1. Implementing Manufacturing and Supply Chain Materials Management
  2. Outside Processing Costing

Outside Processing Costing

How is costing performed for operations that are outsourced to suppliers?

  • Cost Planning: The outside processing service is modeled as an item and is attached to a supplier operation. You can define a standard cost for this item and when the work definition of the finished product is rolled up, the outside processing cost is included as an input item cost in the supplier operation. This step is required only if the outside processing item is a standard costed item. If the outside processing item is using an actual or a perpetual average cost, then the Cost Management automatically calculates the cost based on the purchase cost.

  • Receipt Accounting in Outside Processing: As part of the outside processing enhancements, a new destination type called "Manufacturing" has been introduced. Receipt Accounting recognizes the "Work Order" destination type and processes all purchase receipt transactions for this destination type. There's no change to the logic of creating the accrual entries for the Outside Processing Service item receipt that's, the receiving inspection account is debited with the PO price and the purchase accruals account is credit for the same value.

  • Cost Accounting in Outside Processing: The transaction type "Purchase Order Receipt into Manufacturing" will be processed by cost accounting based on the following logic:

    If the item is standard costed, then the standard cost times quantity received is added to work in process, while the difference between the purchase price and purchase order price is accounted as a purchase price variance.

    For an actual or average costed item, the purchase price times quantity received is added to work in process.

Is outside processing supported for all cost methods?

Yes. It's supported for Standard, Actual, and Perpetual Average cost methods

How can I capture shipping costs in outside processing?

Shipping costs can be modeled as overheads and applied to the Outside Processing Service item receipt transaction to be accounted as part of the work order costs.