3. What to consider – business topics

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 or distribution cost is directly related to the quality of the preceding analysis. The analysis is done outside of M3 BE.

These tables list the primary questions to answer. The Applicable column defines whether the issue is relevant to purchase costing (P), distribution costing (D) or both.

  • Initial considerations
    Question Comment Applicable
    How will purchased items be costed?

    Standard costed, average costed, actual costed per lot number, or by using simplified purchasing (for non-inventory items) as inventory accounting system.

    Currently, distributed items can only be standard costed in M3 BE.

    		 P
    From where is the costing base – that is, the purchase price or the cost of the goods itself – to be retrieved? For a list of available costing bases, see below. P, D
    Are there purchase agreements or at least purchase prices for all items to be purchased? P
  • Identification of costs
    Question Comment Applicable
    What external costs and charges do you have which are made by your suppliers?

    For example, freight and carriage, insurance, duty, packaging, and premium (that is, cost for urgent delivery).

    Currently, only internal charges can be managed in distribution costing in M3 BE.

    		 P
    What trade discounts or cash discounts do your suppliers offer? P
    Which types of taxes affect the total cost of an item from one location to another? P
    What internal costs do you have that you want to monitor? For example, insurance costs, purchasing department costs, and costs for quality inspections of received goods. P, D
    Which legal requirements determine what type of costs to include in the costing model? P, D
  • Definition of individual costs
    Question Comment Applicable
    Is the cost an internal or external charge or a charge from a third party such as a forwarder? For distribution costing only internal charges are currently considered in M3 BE. P, (D)
    Which of these costs should be tracked as accurately as possible and which ones can be represented by a standardized overhead cost instead? Updating actual rates is more resource-demanding than working with standardized, fixed costs. P, D
    If there are specific rates depending on specific factors, which are these factors? Examples of factors that can trigger a different rate are delivery method, warehouse, currency and country of origin. P, D
    Is a cost to be distributed between the lines of a purchase order or is it applicable to the order header only? For example, if the cost is applied to a purchase order line, the cost affects only the inventory value for the item in that specific line. If a cost such as a freight charge is applied to the purchase order header, the item's inventory value is not affected. P
    Which unit of measure is the base for each type of cost to be distributed to the order lines? Available alternatives are gross weight, volume and net amount. P, D
    Can the charge be invoiced several times per purchase order? P
    Is the line charge per quantity independent of the quantity on the invoice line? P
    Which VAT rate, if any, applies to the cost? P
  • Definition of costing model
    Question Comment Applicable
    Which costing model complexity is required for each type of item, for example, which subtotals are required? For information on the role of the costing model, see below. P, D
    Are different costing models required for different combinations of item and facility? P, D
    How will the cost be followed up? Is the cost budgeted? Should cost-unique account entries be created for follow-up in cost accounting? The answers to such questions can affect the decision to have the cost represented by a separate costing element or be included in another costing element. P, D
  • Internal process
    Question Comment Applicable
    Which departments and staff are involved and what education do they require? P, D
    Which process activities must be adjusted or added to ensure a satisfactory quality of the costing? P, D
    How will the company ensure that is has sufficient data for the costing algorithms? P, D
    How will the company ensure that changed cost drivers and rates result in updated costing models? For example, if a delivery method is changed from sea to air due to the order being expedited, there must be a routine to update the purchase order with this information if different delivery methods require different rates. P, D
Related topics