Cost Calculation Process

Step 1. Determine the routing for the item

To calculate the standard cost of an item, first the appropriate routing for the item must be determined. LN must know the routing to determine the set of operations that is used to produce the item. In addition, the best order quantity in which the item is produced must be established.

If the Quantity-dependent Routing check box in the Item - Production (tiipd0101m000) session is selected, the routing depends on the number of items that is going to be produced. Because the production order quantity is not established yet, when you calculate the standard cost, the selection of the routing is based on the number in the Fixed Order Quantity field, or the Economic Order Quantity field in the Item - Ordering (tcibd2100m000) session. If the Quantity-dependent Routing check box is not selected, the default routing is taken. For more information, refer to Selection of routing to calculate costs.

For customized items, LN determines the number of end items by totalizing the end items for all project parts (see the Project Parts (tipcs2111m000) session). For the rest, the same procedure is followed as for standard items, except that a customized item can only have one quantity-dependent routing.

Step 2. Calculate net output and gross output for the operations

For every operation, the net output and the gross output is calculated. The net output and the gross output are used to calculate material costs and operation costs for an operation.

For the last operation, the output is end-items. For the previous operations the output is intermediate products. The scrap and yield on the operations are taken into account to calculate the gross output for each operation.

Standard cost calculation starts with determining the output of the last operation. For the last operation, the net output equals the order quantity as determined in Step 1. You can calculate the gross output of the last operation based on the net output using the operation's scrap and yield:

Gross output = [net output x 100 / yield % on operation] + scrap quantity on operation

The gross output of the last operation equals the net output of the preceding operation. Using the scrap and yield of the preceding operation, you can calculate the gross output of that operation. In the same way, the gross outputs and net outputs of the other preceding operations are calculated, one after another.

All quantities and amounts are recalculated to one end item by dividing the quantities and amounts by the number of end items as determined in Step 1.

Step 3. Calculate operation costs

LN must determine the man hours and the machine hours spent on an operation. The way that man hours and machine hours are calculated by LN depends on whether an operation has a fixed duration or not. For more information, refer to Calculating man/machine hours.

To calculate operation costs, the calculated hours for an operation are multiplied by the operation rates. Operation rates are defined in the Operation Rates (ticpr1150m000) session, and can exist for labor, machines, overhead on labor, and overhead on machines. The operation rates are linked to an operation rate code (defined in the Operation Rate Codes (ticpr0150m000) session).

The operation rate code is linked to a work center in the Work Centers (tirou0101m000) session, and/or to a work center/task relationship in the Task Relationships (tirou0104m000) session. Whether the operation rates linked to the work center, or to the work center/task relationship are used for cost calculation, depends on the setting of the Type of Operation Rates field in the Standard Cost Calculation Parameters (ticpr0100m000) session.

If the parameter says that the operation rates of the work center are used for cost calculation, LN must determine the work center type of the work center on the operation. If the work center is a main work center or a sub work center, LN looks for the operation rates, and uses them to calculate the operation costs. If the work center is a subcontracting work center, LN determines the subcontracting method, and calculates the subcontracting costs as explained in Subcontracting rates.

All quantities and amounts are recalculated to one end item by dividing the quantities and amounts by the number of end items as determined in Step 1.

Step 4. Calculate material costs for the operation

To calculate the material costs for an operation, LN needs to know the material input. Material input is referred to as net input if the scrap is not taken into account. Net input is calculated as follows:

Material net input = gross output items preceding operation x net quantity in BOM 

Note that the gross output of end items for the last operation equals the order quantity as determined in step 1.

However, LN needs to know the gross input of materials for every operation. The gross input is based on the net input, but takes the BOM line's scrap into account:

Gross input = [(scrap% of BOM line/100 + 1) x net input] + scrap qty of BOM line

Note that input is related to component materials. Output is related to semi-finished products and end products, and is calculated as described in Step 2.

To calculate material costs for an operation, LN multiplies an operation's gross input of materials by the prices of the materials concerned. If the material is a purchased item, the purchase price is taken. If the material is an (manufactured) item that consists of materials itself, the item's standard cost is taken. The standard cost of materials is calculated dependent on the multilevel calculation method that was selected in the Calculate Standard Cost (ticpr2210m000) session. For more information, refer to Cost calculation methods.

The standard cost of the material includes the surcharges for the material's item warehouse. However, the item warehouse surcharge is not aggregated to the cost of the main item. Instead, the surcharges for the BOM warehouse are aggregated to the cost of the main item.

An item's purchase price is determined based on the purchase price priority, which is defined in the Cost Calculation Codes (ticpr1100m000) session. The purchase price can be the simulated purchase price, the current purchase price, the average purchase price, or the latest purchase price.

In cost calculation, LN handles phantoms as normal items.

All quantities and amounts are recalculated to one end item by dividing the quantities and amounts by the number of end items as determined in Step 1.

Step 5. Search for previous operation

In the preceding steps of this cost calculation procedure, the costs for the last operation of the routing is calculated. If another, previous operation is found, the cost calculation process is repeated as from Step 3. If a previous operation is not found, the process continues with Step 6.

In (standard) cost calculation, LN ignores the network routing that is established by using phantoms. LN includes the costs for the routing of the phantom in the material costs of the phantom item.

Step 6. Calculate material costs for unlinked materials

If no operations exist for an item, no operation costs are present. Consequently, the previous steps do not apply. Because material is required to produce the item, LN calculates in this step the costs of these so-called unlinked materials. The calculation for unlinked material costs equals the calculation as described in Step 4.

Note that if operations are available, but (some of) the materials have 0 (zero) as a value in the Operation field, in the Bill of Material (tibom1110m000) details session, or the BOM Line - Material-Routing Relationships (tibom0140m000) session, LN assumes that those materials are required in the first operation of the routing.

Step 7. Calculate surcharges

The last step in the cost calculation procedure is to calculate the surcharges. Several types of surcharges are distinguished when calculating the standard cost, for example, surcharges for items, for item groups, for item/warehouse combinations, and for general warehouses. In addition, you can distinguish between surcharges that are effective during the item's receipt in the warehouse, or during issue of the warehouse. Surcharges are defined in the Item Surcharges (ticpr1110m000) session. Surcharges are calculated in a specific sequence. This sequence is important because surcharges can be calculated over other surcharges. For standard cost calculation, surcharges are calculated in the following order:

For standard cost calculation, item and warehouse surcharges are included regardless of their realization moment (receipt or issue). If multiple surcharges of the same type are defined, they are handled by their sequence number, lowest number first.

Step 8. Aggregated or detailed cost

In LN, you can determine how to break down the standard cost: from aggregated on the cost components defined in the Item - Costing (ticpr0107m000) session, until detailed in a greater or lesser degree. If you want to break down your standard cost in a detailed way, you must enter a chart with an associated detailed cost component structure in the Item - Costing (ticpr0107m000) session. For more information, refer to Cost Component Scheme in Manufacturing.