Enabling Purchase/Distribution Costing

This document provides an overview of the process of configuring M3 to support purchase costing and distribution costing.


The company is able to calculate the standard cost of its items that are purchased from an external supplier or distributed from another part of the company.

See Costing Purchased Items and Costing Distributed Items.

Before you start

Follow these steps

  1. Analyze Types of Costs and Establish Costing Policy

    The introduction of purchase/distribution cost requires a thorough analysis of the different types of costs that are related to the items. The quality of the final purchase cost or distribution cost is directly related to the quality of the preceding analysis. The analysis is done outside of M3.

    See Introduction to Purchase/Distribution Costing for a list of issues to consider.

  2. Include Purchase/Distribution Costing in Internal Process

    Make any necessary revisions of the company's internal processes to include purchase/distribution costing.

  3. Configure Basic Costing Settings

    There are some basic settings to consider:

    Applicable to Purchase Costing, Distribution Costing and Product Costing

    • For items with standard costing as the inventory accounting method, select which costing type to use for the standard cost in the '07 Costing type – standard cost and target costing' field in 'Settings – Product Costing' (PCS001/E). A standard cost created with this costing type represents the inventory value and consequently generates financial transactions in the financial system.

    Purchase Costing Only

    • For purchase costing, select the check box called '280 Purchase costing calculation on each line' in 'Purchase Order Type. Open' (PPS095) if you want to be able to add charges during purchase order entry, both on the order header level and order line level.
    • Select the general search path for retrieving the costing base in 'Settings – Procurement' (CRS780/G), field 'Priority order for costing base'. For a description of the available costing bases, see Introduction to Purchase/Distribution Costing. Note that you still will be able to select a different search path when costing the items in 'Purchase Costing. Calculate Selection' (PCS280).
    • If you want to update the purchase price in 'Item. Open' (MMS001/H) with the latest invoice price automatically, this function must be updated using the '220 Update item file with purchase price' field in (PPS095). However, since the values in the item master file in (MMS001) are stored at central level and not divisional or facility level, this option should only be selected where an item only exists in one division or facility. If the item exists in several divisions, the purchase price will be updated every time a change is made in one division.
    • If you want to separate account entries to be created for price variances for item, charges, and exchange rates that occur at goods receipt, select the following check boxes in 'Settings – Cost Accounting' (CAS900/E): '075 Split PO price variance between item and charges' and '080 Separate PO exchange gains/losses from price variance'.

    Distribution Costing Only

    • Select the general search path for retrieving the costing base in 'Settings – Product Costing' (PCS001).
    • For average-costed and actual-costed items, define whether to copy the cost from the supplying facility or to use the internal transfer price instead in the '050 auto transfer of lot cost' parameter in 'Settings – Cost Accounting' (CAS900/E). Normally the internal transfer price is used for average-costed items.
  4. Create Costing Elements

    Once the analysis is complete, create the building blocks in the form of costing elements. Each costing element represents a type of cost, a discount, or a total. The cost can be distributed to the order lines, the order header, or distributed between both the header and the lines.

    Note that once you have created a costing element you cannot change the basic values such as operator and charge type. However, you can delete the costing element, provided that it is not included in a costing model.

    For a brief description of the fields that apply to purchase costing, distribution costing or both, see section 8 in Introduction to Purchase/Distribution Costing.

    Where defined: 'Costing Element. Open' (PPS280). Print a list of costing elements in 'Costing Element. Print' (PPS645).

  5. Enter Language-Specific Names of Charges

    You might want to include predefined external charges such as freight costs in the purchase order. To print the names of the charges in the language of the purchase order, the names must be defined per language for each costing element.

    Where defined: 'Costing Element. Enter Names/Language' (PPS281), which is accessed from (PPS280).

  6. Enter Costing Rates

    For each costing element that represents a charge or a discount, enter the rates to apply. If you selected any costing objects for the costing element, you can set specific rates for those. For example, if the delivery method and country are costing objects for a Freight costing element, you are able to define separate rates for different delivery methods or countries. Each rate has a start date. The costing unit is obtained from the costing operator.

    You don't need to enter any rates for costing elements representing the costing base (cost of goods such as the purchase price) or totals.

    Where defined: 'Costing Element. Enter Values' (PPS282), reached from (PPS280). Print a list of costing rates per costing element in 'Costing Element. Print Values' (PPS655).

  7. Build Costing Models

    Now you can start building your costing models out of the costing elements. It is theoretically possible to use the same costing model for both purchase costing and distribution costing. However, in practice it is probably more convenient to have separate costing models for each purpose. The costing model can be very simple, consisting only of costing elements for the costing base and a grand total, or quite complex with such values as overhead for procurement administration included.

    Where defined: 'Purchase Costing Model. Open' (PPS285).

  8. Test Costing Model by Simulating Costs

    You test the costing model by simulating costs in different scenarios in 'Costing. Display/Simulate Model' (PPS295). A result of the testing can be that you need to adjust the costing model in (PPS285) before proceeding.

  9. Select General Costing Models

    The common procedure is to select one costing model for purchase costing and one for distribution costing for each combination of item and facility in 'Item. Connect Facility' (MMS003/F). However, you can also select a general costing model for per division in the following programs:

    • For purchase costing in 'Settings – Purchasing' (CRS780)
    • For distribution costing in 'Settings – Product Costing' (PCS001).

    The general costing model is normally a simple two-line costing model that contains the costing base and the total for accounting. It is applied when there is no costing model selected for the item and facility.

  10. Prepare Items for Purchase/Distribution Costing

    End by defining some final costing-related values on item level:

    • Select one costing model for purchase costing and one for distribution costing for the combination of item and facility in (MMS003/F).
    • The inventory accounting method – for example, standard cost, average cost or actual cost – in (MMS003/E).
    • The costing decimal places, that is, the number of decimals to be used in the costing calculation in (MMS003/E).
    • The quantity to use for costing, for example, costing of the item per unit or per thousand, in (MMS003/E)
    • The supplying warehouse must be selected either for the item in 'Item. Connect Warehouse' (MMS002/E) or as a default value in 'Distribution Relation. Open' (DPS001). The supplying warehouse determines from which facility the cost is transferred in distribution costing.
  11. Configure Accounting Rules for Follow-Up

    In purchase costing you have the opportunity to follow up individual costs per costing element or per accounting control object selected for the costing elements. By including the costing element or accounting control object in accounting rules PP10–225 to PP10–228 in 'Accounting Rule. Set' (CRS395), separate account entries are created for each costing element or object.

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