Understanding Calculations in Cost Rollup

This chapter provides information on how the system generates hard-coded cost components in the cost rollup process. These calculations can vary according to the settings in the manufacturing constants and processing options.

This chapter discusses:

Click to jump to parent topicSimulated Cost Rollup

The Cost Simulation program (R30812) adjusts direct labor hours and direct machine hours by time basis, crew size, and cumulative yield, as appropriate. The program adjusts component material quantities by operation scrap and percent scrap.

Click to jump to parent topicMaterial Cost Components

This table illustrates how the material cost components A1 and A2 reflect the cost that is incurred from purchased material and from material scrap:

Cost Component

Description

A1 (Purchased Material)

When you enter a cost method in the Purchased Item processing option in the Cost Simulation program, the program uses that cost method to retrieve the cost from the Item Cost table (F4105).

A2 (Material Scrap)

Use the A2 cost component for items for which you defined a scrap percentage in the bill of material.

The net-added cost comes from scrap that is incurred when the components are assembled.

Component material scrap cost = percent of scrap from the bill of material × quantity per parent item × total cost of the component.

Click to jump to parent topicRouting Cost Components

Routing cost components (cost components B and C) can be controlled manually or through the Simulate Rollup program (R30812).

This section discusses:

Click to jump to top of pageClick to jump to parent topicB1 (Direct Labor)

B1 costs can be calculated as:

Click to jump to top of pageClick to jump to parent topicB2 (Setup Labor)

B2 costs can be calculated as:

Click to jump to top of pageClick to jump to parent topicB3 (Machine Run)

B3 costs can be calculated as:

Click to jump to top of pageClick to jump to parent topicB4 (Labor Efficiency)

This cost component increases or decreases the cost of the labor that is required to produce an item. If you have set the manufacturing constants to modify costs by work center efficiency, the program creates a cost component (B4) for labor efficiency when you run the Simulate Rollup program. In addition, if the efficiency for a work center is equal to zero, the system does not perform a calculation for that work center.

The system calculates labor efficiency only for direct labor hours as:

Parent labor efficiency cost = sum of all efficiency calculations for all operations on the item's routing

Calculating the operation labor efficiency cost requires these calculations:

Click to jump to top of pageClick to jump to parent topicC1, C2 (Variable and Fixed Machine Overhead)

The system calculates C1 and C2 costs only if you have set the manufacturing constants for the branch/plant to include variable and fixed machine overhead in the cost. You must also specify whether you want the system to calculate machine overhead costs from manually entered rates in the Work Center Master table (F30006) or as a percent of machine run costs.

Parent variable and fixed machine overhead cost is the sum of all variable and fixed machine overhead calculations for the item's routing.

Calculating variable machine overhead costs requires these calculations:

Calculating fixed machine overhead costs requires these calculations:

Click to jump to top of pageClick to jump to parent topicC3, C4 (Variable and Fixed Labor Overhead)

The system displays these calculations as rates. If you indicate on the Work Center Master Revisions form that variable and fixed labor overhead costs should be calculated as a percent of labor costs, multiply the work center labor rate by the percent divided by 100 to obtain the labor overhead rate. For example:

(Operation variable labor overhead rate) = (work center variable labor overhead percent) ÷ (100) × (work center direct labor rate)

These costs are calculated only if you have set the manufacturing constants for the branch/plant to include variable and fixed labor overhead in the cost. In this table, you must also determine whether labor overhead costs are calculated from manually entered rates in the Work Center Master table (F30006) or as a percent of labor costs.

In addition, you can set the manufacturing constants to factor labor overhead by work center efficiency:

Click to jump to parent topicOutside Operation Cost Components

You can manually enter cost components for outside operations on the Enter Cost Components form (W30026B) or let the system retrieve them from the Item Cost table (F4105) when you run the Simulate Rollup program (R30812).

The Order Processing program (R31410) creates item numbers for outside operations where Parent represents the parent item number, and xx represents the whole-number portion of the operation sequence number of the outside operation:

Parent*Opxx

For example, for item 333, an outside operation at operation sequence number 30 receives an item number of 333*OP30.

If you enter a cost method in the Outside Operations processing option for the Simulate Rollup program, the program uses that cost method to retrieve the cost from the F4105 table. If the value is zero, and a value previously existed in the Item Cost Component Add-Ons table (F30026), the original value remains. If you leave the processing option blank, the program uses the values that you manually entered on the Enter Cost Components form.

Click to jump to parent topicPurchase Price Variance

For purchased items, a purchase price variance (PPV) results when the standard cost differs from the actual purchase price. If you use extra costs on purchased items, the total standard cost might differ from the A1 (material) cost. This difference is the material burden cost.

When you receive a purchase order, the system updates the accounts payable account using the price on the purchase order. The system updates the inventory account with the standard item cost from the F4105 table. Any difference between the two costs is made up of PPV and material burden. PPV is the difference between the frozen A1 cost and the purchase order cost.

Material burden cost is the difference between the total standard cost from the F4105 table and the A1 cost:

Click to jump to top of pageClick to jump to parent topicExample: Purchase Price Variance and Material Burden

The Item Cost table (F4105) includes this information:

The Item Cost Component Add-Ons table (F30026) includes:

These t-account graphs illustrate the accounting flow for price variance and material burden:

T-account for price variance and material burden

This T-account graph illustrates how material that is issued to the work order relieves the inventory account and posts to the work-in-process (WIP) account with the fully loaded standard cost for the item:

T-account for material inventory and WIP

This t-account graph illustrates that at period end, a manual journal entry closes the PPV to the Cost of Goods Sold account:

T-account for PPV and COGS

AAI table 4337 posts the material overhead. If you have multiple cost extras and you want to post to different accounts for each of them, you must use landed cost.