Costing Components and Cost Drivers in M3 Product Costing

This document explains the following:

The purpose of costing components is to retrieve and display different categories of production-related costs, such as operation costs and material costs, in a single product costing model.

Most costing components have cost drivers (see below).

For an overview of the product costing process, see Managing M3 Product Costing.

Cost drivers

Definition of Cost Driver

APICS defines a cost driver as follows:

Types of Cost Drivers

There are three basic drivers of cost:

Volume-Driven Cost Drivers

For volume-driven cost drivers, the cost allocated to the costing object is in direct proportion to the produced volume or allocated resources. That is, the cost increases by the cost rate times the production volume. These cost drivers are supported in M3.

Order-Driven Cost Drivers

For cost drivers driven by assortment, product structure or order lines, the cost allocated to the costing object is not affected by the produced volume or allocated resources. It is a fixed cost that is allocated. These cost drivers have some support in M3. For example, cost drivers related to order and material lines can be defined.

This type of cost driver is called order-driven in this document.

Cost Drivers Driven by New Items or Changes

For cost drivers driven by new items or changes, the cost allocated to the costing object varies with regards to the time or produced volume. The cost increases until it reaches its peak, then decreases and finally fades away. For example, costs for introducing a new product or a new market. These cost drivers have no support in M3.

Material costs

Material costs are not calculated in M3 Product Costing, but are transferred directly from the purchase costing model (the MCCOPU table). The transfer can be done in two ways:

Costing Components A01-A03

Costing components A01-A03 show costs for direct material (material items) in the selected product structure. These costing components have no cost drivers

If the product consists of purchased material items, the total cost is transferred from the costing model for purchase/distribution costing before calculation.

Starting Conditions for Using A01-A03 Costing Components

By using all three components, you can display costs for specific item types instead of one lump sum for all material items. However, this requires two starting conditions:

A04-A05 Material Overhead Costs

Costing components A04-A05 show costs for material overhead.

Description of Cost Drivers

Cost Driver

Refers To

Comment

Driven By

41

Material overhead with order-initiated portion of purchase costing

In order to retrieve a material overhead cost, a purchase agreement must be created with the order-specific cost (the setup cost) on 'Supplier. Connect Item' (PPS040/F). The order quantity is retrieved from 'Item. Connect Warehouse' (MMS002/F).

The purchase costing model used for the item must include a costing element with costing operator 21

Order

97

Distribution cost

This cost driver stores the distribution cost for distributed items, provided that check box 22 'Split cost into costing components' is selected on (PCS001/F). Cost driver 97 is valid for costing components E01-E10 and A04-A05). For details, see Configure Basic Product Costing Settings.

 

99

Material overhead (%)

The amount of the material overhead is calculated when 'Purchase/Distribution Costing. Calculate' (PCS280) is run. The total cost of the purchased item is stored in the purchase costing table MCCOPU; the cost per costing element is stored in the MCELEM table.

Volume

Operation costs

Costing Components B01-B14

Costing components B01-B14 are used for operation costs for labor and machine hours. Subcontract costs and tool costs are not included.

The cost is connected to the work centers that are used in the product structure. Work center is always the first cost distribution key for B components and cannot be changed.

Cost distribution keys for B costing components allow you to use alternative cost rates. The main reason is to allow other resources than those planned to be used at the work center during or after business hours, depending on the product to be produced. These resources can have different costs, so different products will have different cost rates.

You define cost rates in 'Costing Component. Create Cost Rates' (PCS120).

Description of Cost Drivers

Cost Driver

Refers To

Comment

Driven By

1

Machine time - production

The formula used is: Run time x Cost rate from work center in 'Costing Component. Create Cost Rates' (PCS120).

Volume

2

Labor time - production

If the work center involved has capacity type 1 (Machine time), the formula used is: Planned number of workers x Run time x Cost rate from work center in (PCS120).

If the capacity type is 2 (Man hours), the formula used is: Run time x Cost rate from work center in (PCS120).

The capacity type for the work center is shown on 'Product. Connect Operations' (PDS002/G).

Volume

3

Total machine time

The formula used is: Machine time for production (cost driver 1) + Labor time for setup (cost driver 41).

Volume

4

Total labor time

The formula used is: Labor time for production (cost driver 2) + Labor time for internal and external setup (cost driver 42).

Volume

5

Unit produced

The formula used is: Number of units produced x Multiplication factor on 'Product. Connect Materials/Operations' (PDS002/H) x Cost rate for work center in (PCS120).

Volume

6

Weight unit produced

The formula used is: Initial weight in kilos before the current operation was performed, which is defined on (PDS002/H) x Cost rate for work center in (PCS120).

Volume

7

Order multiple

The formula used is: Cost rate for work center in (PCS120) / Order multiple defined on 'Product Structure. Open' (PDS001/E).

Example: You always sell pens in packages of 100. The multiplier indicates that 100 pens are treated as one item.

Volume

8

Cost multiplication unit

The formula used is: Multiplier for the operation cost defined for the operation on (PDS002/H) x Cost rate for work center in (PCS120).

Example: A certain operation can be rather complex and sometimes requires external skills or tools. Use the multiplier to indicate that, for example, the operation cost is doubled to reflect this.

Volume

9

Volume produced

The formula used is: Volume defined for the operation in (PDS002/H) x Cost rate for work center in (PCS120).

Volume

41

Time for internal setup of machine

The formula used is: (Internal setup time x Cost rate for work center in PCS120) / Order quantity.

The order quantity is retrieved either from 'Product Structure. Open' (PDS001/E) or overruled in 'Product Costing. Calculate Selected Item' (PCS200) when the product is being cost calculated.

Order

42

Labor time for internal and external setup

The formula used is: (Internal setup time + External setup time) x Cost rate for work center in PCS120) / Order quantity.

See comment on cost driver 41 for the retrieval of order quantity.

Order

43

Cost per operation

The formula used is: Cost rate for work center in (PCS120) / Order quantity.

See comment on cost driver 41 for the retrieval of order quantity.

Order

44

Cost per material line

The formula used is: (Number of material lines in the product structure in (PDS001) x Cost rate for work center in (PCS120)) / Order quantity.

See comment on cost driver 41 for the retrieval of order quantity.

Order

45

Transport distance to the next work center

The formula used is: Transport distance from work center A to work center B as defined in the transport table on 'Work Center. Enter Queue & Transit Time' (PDS020/E) x Cost rate for work center in (PCS120) for work center A.

Both the work center from which the material is transported and the receiving work center must be included in the product structure. Otherwise, the cost cannot be calculated.

Order

46

Cost per operation including multiplication factor

Multiplier for the operation cost defined for the operation on (PDS002/H) x Cost rate for work center in (PCS120) / Order quantity.

See comment on cost driver 41 for the retrieval of order quantity. Compare with cost driver 08.

Order

49

Internal transfer price

The internal transfer price is used for work orders when labor is reported by an employee who belongs to a different facility. A cost component with this cost driver is needed in the cost model in order to update the final cost correctly.

This is only valid for work orders.

 

99

Percent

The formula used is: Value for the B costing component selected as overhead base on 'Costing Component. Open' (PCS010/E) x Cost rate for work center in (PCS120).

Volume

Tool costs

Costing Components C01-C02

Costing components C01-C02 are used for costs related to tools. The cost is connected to the work centers that are included in the product structure.

You define cost rates in 'Costing Component. Enter Tool Cost' (PCS105).

The unit cost for these cost drivers is defined for each tool. A tool is an item belonging to item category 4 on 'Item. Open' (MMS001/G). The unit cost for each tool is based on the tool quantity defined for the tool in (MMS001/J). The tool quantity represents the number of items produced each time the tool is used; for example, for each punch.

The tool must be connected to the product structure. You connect the tool by selecting option 19 for a type-3 operation element in 'Product. Connect Materials/Operations' (PDS002), which is a subprogram of 'Product Structure. Open' (PDS001).

Description of Cost Drivers

Cost Driver

Refers To

Comment

Driven By

1

Machine time

The formula used is: Cost rate for tool in (PCS105) for tool connected to operation in 'Operation. Connect Operation Element' (PDS027) x Run time for operation as defined on 'Product. Connect Materials/Operations' (PDS002/H)

Volume

2

Price per tool punch

The formula used is: Cost rate for tool in (PCS105) for tool connected to operation in (PDS027) / Tool quantity as defined on (MMS001/J).

Volume

41

Price per operation performed

The formula used is: Cost rate for tool in (PCS105) for tool connected to operation in (PDS027) / Order quantity.

The order quantity is retrieved either from 'Product Structure. Open' (PDS001/E) or overruled in 'Product Costing. Calculate Selected Item' (PCS200) when the product is being cost calculated.

Order

Subcontract costs

Costing Components D01-D02

Costing components D01-D02 are used for costs related to a subcontract. Costing component D01 focuses on the costs of direct materials for subcontract operations, whereas costing component D02 retrieves the subcontract overhead costs.

The cost of the subcontract operation can be retrieved from two sources:

Starting Conditions for Retrieving Subcontract Cost

To be able to enter a subcontract cost directly for the operation in the product structure (alternative 1 above), you must enter the work center used as a subcontract work center. A subcontract work center belongs to resource type 2 on 'Work Center. Open' (PDS010/E).

To be able to retrieve the subcontract cost from the purchase agreement (alternative 2 above), the following starting conditions must be met:

Description of Cost Driver for Costing Component D01

Cost Driver

Refers To

Comment

Driven By

00 [blank]

Subcontract cost

The formula used is: Subcontract cost in (PDS002/H) - Setup cost

Volume

Description of Cost Driver for Costing Component D02

Cost Driver

Refers To

Comment

Driven By

41

Order-initiated portion of purchase costing

The cost retrieved is the setup part of the subcontract cost displayed on (PDS002/H).

Volume

99

Material overhead cost (%)

   

Product costs

Costing Components E01-E10

Costing components E01-E10 are used for "common" costs not related to material, labor, tools, or subcontract.

An important characteristic of E costing components, compared to the other costing components, is that the values are not evaluated as Work in Progress (WIP) in M3 Cost Accounting.

You define cost rates in 'Costing Component. Enter Product O/H' (PCS120).

Description of Cost Driver for Costing Component D02

Cost Driver

Refers To

Comment

Driven By

1

Gross weight

The formula used is: Gross weight on 'Item. Open' (MMS001/E) x Cost rate in (PCS120).

Volume

2

Volume

The formula used is: Volume on (MMS001/E) x Cost rate in (PCS120).

Volume

3

Quantity in basic unit of measure (U/M)

The formula used is: Units in basic U/M x Cost rate in (PCS120).

PCS120). The basic U/M is defined for the item on 'Item. Open' (MMS001/E) and displayed in the product structure on 'Product Structure. Open' (PDS001/E).

Volume

4

Lead time with capital tied up

The formula used is: (Lead time in PDS001/E x Sum of all A, B, C, and D costing components in the product costing model x Percentage cost rate in PCS120) / Number of working days calculated by M3.

Volume

5

Average inventory

The formula used is: (Average on-hand balance on 'Item. Connect Warehouse' [MMS002/Y) x Cost rate) / Annual demand in (MMS002/F).

Volume

6

Structure complexity - cost per complexity unit

The formula used is: Multiplier for structure complexity (the 'Order multiple' field) on 'Product Structure. Open' (PDS001/E) x Cost rate for each complexity unit in (PCS120).

You can use this cost driver to increase the cost of a specific product structure. This can be useful when you have several product structures for the same finished item.

Volume

7

User-defined field 2 in the item master file

The formula used is: Costing value in user-defined field 2 on 'Item. Open' (MMS001/F) x Cost rate in (PCS120).

Volume

8 Net weight The formula used is: Net weight on 'Item. Open' (MMS001/F) x Cost rate in (PCS120). Volume

41

Cost per lead time day

The formula used is: Lead time in (PDS001/E) x Cost rate in (PCS120) / Order quantity.

The order quantity is retrieved either from 'Product Structure. Open' (PDS001/E) or overruled in 'Product Costing. Calculate Selected Item' (PCS200) when the product is being cost calculated

Order

42

Cost per order (ordering cost)

The formula used is: Cost rate in (PCS120) / Order quantity in (PDS001/E).

Order

43

Cost per material item line in product structure

The formula used is: Number of material item lines on (PDS002/U) x Cost rate in (PCS120).

Order

44

Cost per operation line in product structure (subcontract cost excluded)

The formula used is: Number of operation lines on (PDS002/U) x Cost rate in (PCS120) / Order quantity.

See comment on cost driver 41 for the retrieval of order quantity.

Order

45

Cost per subcontract operation line in product structure

The formula used is: Number of subcontract operation lines on (PDS002/U) x Cost rate in (PCS120) / Order quantity.

See comment on cost driver 41 for the retrieval of order quantity.

Order

46

Structure complexity - cost per complexity unit

The formula used is: Multiplier for structure complexity (the 'Order multiple' field) on 'Product Structure. Open' (PDS001/E) x Cost rate for each complexity unit in (PCS120) / Order quantity.

See comment on cost driver 41 for the retrieval of order quantity.

 

93

Margin amount - Material

The margin amount is the difference between the cost price and the sales price for materials on a work order. The margin amount is used to adjust the final cost of an item. The margin amount is only valid for actual costed items produced via a work order.

To set a sales price on a work order, a valid customer and a valid agreement must be added to the work or-der. The prices can, for example, be seen in (MOS101) in sorting order 19.

 

94

Margin amount - Labor

The margin amount is the difference between the cost price and the sales price for labor on a work order. The margin amount is used to adjust the final cost of an item. The margin amount is only valid for actual costed items produced via a work order.

To set a sales price on a work order, a valid customer and a valid agreement needs to be added to the work order. The prices can, for example, be seen in (MOS101) in sorting order 19.

 

97

Distribution cost

This cost driver stores the distribution cost for distributed items, provided that check box 22 'Split cost into costing components' is selected in (PCS001/F). Cost driver 97 is valid for costing components E01-E10 and A04-A05). For details, see Configure Basic Product Costing Settings.

 

98

Uplift (change in standard cost) for distributed items

The uplift cost is the difference between the standard cost in the delivering facility and the new standard cost in the receiving facility.

The uplift cost updates the cost driver when 'Purchase/Distribution Costing. Calculate' (PCS280) is run. However, a starting condition is that the 'Split distribution cost into costing components' check box is selected in 'Settings - Product Costing' (PCS001). The uplift cost, if any, is then stored in a separate E costing component when calculating the product cost.

 

99

Percent

 

Volume

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