4. The costing model - Introduction to Purchase/Distribution Costing

Overview of the costing model structure

The costing model for purchase/distribution costing has the following structure:

Each type of cost, discount, or total in the summarized purchase cost or distribution cost is represented by a costing element. The costing element is the basic building block.
Each costing element retrieves its value either from other parts of M3 BE, such as the purchase order or distribution order, or by calculating values retrieved from other costing elements. The costing operator selected for each costing element determines how the values are processed.
The costing elements that represent the critical costs for a specific product or material are combined into a costing model.
The costing model is selected for an item.

Outline of costing elements

Each costing element represents one of the following types of costs related to the purchase:

The cost for the goods invoiced directly by the supplier.
An internal charge such as the cost for quality inspection of delivered goods.
An internal cost related to transferring a product or material from one facility to another.
An external charge invoiced directly by the supplier.
A third-party charge, that is, an external charge invoiced by another supplier, for example, a freight cost.
A discount.

A costing element used in purchase costing can be reserved for a cost that applies to a purchase order line, or a purchase order header, or both, with different impact on the inventory value of the items involved. A costing element used in distribution costing, however, can only be reserved for a cost that applies to a distribution order line.

For each costing element that represents a charge (or discount) other than the cost of goods or a total, you select one or several rates to apply when calculating the cost.

For purchase orders, the name of the applicable costing elements that represent external charges can be printed together with their costs on the order.

Defining rates

For each costing element that represents a charge or a discount, you can select up to five predefined object types. In purchase/distribution costing, an object type represents a "reason" or a cause that triggers a different rate. For example, if you select warehouse, delivery method and country as object types for a costing element representing an external freight cost, you can select different rates depending on a combination of these parameters. Items purchased for warehouse A and shipped from France by air have a different freight rate than the same items that are purchased for warehouse B and shipped from China by sea. You can see the available object types by selecting view 11 in 'Object Type. Open' (CRS550).

You can also select up to five combinations of attributes and configurable custom columns for the same purpose.

Attributes for attribute-controlled items are used primarily for food & beverage and fashion industries. That is, you can use different attributes such as color or grade of vegetables as a base for different rates.

Configurable custom columns provide flexibility to tailor the costing model to the specific procurement requirements and provide flexibility when selecting a model for a settlement line.

The rates are used both for the costing and for PO transactions and invoice transactions.

Outline of costing operators

Each costing element has a costing operator. The costing operator contains the formula for retrieving the cost and, if applicable, the costing unit to apply. The costing unit can be a price, a percentage, a weight based on an order's unit of measure, and so on.

There are two types of costing operators:

Display operators display the cost of goods and totals that are retrieved without calculation based on a costing unit. Examples are gross purchase price and total cost.
Calculation operators are operators that calculate costs or discounts based on a costing unit.

The costing operators are system-defined and cannot be created or changed manually. See below for a description of each costing operator.

Costing elements are defined with their respective costing operator in 'Costing Element. Open' (PPS280).

Required costing elements in costing model

In the simplest scenario there are just two costing elements: one for the cost of goods – in this documentation called the costing base – and one for the total value of the costing. (For items with standard costing as inventory accounting method, the total represents the inventory value.) In other words, a costing model must consist of at least the following costing elements:

A costing element with operator 01 (retrieving the gross purchase price) or 02 (retrieving the net purchase price).
A costing element with operator 99 (the sum element representing the total value of the costing).

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

Costing model structure – Example 1

Comments to Example: In the example above, two purchased items have the same costing model. The model is simple and includes only the gross purchase price as the costing base, a freight cost based on weight and the mandatory total sum. However, there are many more costing elements available that can be used in different combinations in other costing models.

The model also applies to distributed items, although the costing base then would be either the cost in delivering facility or the internal transfer price.

Costing model structure – Example 2

Below is another example of a costing model:


Costing element	Costing element amount comment	Comment
Costing base: Net price	50.00	Cost of goods
Ordering cost	3.70	External charge from the supplier
Overhead	1.25	Internal charge
Cost for inter-facility transfer	1.00	The costing element uses an operator that calculates the cost based on the distance between warehouses.
Freight	1.00	External charge from third party
Total for accounting	56.95	= Standard cost