps to create new costing components.

Parameters to set

Program ID/Panel Field The field indicates …

Common Fields for all Costing Components

(PCS010/E)

Scrap reference

…how to display costs for scrapped material in (PCS300/E). For example, if you select alternative 1, all scrap costs related to this costing component are included in scrap total 1 in (PCS300/E).

Splitting the scrap into different totals gives a higher degree of traceability of scrap costs, since you can display scrap costs for a specific costing component or a category of costing components, such as materials or tools.

You can select how to display scrap costs for the following costing components: A, B, C, and D.

(PCS010/E)

Accounting control object

...a dynamic accounting control object with the purpose of posting split internal Cost of Goods Sold (COGS) transactions for the costing component to separate accounts. This field lets you display the actual costs of this costing component in M3 Cost Accounting. The accounting control objects are created in 'Control Object. Open User-Defined' (CRS335).

For each activity that involves production, internal account entries are created in M3 based on accounting rules defined in 'Accounting Rule. Set' (CRS395). For each accounting rule, you can define exceptions so that an accounting string containing a dynamic control object is posted differently than a regular accounting string. In 'Internal Account Entry. Create' (CAS950), you update the financial system with these account entries, which are then displayed in 'Internal Account Entry. Open' (CAS300) and 'Order Costing. Display' (CAS310).

There is a special type of account entry that shows the Cost of Goods Sold (COGS) – the actual cost of producing the item in a specific manufacturing order. For example, if you have selected an accounting control object for two costing components, one for the A01 (material) costing component and one for the B01 (operation) costing component, you will not get one account entry with the COGS, but two: one with the actual material cost and one with the actual cost of the operation. This makes it easier to compare the planned product cost of each costing component with the actual cost of the component.

Instead of using accounting control objects selected for costing components, you can use the costing component itself as a dynamic accounting control object when defining the accounting rules for the account entries involved in 'Accounting Rule. Open' (CRS395). The result of either method is the same.

(PCS010/E)

Price decimal place

…how many decimal places are used to show the cost in the costing model. The field also determines how many decimal places to use when entering cost rates.

Alternatives

0 = No decimal places

1–4 = From one to four decimal places.

Important!

For costing values related to customer order processing, the number of decimal places is determined by the currency used. A rule of thumb is to cost the product using two more decimal places than selected for the currency. For example, four decimal places for US dollars and euro but six decimal places for Japanese yen.

(PCS010/E)

Budget connection

…whether values are to be retrieved from a budget. If you select this check box and run 'Costing Total. Transfer from BUD' (PCS480), values from the accounts selected for the costing component in 'Costing Component. Connect Accounts' (PCS013) are retrieved from the selected budget.

Note: If you select this check box, you must also select the 'MRP/CRP connection' check box.

(PCS010/E)

MRP/CRP connection

…whether cost rates are calculated by dividing budget values by cost driver units (CDU).

This calculation is done when you run the following programs:

'CDU Rate. Calculate for Mtrl Overhead' (PCS440)

'Resource Driver. Calculate Rate' (CAS450)

'CDU Rate. Calculate for Tool' (PCS460)

'CDU Rate. Calculate for Product' (PCS470).

Note:  (CAS450) has replaced the previously used program 'CDU Rate. Calculate for Work Center' (PCS450).

(PCS010/E)

Ordering cost

…whether to calculate order-initiated costs, such as setup time based on the order quantity, when they are included in higher levels in the costing model. The cost is always divided by the order quantity. Read more about ordering cost in Create Costing Types.

(PCS010/E)

Cost distribution keys

…the object or objects for which you want to set cost rates.

Examples of predefined objects that you can select for a cost distribution key are item number, item type, item group and warehouse. You must select an object for at least one cost distribution key. Selecting more objects lets you define targeted cost rate exceptions; for example, for a specific item from a specific warehouse.

Work center is always the first cost distribution key for B components.

(PCS010/E)

Warnings

…whether to display a warning when the cost of this costing component is zero in the costing model. Read more about warnings in Configure Basic Product Costing Settings.

(PCS010/E)

Overhead base

…the costing component or costing element whose value you want to use as a basis for calculating overhead cost.

M3 calculates the cost by multiplying the value of the costing component or costing element in this field with the percentage selected as the cost rate of the costing component.

For B costing components, the base should be another B costing component or a virtual costing element (element of type 2 or 4). Note that only other B costing components can be defined in the virtual costing element.

For E costing components, the base should be an optional costing component or a virtual costing element. Note that optional costing components can be defined in the virtual costing element.

Important!

This field can only be used for cost driver 99 in combination with costing components B01–B14 and E01–E10.

Fields Specific to B Costing Components

(PCS010/E)

Resource driver

…a resource driver in M3 Cost Accounting. A resource driver is a link between resources and activities. Resource drivers are also used in M3 Product Costing to retrieve cost rates automatically as an alternative method of setting cost rates.

You define resource drivers in 'Resource Driver. Open' (CAS040). The rate per resource driver unit of measure is defined in 'Resource Driver. Connect RD Rates' (CAS220). The rate, which can be fixed or variable, can be based on a value that is set manually or calculated automatically. You transfer the rates in (CAS220) to the costing component by running 'RD Rate. Transfer from Resource Driver' (PCS420).

(PCS010/E)

Fixed/variable value

…the rate that updates the costing components when you use the resource drivers to set cost rates.

Alternatives

1 = The fixed rate

2 = The variable rate

3 = The total of the fixed and variable rates.

Fields Specific to E Costing Components

(PCS010/E)

Negative component

…that you want the E costing component to have a negative value. The cost price must never be entered with a minus sign.

Example: When you want to calculate the total gross sales price using E costing components, but also have a bonus agreement with the customer, you can use a negative component to reduce the full cost or sales price.

(PCS010/E)

Overhead rule

…The field indicates whether to add the markup from lower levels to the higher levels in the product structure or to calculate a markup based solely on the highest level.

Alternatives

1 = The markup is calculated based solely on the overhead value of the highest level in the product structure. The lower level costing components are not added to the higher level costing components.

2 = The lower level costing components are added to the higher level components. That is, the lower level overhead is added to the overhead of the higher level, resulting in overhead on overhead.

3 = As alternative 1, except that only costing components from A01 to A05 that refer to material items with acquisition codes 2 (Purchased item) or 3 (Item distributed from another warehouse) in 'Item. Connect Warehouse' (MMS002/E) are included in the calculation. Any values for semi-finished products that were included in the base on lower levels are not included.

Alternative 1 can result in a difference for the semi-finished products at lower levels in the product structure when selecting costing level "this level" (alternative 1 in the 'Cost this level' field) in 'Product Costing. Display Model' (PCS300) compared to selecting costing level "all levels" (alternative 2 in the same field). The value calculated for "this level" is used as the basis for the account entries for work in progress (accounting events PM11 to PM31) and the reconciliation report for inventory valuation created in 'Inventory Value. Print Reconciliation List' (CAS530). The value calculated for "all levels", on the other hand, is used as the basis for the COGS account entry at customer order invoicing, OI20-971.

Normally, alternative 2 is selected to get a correct cost accounting. To obtain a correct product cost, lower level overheads must be brought up a level as material costs so that a percentage overhead can be calculated.

Example: You have a two-level product structure, where the cost base of the higher level is 133.34 and the cost base of the lower level is 116.67. If you select alternative 1, the 50% markup is calculated only on the cost base of the current level: 133.34 x 50 = 66.67. Otherwise, the 50% markup is calculated on the lower level (E01 = 50 x 116.67 = 5834) and the current level (133.34 x 50 = 66.67). Therefore, the value of E01 = 66.67 + 58.34 = 125.01, if you select alternative 2.

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