1. Product Costing and Manufacturing Accounting Implementation Guide
  2. Understanding Product Costing

Understanding Product Costing

Product costing enables you to differentiate what types of cost information you want to consider as you establish the total cost of a product that you want to manufacture. You can set up different types of cost components to capture the different types of cost.

Cost components are values in user-defined code (UDC) table 30/CA that represent the individual costs that accrue for an item, such as costs for material, labor, overhead, and extras. The system automatically calculates material, labor, and overhead costs. Extra costs, such as electricity, are manually controlled.

The system provides various sources for cost information. For material costs, the system uses the bill of material to retrieve the cost of manufactured parts, such as labor, outside operations, and extra costs, and the costs of lower-level material. You can use only bills of material of type M to establish standard costs. For labor and machine costs, the routing provides information such as labor, machine, and setup costs.

Based on the cost components that you set up, you can create hypothetical situations for a given cost method. You might want to calculate simulated costs because of changing factors in the business environment. You create cost scenarios by running the Cost Simulation program (R30812).

For example, you can use cost simulations to:

  • Simulate an increase in material costs.

  • Simulate changes in labor rates.

  • Develop strategies for pricing, contractual, or labor negotiation.

You can simulate cost change scenarios (rollups) as many times as needed before you finalize the changes.

In addition, you can:

  • Allow for extra costs that are related to the manufacturing of a product, such as costs for electricity, insurance, water, and warehouse space.

  • Review specific calculations that determine cost amounts for any item.

  • Maintain costs by branch for multifacility processing to account for costs that differ based on regional or business variations.

  • Define additional cost factors to include in product costing calculations.

Changes are finalized in the system when you perform a frozen cost update for a given cost method. You use the Item Cost Component - Frozen Update program (R30835) to freeze costs. A frozen update copies the simulated values, freezes them, and updates the Item Cost table (F4105) with the total cost. These costs remain in effect until you overwrite them with the results from another frozen update.