Computing Activity-Based Product Costs in Cost Management
After you have determined activity unit costs, you can compute activity-based product costs.
To compute activity-based product costs:
1. Define a cost type to hold activity-based cost information.
If you are using General Ledger to compute activity unit costs, you will probably name your activity-based costing cost type the same name used for the activity-based cost budget in General Ledger. See: Defining Cost Types.
For example, you might have the following cost types:
- FY96 Next Year Budgeted Costs
2. Define activities and enter activity costs.
Define each activity from your activity cost model to Cost Management. For each activity, you can enter a cost for one or more cost types. Specify the total number of occurrences and total cost for each activity for the FY95ABC cost type. The cost per occurrence (activity unit cost) is computed automatically.
In addition, you can add more information to your activity definition using descriptive flexfields. For example, you might define a "Value Added" descriptive flexfield for the values (value set) "low," "medium," and "high." See: Defining Activities and Activity Costs.
3. Define a sub-element to reference for each activity.
Cost Management requires you to specify a cost element and sub-element for each cost you enter. Before you associate activities with products, set up at least one cost sub-element that you can reference for each activity. You can reference a default activity when you define the sub-element and the material overhead sub-element. You can use the "Activity" basis to directly allocate the activity cost to the item. For example, you could create a sub-element called "ABC Cost" for the material overhead cost element and reference it for each activity cost. See: Defining Overhead.
4. Associate activities to products.
Either directly or indirectly specify your activity costs for each product. Products include all of your finished goods, subassemblies, as well as purchased items. For each item and cost type, you can specify any number of item costs where each item cost references a cost element, sub-element, and activity.
Some item costs, such as material purchase price, are direct. For direct costs, you can specify the exact amount and reference the appropriate activity, such as "Material". Other activity costs, such as placing purchase orders, are based on the estimated or actual usage of the activity for this item and the activity unit cost. For these types of costs, you specify an activity, the "Activity" cost basis, and enter the usage of this activity for the item. Cost Management automatically computes the net cost for the item by multiplying the activity usage times the activity unit cost. See: Defining Item Costs.
5. Specify activities in routings.
Bills of Material lets you reference an activity for each operation resource in a routing. For example, in a single operation you might use the same labor resource for two activities, such as Setup and Run. By specifying an activity for each resource usage, Cost Management can track all costs by activity. See: Creating a Routing.
6. Assign activities to routing overheads.
When you define overhead sub-elements, you can enter a default activity. For every overhead earned in a routing, the default activity is used by the cost rollup to associate the overhead cost with the activity. This includes overheads based on the number of resources earned in the operation and overheads based on the number of units moved in the operation. In this way, all overhead costs in your routings reference an activity. See: Defining Overhead.
7. Roll up costs by activity.
Once you have entered your activity costs for each item, roll up your assembly costs by activity and report bill of activities. Depending on the cost type and rollup options, you can roll up activity costs through the bills of material and keep activity costs at all levels of your bills and routings. See: Defining Cost Types. See: Rolling Up Assembly Costs.
8. Report and view costs by activity.
Using the item cost inquiries and reports, you can see your costs by activity summary, activity by level, activity by operation, activity by department, activity by flexfield segment value, sub-element by activity, and cost element by activity. See: Viewing Item Costs.
9. Compare standard with activity-based costs.
You can compare your traditional standard costs with your activity-based costs using the Cost Comparison reports. You can compare by cost element, sub-element, activity, department, level type, or operation. In addition, you can run the Margin Analysis and Inventory Valuation reports using any cost type. This way you can use your activity-based costs for better margin and inventory reporting.
