Example of Supply Chain Cost Rollup for Discrete Manufacturing

Scenario

Organization ZQD is manufacturing the item SC_FP01. To manufacture this item, you need various other items. The items, their sourcing rules, and quantities are listed in this table:

Item	Organization	Sourcing Rule	Source Organization	Allocation	Quantity
SC_FP01	ZQD	Make	N/A	100%	1
SC_F1	ZQD	Buy	N/A	100%	10
SC_SubPhantom1	ZQD	Make	N/A	100%	5
SC_Ph1	ZQD	Buy	N/A	100%	25
SC_Ph2	ZQD	Buy	N/A	100%	25
SC_SubAsmb1	ZQD	Transfer	M1	100%	1

The item SC_SubAsmb1 in the above table is made in the organization M1. The corresponding sourcing rules are listed in this table:

Item	Organization	Sourcing Rule	Source Organization	Allocation	Quantity
SC_SubAsmb1	M1	Make	N/A	100%	1
SC_A1	M1	Buy	N/A	100%	5
SC_A2	M1	Buy	N/A	100%	5

As you can gather from the tables, the organization ZQD requires the items listed here to manufacture the finished item SC_FP01:

SC_F1 – ZQD buys this item and a standard or buy cost must be defined for this item.
SC_SubPhantom1 – ZQD makes this item and needs these items:
- SC_Ph1 – ZQD buys this item and a standard or buy cost must be defined for this item.
- SC_Ph2 – ZQD buys this item and a standard or buy cost must be defined for this item.
SC_SubAsmb1 – ZQD sources this from M1, which manufactures it with these items:
- SC_A1 – M1 buys this item and a standard or buy cost must be defined for this item.
- SC_A2 – M1 buys this item and a standard or buy cost must be defined for this item.

Apart from these materials, you also require various other resources to manufacture this item. Here's an image illustrating the overall manufacturing flow for the finished item SC_FP01.

Image illustrating the manufacturing flow for the finished product SC_FP01.

For this item, you create the work definitions.

Item	Work Definition Name	Version	Date
SC_FP01	ZQD_Final	1	11/1/2023
SC_SubAsmb1	Main	1	11/1/2023

Let's assume that the batch size of the work definition output is 1 each (primary UOM of these items).

Note: We haven't defined a work definition for the phantom subassembly SC_SubPhantom1. Only for phantom subassemblies, the logic will roll up the cost without a work definition, using the item structure of the phantom. However, if you create a work definition for the phantom, it takes precedence for cost rollup.

Cost Scenario, Standard Costs, Resource Rates, and Overhead Rates

Now, to calculate the unit cost of SC_FP01, you start by creating a cost scenario. You must make sure that the effective start date of the cost scenario is same as or later than the work definition start date. Also, ensure that the settings listed here are made in the cost scenario:

Enable Supply Chain Cost Rollup – Select this option.
Organization Context – Group
Cost Rollup Group – Select a cost rollup group that you've created with the cost organization and cost book combinations for the ZQD and M1 organizations respectively.
Effective Date – 11/1/2023
Assignment Set Name – Select the assignment set in which you have set the sourcing type for all the items. Also, ensure that you’ve defined the various sourcing rules. The sourcing rules must be planning enabled and linked to the assignment set. Also, check whether active supply sourcing rules with total allocation of 100% exist as of the scenario effective date.

Note: You must run the Extract Supply Sources process for the assignment set before running the Roll up Costs process.
Transfer Charge Rule Set – Select the rule set with the transfer charge rule for transfer from M1 to ZQD. Let’s assume you've defined a 2% transfer charge rule.
Rollup Scope – Select Items. Add the items listed here:
- SC_SubAsmb1
- SC_SubPhantom1
- SC_FP01
Use Latest Work Definitions – Select this option to use the latest version of active work definition in the manufacturing organization.

Next, you must define the standard costs for the materials used, the rates for the various resources used when manufacturing the item, and the overheads incurred.

Standard Costs

Item	Valuation Unit	Buy Cost	Cost Element	Cost Element Type	Expense Pool	Unit Cost ($)
SC_F1	ZQD-Org1	Yes
			P2P-Material	Material		9.80
			P2P-OH	Overhead	P2P_Exp_Pool	1.43
						11.23
SC_Ph1	ZQD-Org1	No
			P2P-Material	Material		10.00
			P2P-OH	Overhead	P2P_Exp_Pool	2.15
						12.15
SC_Ph2	ZQD-Org1	Yes
			P2P-Material	Material		5.35
			P2P-OH	Overhead	P2P_Exp_Pool	1.45
						6.80
SC_A1	M1-Org1	Yes
			P2P-Material	Material		2.65
			P2P-OH	Overhead	P2P_Exp_Pool	0.75
						3.40
SC_A2	M1-Org1	Yes
			P2P-Material	Material		20.00
			P2P-OH	Overhead	P2P_Exp_Pool	2.00
						22.00

Note:

For SC_Ph1, Buy Cost isn't selected. You are defining a standard cost for this item that can be used to cost inventory transactions in Cost Accounting. When you select Buy Cost, the buy cost will be used by the Roll up Costs process to calculate the standard cost of the item only if the cost scenario is enabled for supply chain cost rollup and a buy sourcing rule exists for the item in the sourcing assignment. The buy cost is never used to cost inventory transactions in Cost Accounting.
Ensure that you select the appropriate cost organization and cost book combination for the items made or used by the ZQD and M1 organizations respectively.

Resource Rates

Resource	Plant	Cost Element	Cost Element Type	Expense Pool	Unit Cost ($)
SC_ZQD_Res1	ZQD-Mfg
		P2P-Resource	Resource	P2P_Res_Pool	7.00
		Res-OH-2	Overhead	RS_OH_Exp	2.99
					9.99
SC_M1_Res1	M1-Mfg
		P2P-Resource	Resource	P2P_Res_Pool	5.00
		Res-OH-2	Overhead	RS_OH_Exp	0.35
					5.35

Overhead Rates

Plant	Overhead Rate Type	Item	Cost Element	Expense Pool	Absorption Type	Rate
M1-Mfg	Work center overhead	SC_SubAsmb1	Res-overhead	WC-OH	Percentage	10%
ZQD-Mfg	Plant overhead	N/A	Plant_OH	P1-OH	Fixed	$50.00
ZQD-Mfg	Plant overhead	N/A	Plant_OH	P1-OH	Percentage	20%

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 costs for the items SC_SubAsmb1, SC_SubPhantom1, and SC_FP01.

The item cost calculation for SC_SubAsmb1 is as shown here.

Operation Sequence	Component/Resource	Cost Element Type	Unit Cost	Quantity	Amount
	SC_SubAsmb1		138.70	1	138.70

10	SC_A1	Material	2.65	5	13.25
		Overhead	0.75	5	3.75
10	SC_A2	Material	20.00	5	100.00
		Overhead	2.00	5	10.00
10	SC_M1_Res1	Resource	5.00	2	10.00
		Overhead	0.35	2	0.70
10	Work center overhead	Overhead	1.00	1	1.00

The item cost calculation for SC_SubPhantom1 is as shown here.

Operation Sequence	Component/Resource	Cost Element Type	Unit Cost	Quantity	Amount
	SC_SubPhantom1		160.10	1	160.10

10	SC_Ph1	Material	10.00	5	50.00
		Overhead	2.15	5	10.75
10	SC_Ph2	Material	5.35	5	26.75
		Overhead	1.45	5	7.25
10	Plant overhead	Overhead (Fixed)	50.00	1	50.00
10	Plant overhead	Overhead (Percentage)	15.35	1	15.35

The percentage plant overhead in the table is defined at 20%. That's 20% of the material cost. The material cost equates to sum of the material cost multiplied by the quantity.

Overhead = 0.2 * [5 * (10.00 + 5.35)]

Overhead = 0.2 * [76.75] = 15.35

The item cost calculation for the final product SC_FP01 is as shown here.

Operation Sequence	Component/Resource	Cost Element Type	Unit Cost	Quantity	Amount
	SC_FP01		817.10	1	817.10

10	SC_F1	Material	9.80	10	98.00
		Overhead	1.43	10	14.30
10	SC_Ph1	Total cost from phantom	60.75	5	303.75
10	SC_Ph2	Total cost from phantom	34.00	5	170.00
10	SC_SubAsmb1	Total cost from subassembly + transfer charge rule	141.47	1	141.47
10	SC_ZQD_Res1	Resource	7.00	2	14.00
		Overhead	2.99	2	5.98
10	Plant overhead	Overhead (Fixed)	50.00	1	50.00
10	Plant overhead	Overhead (Percentage)	19.65	1	19.60

The percentage plant overhead in the table is defined at 20%. That's 20% of the material cost. The material cost equates to sum of the material cost multiplied by the quantity.

Overhead = 0.2 * [10 * (9.8)]

Overhead = 0.2 * [98] = 19.60

Also, the cost for the item SC_SubAsmb1 must include the 2% transfer charge. So the item cost is,

1.02 * 138.70 = 141.47

When you view the rolled up cost for the product, you'll notice that the phantom subassembly isn't shown directly, instead the phantom is expanded to show its components as if they're going into the higher-level assembly.