Calculation of Item Cost per Inventory Accounting Method

This document explains how the cost of an item is calculated in M3 based on the inventory accounting method selected. The inventory accounting method represents a costing method. For example, inventory accounting method "Standard cost" corresponds to the costing method standard costing.

For information about how to calculate a historic actual cost in arrears for purchased and manufactured items, see Calculating Historic Actual Costs.

Outcome

Use the information to verify that the items manufactured or otherwise acquired by the company have a correct item cost.

Introduction

The calculation method for the item cost is primarily based on these basic parameters:

Inventory accounting methods

There are six inventory accounting methods in M3:

The three most basic inventory accounting methods are the calculation of standard cost, average cost, and actual cost.

Acquisition codes

There are four acquisition codes in M3, numbered as follows:

If an item is connected to several warehouses, it is always the acquisition code for the main warehouse that is used in product costing and cost accounting.

Applicability - Overview

This table presents an overview of the methods that can be selected for the different types of items:

Category of cost objects

Non-inventory item

Inventory item

Manufactured items

Zero cost

Zero cost, standard cost, average cost, dynamic cost, actual cost

Purchased items

Zero cost, simplified purchasing

Zero cost, standard cost, average cost, actual cost

Distributed items (from another warehouse)

Zero cost

Zero cost, standard cost, average cost, dynamic cost, actual cost.

Zero cost (Method 0)

Applicability

Calculation

Standard cost (Method 1)

Definition

Applicability

Where displayed

Data model

Calculation

Manufactured items (Products)

Purchased and distributed items

Manual update of standard cost

Average cost (Method 2)

Definition

Applicability

Where displayed

Data model

Calculation

Rolling average cost vs. true average cost

Standard formula for rolling average cost

Formula used at invoice matching

Formula used for true average cost

Formula used for recalculation of rolling average cost

Exceptions

Rolling average cost

Scenario

Result

The total on-hand balance is negative.

No normal calculation of rolling average cost is done as long as the on-hand balance is below zero. Instead, the average cost is set to the acquisition cost of the transaction.

The total on-hand balance is positive but was negative before the current transaction.

No normal calculation of rolling average cost is done for the inventory transactions that turn the on-hand balance positive again. Instead, the new average cost is set to the acquisition cost of the transaction.

The average cost is negative or zero.

A new average cost cannot be negative or zero. The average cost is set to the previous average cost, that is, the average cost before the average cost calculation.

Calculation during Invoice Matching

Scenario

Result

The total on-hand balance is negative.

No normal calculation of rolling average cost is done as long as the on-hand balance is below zero. The average cost is set to the invoice price.

The total on-hand balance is lower than the invoiced quantity.

The adjustment quantity is set to the total on-hand balance.

The average cost is negative or zero.

A new average cost cannot be negative or zero. The average cost is set to the invoice price.

How the acquisition cost is determined

Cost object

Method

Manufacturing order receipts

For manufactured items, the acquisition cost is retrieved from the MCHEAD table (the table for the product costing header). The consequence of this is that the cost must be calculated using the same programs used for calculating standard costs (see above).

Purchase order receipts, put-away

For purchased items, the acquisition cost is defined as the purchase order price plus any internal and external charges at goods receipt on 'Purchase Order. Receive Goods' (PPS300). The values are based on the costing model connected to the purchase order.

Customer returns

The acquisition cost is set to the current average cost.

Requisition order returns

The acquisition cost is specified manually when the order is specified in the 'Inventory accounting price' field on 'Requisition/Distribution Order. Open' (MMS101/F). The current average cost is displayed by default. If this cost is zero, the cost is retrieved from the MCHEAD table instead.

Distribution order receipts

For distribution orders between facilities, the acquisition cost is set to the internal transfer price defined on 'Internal Transfer Price. Open' (MFS001).

For distribution orders within the same facility, the acquisition cost is set to the current average cost.

Maintenance work order – returns

The acquisition cost is set to the current average cost.

Service order returns

The acquisition cost is set to the current average cost.

Reclassification of item number

At reclassification of an item number the acquisition cost is set to the current average cost of the "From" item.

Calculation

Recalculation of average cost

Manual update of average cost

Occurrence of incorrect average cost after invoice matching

Dynamic product cost (Method 3)

The calculation of dynamic product costs is a variant of standard costing applied primarily to configured items where a regular standard cost cannot be calculated. Configured items are items that are product variants with unique item numbers.

Note: You cannot update the cost for a configured item manually in (PCS260).

Applicability

Where displayed

Data model

Calculation

Actual cost (Method 4)

Definition

An actual cost is the cost of an item based on incurred costs of material, labor, and overhead required in manufacturing or acquiring it.

Applicability

Where displayed

Data model

Calculation

Manual update of actual cost

Simplified purchasing (Method 5)

Applicability

Calculation

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