This document explains how to calculate and analyze standard costs of manufactured, distributed, and purchased items to ensure that the company sells its products with a profit.
Costs can also be calculated for product variants, maintenance orders, manufacturing orders, and services. You will also be able to define a product's target cost using this process.
For a brief presentation of the concept of product costing, see Introduction to Product Costing. For a presentation of the principles behind and the formulas used for item cost calculation based on different inventory accounting methods, see Calculation of Item Cost per Inventory Accounting Method.
Use the outcome to:
See the appropriate subordinate process documents for details.
Calculate Product Costs
The company calculates the standard cost of a product or item based on a product costing model which represents the different types of costs to include in the calculation. Usually, this is done once a year or when a new item is introduced.
After the calculation, you can view the calculated cost of the product (the costing object) broken down into material costs, labor costs, tool costs, subcontracting costs, overhead costs, and costs for purchased and distributed material components that are part of the manufactured product, depending on the complexity of the product costing model selected.
You can also calculate the cost of products and their variants, manufacturing orders, and work orders. You can calculate the standard cost of items that have a different inventory accounting method than standard costing as well; the standard cost created then reflects the cost of the item at the last product costing run and does not affect the inventory value of the item.
When costing a product, you select which costing type to apply. The costing type determines whether the product cost run updates the standard cost of the product or is to be used as a simulated cost.
Saving of Costing Data
If you select the option to save data in a product cost run, all data used in the costing calculation, including material lines, operations and item data, will be saved and connected to the current calculation.
However, the cost rates for the product costing model are not saved. In order to have full traceability when updating cost rates, the following principle should be followed: All cost rate updates must be made using the date the change takes effect. This means that historic cost rates are always correct.
If this principle is followed, it is possible to determine the exact reason for a cost on the lowest level in the product structure, long after it was incurred. For example, it is possible to explain why the new standard cost for differs from the last year's cost for the same product.
Programs for Costing Calculation
You can calculate product costs using:
|Program Name||The Program Enables You to Cost:|
'Product Costing. Calculate Selected Item' (PCS200)
Products based on various selection criteria: product numbers, item groups, product groups, etc.
'Product Costing. Calculate All Items' (PCS210)
All items in a range of facilities. This calculation is usually performed as a yearly run.
'Product Costing. Calculate Where-Used Components' (PCS220)
Lower-level items that are used in final products based on various selection criteria: status, item groups, and procurement groups.
'Product Costing. Calculate Variants' (PCS230)
Family items based on various selection criteria: product numbers, structure types, configurations IDs, etc.
'Product Costing. Calculate MO' (PCS240)
A range of manufacturing orders in a facility. Only used for items with a dynamic product cost (inventory accounting method 3).
'Product Costing. Calculate WO' (PCS245)
A range of work orders in a facility. Only used for items with dynamic product cost.
'Product Structure. Open' (PDS001)
A specific product, by selecting an option for product costing.
The result of the product cost run is displayed in 'Product Costing. Display' (PCS300).
Calculate Costs for Purchased Items and Distributed Items
Usually a company purchases materials to manufacture a product or transfers the material from one part of the company to another. When a new purchased or distributed item with standard costing as inventory accounting method is introduced or the cost of such an item changes more than marginally, it is necessary to calculate their cost as well to update the product cost.
Once their standard cost is calculated, the new costs will be included in the product costing model in the next product cost run.
Simulate and Analyze Product Cost
An important part of product costing is testing how changes to different parts of the costing model, including the cost rates, affect the results of the product cost. Therefore, a company probably would simulate such changes on a continuous basis to ensure that they can sell their products with a profit.
You can compare changes between different product cost runs and also between different costing types; for example, Budget cost vs. Simulated cost vs. Financial standard cost. Depending on the proposed cost values of products, you can decide to make or buy the product or procure it from a subcontractor. You can also compare the costs of the same products, manufacturing orders or work orders in different years.
M3 also lets you perform simulations based on sales price, profit, contribution margin, and contribution margin per machine hour. You have the flexibility of analyzing product costs based on the product structure, which includes both the materials and the operations, and also based on the selected costing model.
For information on the programs used to calculate and display simulated costs using different costing types, see above.
3a. Review Results Online
The results of the costing calculation are displayed per product and facility in 'Product Costing. Display' (PCS300) and its sub-programs:
3b. Simulate Changes in Cost Rates
Small changes in the cost rates - for example, the cost for labor or the cost for using a specific machine - can have a considerable impact on the total cost of the product. The simulation of cost rates is done by first updating the cost rates for the applicable building blocks of the product costing model using a unique costing type reserved for this purpose. You only need to enter adjusted cost rates for the costing components for which a simulated cost will be calculated. If you have selected a substitute costing type in 'Costing Type. Open' (PCS005) for the simulation costing type, this costing type is used to retrieve the cost rate if there is no cost rate in the simulation costing type. This enables you to enter cost rates only for costing components that need to be simulated in the product costing model; unaffected cost rates are retrieved from the substitute costing type.
Then you calculate the product cost for a specific costing type in a regular product cost run. The result is a proposed cost which does not update the standard cost of the product.
3c. Simulate Changes in Product Structures
You can simulate changes in an item's product structure to identify the impact of, for example, adding different materials or operations required to manufacture the product. This type of simulation is done by first creating a copy of the product structure in 'Product Structure. Open' (PDS001) with a new structure type reserved for this purpose, updating the new product structure and then finally calculating a cost for the simulated item.
3d. Review Warnings
Errors may be detected when calculating costs, such as when an operation in the product structure has a setup cost but no lot size or when a costing component in the product costing model has a cost equal to zero. Messages warning the user about such errors can be issued automatically during the product costing run. The warning messages function is activated in 'Settings - Product Costing' (PCS001).Each user then selects whether to issue such warnings for each costing run in the respective costing program.
Warnings are saved and are displayed in 'Costing Warning. Update' (PCS325), a program accessed for a product cost run in (PCS300/B). If a warning is displayed and no error is detected, you can deactivate the warning and prevent it from being displayed again.
Each warning contains the operation's origin number so that they function properly even when the operations are renumbered.
3e. Analyze Product Costs Using Printed Reports
You can print product costing reports using one of four types of predefined analysis options in 'Product Costing. Analyze' (PCS410). Some examples of reports are:
Accept Standard Cost
The common procedure for accepting a proposed cost calculated by using a costing type for budgeted or simulated values is:
Another method is to copy a budgeted or simulated cost to a costing type reserved for the financial standard cost in 'Product Costing. Copy' (PCS275).
This results in an updated standard cost of the costed products. For products with standard costing as their inventory accounting method, the standard cost is used automatically as the inventory value.
Follow Up True Cost
After you have analyzed and accepted the product costs, you can compare the planned product costs with the actual cost per manufacturing order or work order in 'Order Costing. Display' (CAS310).
Manually Update Cost
If you discover that an item has an incorrect standard cost or average cost, you can change the cost manually in 'Product Costing. Update Manually' (PCS260). A requirement is that the cost to change is calculated on the current date or at a future date. Note, however, that if you change the cost, all detail values in the product costing model and the product costing model are deleted and only one total is saved.
Managing Target Costing
Target costing is an optional part of the costing process. The purpose of target costing is to attain low costs and thus low prices. Throughout the target costing program, your aim is to decide "What should the new product cost be?" rather than "What does it cost?" Based on market research, you establish the target sales price and subtract the desired profit from it to yield the allowable cost. Then you can compare the product cost calculated by M3 with the target price. Many companies attempt to do this before the detailed design phase, since 70% to 80% of product costs will be unchangeable after the drawings have left the designer's hands.
In addition to product cost, target costing options include cost-related figures such as target scrap rates and target lead times. You can enter and update target costs as well as cost driver factors such as lead time, order quantity, and inventory turnover rate.
You enter target costs manually in 'Target Costing. Open' (PCS160). You mass update them in 'Target Costing. Update' (PCS165), and follow up in 'Target Costing. Display Follow-up' (PCS330).
Target costing can be used for in-process products at any stage of development.