Enabling purchase/distribution costing

Outcome

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

Before you start, you must meet these prerequisites:

• The company must have well-defined routines and policies for planning and control.
• The financial system must be configured.

  See

• You must define languages in 'Language. Open' (CRS010).
• You have read and understood Introduction to Purchase/Distribution Costing.

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.

   These 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 '280 Purchase costing calculation on each line' in 'Purchase Order Type. Open' (PPS095)to add charges during purchase order entry, both on the order header level and order line level
     • On 'Settings – Procurement' (CRS780/G), select the field 'Priority order for costing base' to define the general search path for retrieving the costing base.
       For a description of the available costing bases, see Introduction to Purchase/Distribution Costing

       Note: You can select a different search path when costing items in 'Purchase Costing. Calculate Selection' (PCS280).
     • To automatically update the purchase price on 'Item. Open' (MMS001/H) with the latest invoice price, you must update this function using the '220 Update item file with purchase price' field in (PPS095). However, since the values in the item main file in (MMS001) are stored at the central level and not the divisional or facility level, you should only select this option where an item only exists in one division or facility. If the item exists in several divisions, the purchase price is updated every time a change is made in one division.
     • To separate account entries to be created for price variances for item, charges, and exchange rates that occur at goods receipt, select these check boxes on '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 on 'Settings – Cost Accounting' (CAS900/E). Normally, the internal transfer price is used for average-costed items.
4. Create costing elements
   After 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: After you create 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. Specify language-specific names of charges

   You can 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. Specify costing rates

   For each costing element that represents a charge or a discount, specify the rates to apply. If you selected any costing objects for the costing element, set specific rates for each object. For example, if the delivery method and country are costing objects for a Freight costing element, you can define separate rates for different delivery methods or countries. Each rate includes a start valid from-date and to-date. Leave the valid to-date blank to enable automatic entry when a new valid from-date is added for the same costing objects. You can also manually set the valid to-date or create gaps between the validity period.

   Do not specify 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

   You can now 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 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 can 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 these 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 the item level:

    • Select one costing model for purchase costing and one for distribution costing for the combination of item and facility on (MMS003/F).
    • The inventory accounting method , for example, standard cost, average cost or actual cost, on (MMS003/E).
    • The costing decimal places, that is, the number of decimals to be used in the costing calculation on (MMS003/E).
    • The quantity to use for costing, for example, costing of the item per unit or per thousand, on (MMS003/E)
    • The supplying warehouse must be selected either for the item on '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.