Example of Cost Rollup with Different Overhead Absorption Types
This example extends the previous example and illustrates how the unit cost of a make item is calculated by the Roll up Costs process when overhead rates with different absorption types are defined in the cost scenario.
Scenario
You're defining a new plant overhead at the plant level that's absorbed by all the assemblies manufactured. Work definitions, standard costs, and resource rates are same as defined earlier.
Revised Overhead Rates
These are the overhead rates defined in the cost scenario.
Overhead Rate Type |
Item Category |
Item |
Cost Element |
Expense Pool |
Absorption Type |
Rate |
---|---|---|---|---|---|---|
Plant Overhead |
RS-ABCD |
Manufacturing Overheads |
MFG_Resources_EP |
Percentage of Material Cost |
1% |
|
Plant Overhead |
P2P-Overhead-CE |
P2P_Exp_Pool |
Percentage of Total Cost |
2% |
Analysis
After you define the cost scenario and the corresponding standard costs, resource rates, overhead rates, run the Roll up Costs process for the cost scenario.
Rolled Up Costs
Let's start with identifying the revised costs for the items RS-AB and RS-CD after including the new plant overhead, which is defined as 2% of the total cost.
To fabricate RS-AB, you need couple of machine operators and fabrication engineers. This is the item cost calculation for RS-AB.
Number |
Operation Sequence |
Item |
Item Description |
Unit Cost |
Quantity |
Extended Cost |
---|---|---|---|---|---|---|
Main (#V1) |
RS-AB |
RS-AB |
9.66 |
1 |
9.66 |
|
10 |
Fabrication |
9.50 |
||||
RS-A |
RS-A |
1.50 |
1 |
1.50 |
||
RS-B |
RS-B |
2.00 |
1 |
2.00 |
||
Machine Operator |
1.00 |
2 |
2.00 |
|||
Fabrication Engineer |
2.00 |
2 |
4.00 |
|||
Plant Overhead |
0.16 |
The plant overhead is 2% of the total cost, excluding the overheads for material RS-A and the fabrication engineer. Therefore, the plant overhead is calculated as shown here:
0.02 x [Total material cost of (RS-A + RS-B) + Total resource rate of (Machine Operator + Fabrication Engineer)]
0.02 x [(1.00 + 2.00) + 2 x (1.00 + 1.50)] = 0.16
To make RS-CD, you need an electrician and the work must be inspected by an inspector. This is the item cost calculation for RS-CD.
Number |
Operation Sequence |
Item |
Item Description |
Unit Cost |
Quantity |
Extended Cost |
---|---|---|---|---|---|---|
Main (#V1) |
RS-CD |
RS-CD |
14.28 |
1 |
14.28 |
|
10 |
Electrical |
10.00 |
||||
RS-C |
RS-C |
3.00 |
1 |
3.00 |
||
RS-D |
RS-D |
4.00 |
1 |
4.00 |
||
Electrician |
3.00 |
1 |
3.00 |
|||
20 |
Inspection |
4.00 |
||||
Inspector |
4.00 |
1 |
4.00 |
|||
Plant Overhead |
0.28 |
RS-ABCD is made by using RS-AC and RS-CD. You need welding torches and the work must be inspected by an inspector. This is the item cost calculation for RS-ABCD.
Number |
Operation Sequence |
Item |
Item Description |
Unit Cost |
Quantity |
Extended Cost |
---|---|---|---|---|---|---|
Main (#V1) |
RS-ABCD |
RS-ABCD |
38.80 |
1 |
38.80 |
|
10 |
Frame Assembly |
33.94 |
||||
RS-AB |
RS-AB |
9.66 |
1 |
9.66 |
||
RS-CD |
RS-CD |
14.28 |
1 |
14.28 |
||
Electrician |
5.00 |
2 |
10.00 |
|||
20 |
Inspection |
4.00 |
||||
Inspector |
4.00 |
1 |
4.00 |
|||
Plant Overhead |
0.10 |
|||||
Plant Overhead |
0.76 |
The first plant overhead is defined as 1% of the total material costs, which is the sum of the material costs for RS-A, RS-B, RS-C, and RS-D. The overhead for RS-A defined in the standard cost is excluded.
The second plant overhead is defined as 2% of the total cost. When calculating this overhead, the overhead for material RS-A, the overhead for fabrication engineer, and the plant overhead calculated for RS-AB and RS-CD are considered.
Cost details of the materials, resources, and overheads for the item RS-ABCD are summarized here.
Cost Element |
Cost Element Type |
Expense Pool |
Cost Level |
Unit Cost |
---|---|---|---|---|
ZCST-Electrical |
Overhead |
Lower Level |
1.00 |
|
CML Material |
Material |
Lower Level |
1.00 |
|
CML Overhead |
Overhead |
Lower Level |
0.50 |
|
OSPMatElement |
Material |
Lower Level |
2.00 |
|
RS-Resource |
Resource |
Lower Level |
4.00 |
|
RS-Resource |
Resource |
This Level |
4.00 |
|
P2P-Overhead-CE |
Overhead |
P2P_Exp_Pool |
This Level |
0.76 |
P2P-Overhead-CE |
Overhead |
Lower Level |
0.44 |
|
P2P-Material-CE |
Material |
Lower Level |
4.00 |
|
0554-MatElement |
Material |
Lower Level |
3.00 |
|
0554-ResElement |
Resource |
Lower Level |
3.00 |
|
Direct Labor |
Resource |
Lower Level |
5.00 |
|
Direct Equipment |
Resource |
This Level |
10.00 |
|
Manufacturing Overheads |
Overhead |
MFG_Resources_EP |
This Level |
0.10 |
38.80 |