Material Cost Estimate with Quantity
Structure
Unit Overview
This unit will focus on the integration of product costing with logistics master data. You will analyze the results of material cost estimate with quantity structure, and learn how to update prices in the material master record, to include the standard cost.
Unit Objectives
After completing this unit, you will be able to:
• Analyze the results of a material cost estimate with quantity structure • Use the BOM to determine the material costs
• Use Routing and work centers to determine production costs • Link work centers to cost centers to valuate production costs • Describe the required entries in the Logistics master data • Create a material cost estimate with quantity structure
• Analyze the results of a material cost estimate with quantity structure • Update prices in the material master
• Use price control techniques in material valuation
• Use the functions of material costing with quantity structure efficiently
Unit Contents
Lesson: Basics of Material Costing with Quantity Structure ... 82 Exercise 4: Displaying a Material Cost Estimate ... 99 Lesson: Material Cost Estimate... 110
Lesson: Basics of Material Costing with Quantity
Structure
Lesson Overview
This lesson will help you in analyzing the results of a material cost estimate with quantity structure. The lesson provides detailed information regarding the logistics master data which will help you use the BOM, routing, and work centers to determine the material and production costs.
Lesson Objectives
After completing this lesson, you will be able to:
• Analyze the results of a material cost estimate with quantity structure • Use the BOM to determine the material costs
• Use Routing and work centers to determine production costs • Link work centers to cost centers to valuate production costs • Describe the required entries in the Logistics master data
Business Example
As the cost planner for your company, your task is to check the latest cost estimate for a pump, which is currently being produced in a repetitive manufacturing process. The manufacturing engineer responsible for this material requires confirmation that the costs are accurate because his supervisor wants to compare the costs of manufacturing this material internally against buying the pump from a vendor, either as a complete unit or in assemblies.
Overview of Material Costing
Figure 38: Overview
The results of a material cost estimate with quantity structure do not differ from those without a quantity structure; they are identical from a costing point of view: • Cost component split
• Itemization
• Costed multilevel BOM
This means that the valuation principles outlined in earlier units also apply here. It is only the method by which costing results are obtained that differs.
Material costing with quantity structure can determine the product structure and
production plans as entered in Logistics, and convert them to structures of the itemization and cost component split.
This explains the emphasis on describing the logistical data. In addition, Activity-Based Costing is briefly covered.
Finally, this unit describes the price update process after the execution of a standard cost estimate.
BOM
Figure 39: BOM
The bill of material (BOM) is a directory for an object and its constituent parts, containing information such as the name, reference number, quantity and unit of measure.
BOMs are used in:
• Material Requirements Planning for procuring parts • production for staging parts
• costing for calculating material costs
The procedures for maintaining the basic data (BOM and routing) are described in course PLM114.
Figure 40: BOM: Example
Costing levels are automatically determined by the system when you create a cost estimate.
Assigning materials to costing levels ensures that costing is performed in the correct sequence: raw materials and purchased parts, followed by semi-finished products, followed by finished products.
The above figure lists the fields in the BOM header that are relevant to costing. BOM usage: Examples for BOM usage: BOMs used exclusively for engineering or costing purposes.
BOM status: If complex changes are made to a BOM, you can use the BOM status to control when the BOM is used, such as for a cost estimate.
Area of validity: A BOM can be defined as valid for only a limited range of lot sizes, such as 1 to 1,000 units. You can then create a different BOM for lot sizes exceeding 1,000 units. Therefore, only one BOM can be used for the defined costing lot size.
Alternative BOM: Alternative BOMs can describe different product structures that create a product with the same properties. For example, one alternative uses sheet metal A, while the other alternative uses sheet metal B.
Figure 42: BOM: Item
Item category:
• L = stock item, valuation in accordance with material valuation strategy or separate cost estimate
• N = non-stock item (see next figure)
• R = variable-size item, valuation in accordance with material valuation strategy or separate cost estimate
Fixed quantity indicator: This indicates whether the quantity entered is dependent
on the lot size. It applies mainly to unavoidable material loss at the start of the production process.
Planned scrap: This topic is covered in detail in the unit Further Valuation
Relevancy to costing indicator: If this indicator is not selected, the system ignores
the BOM item in the material cost estimate. For standard cost estimates, modified standard cost estimates, and current cost estimates, the only decision to be made is whether or not the item will be costed (“X”or “ ”). For inventory costing, a
relevancy to costing indicator can be entered here that has a devaluation factor
in Customizing. This enables you to devaluate BOM items, such as packaging materials, on a flat-rate basis for inventory or commercial purposes.
The settings in the BOM usage and BOM item categories enable you to specify whether this field contains a default value and whether this value can be changed when the BOM is maintained.
Bulk material: Bulk material is usually posted as consumption at production cost centers as soon as it is procured. Therefore, it is not included in the cost estimate in the standard system. A user exit is available for costing bulk materials.
Figure 43: BOM: Nonstock Materials
Nonstock materials are materials that are not kept in inventory. They are always procured externally and assigned directly to the order.
Nonstock materials have either no material master or are maintained with a nonstock material master for the entry tool.
• For nonstock materials without a material master, data that is relevant to costing (such as prices) is entered directly in the BOM item (purchasing data). • For nonstock materials with a material master, no prices can be maintained
Routing and Work Center
Figure 44: Routing
Production costs are determined through the routing, the work centers at which the operations are performed, the cost centers, and the relevant activity types.
A routing consists of one or more operations.
Each operation contains information about the work center, production resources, and tools, material assignments, operation texts, and standard values (how long, how much).
Rate routings and recipes can be used for repetitive manufacturing and process manufacturing.
Work centers are used in plans (routings, networks, inspection plans, maintenance task lists, and rough-cut planning profiles).
Machine group and capacity planner group are synonyms for work center.
Work centers are defined with reference to a plant. Work centers are assigned to cost centers.
Figure 46: Use of Work Center and Routing
The routing/work center can be adapted to these areas because it is used as basic data by many applications.
The standard value key enables you to define up to six standard values for an operation. The system assigns a parameter key to the standard values of the operation and the work in the network activity. This parameter key specifies the following:
• Keyword appearing with the standard value on the screen, such as setup, machine, personnel, teardown, and so on.
• Dimension (time, quantity, volume, and so on) in which the standard values must be maintained.
• At the same time, the parameter key represents the names of the formula parameters. You can use the formula parameters to represent the standard values in a formula to determine the following: execution time, capacity requirements, and costs.
The control key specifies the business functions you want to execute with an operation:
• Scheduling • Capacity planning
• Costing: This ensures that the operation is included in costing.
• Confirmation: Here you specify whether and how the operation is confirmed. • External processing: Here you specify whether the operation is processed
internally, externally, or both.
The performance efficiency rate is the ratio of target duration time to actual time attained. The standard times used by capacity planning and costing are modified by this rate.
Figure 48: Routing: Header
Material – plan assignment: A routing can contain multiple materials involved in the same production process.
You use a task list usage to assign routings to various work areas. This way, you can create several routings to produce one plant material. These routings are differentiated in your task list usage.
Routing status: You use this status to indicate the processing stage of a plan. For example, you could indicate whether the plan is still at the creation stage, or whether you have already released it.
Figure 49: Routing: Operations
Relevancy to costing:
• If the control key specifies that the operation is not relevant to costing, the
relevancy to costing indicator is ignored in the operation.
• If the control key specifies that the operation is relevant to costing, you can override it`with the relevancy to costing indicator in the operation.
Assigment of activity types/business process:
If the reference indicator is turned off in the work center, you can overwrite the standard values of the work center in the routing. Linking the standard times with the activity types is performed using the formulas in the work center.
Links
Figure 50: Where Are the Entries Made?
Production costs are created by combining data from Production Planning with Cost Center Accounting/Activity-Based Costing.
The routing describes the quantity of an activity and the location of the operations. The work center describes where an operation is performed.
It is linked to a cost center to valuate the activities.
The planned activity prices for the work center are calculated through the link to a cost center and the activity type planning for the cost center.
Figure 51: Links
You can have up to six standard values in the operation. If no activity type has been entered for a standard time, it is not included in the cost estimate.
Figure 52: What Is Entered in the Formulas?
The standard value key enables you to define the six standard values in the operation. The system assigns a parameter key to the standard values of the operation and the work in the network activity. This parameter key specifies the following:
• Keyword appearing with the standard value on the screen, such as setup, machine, personnel, teardown, and so on.
• Dimension, such as time, quantity, volume, and so on, in which the standard values must be maintained.
• At the same time, the parameter key represents the names of the formula parameters. You can use the formula parameters to represent the standard values in a formula, to determine the following: Execution time, capacity requirements, and costs.
Formula: You can use formula parameters to which you have assigned values. You can then link these parameters with mathematical operations such as addition, subtraction, multiplication, or division.
Example: Formula 2 = Standard value * Operation quantity / Base quantity The formulas are maintained in Customizing for the work center.
Figure 53: What Is the Costing Result?
The system calculates the costs by multiplying the quantity by the price. The quantity comes from the standard values for the operation and is modified by the performance efficiency rate and a formula.
In the itemization for the cost estimate, an internal activity for the cost
center/activity type is displayed. Furthermore, the assignment to the operation and work center is saved in the itemization.
Production Version
Figure 54: Production Version
You can maintain the production version in the material master: • MRP view 4
Quantity structure control is a process by which the system searches for alternatives if multiple BOMs and/or routings exist for a material.
You enter the quantity structure control ID in the costing variant. This ID describes a list of priorities for the BOM and routing through the BOM application and routing selection keys.
The BOM application determines (by means of a selection ID) which BOM usage is selected first. It enables you to prefer an alternative of a multilevel BOM from a certain date and specifies whether the status is relevant for the BOM selection. Standard criteria:
• Period of validity: The BOM must be valid on the quantity structure date. • Lot-size range: The costing lot size must fall within the lot size range. • The status allows costing.
Explanation facilities: To check the BOM that was costed in the cost estimate, you need to do the following:
• Use the Info icon to go to the BOM.
• Go directly to the quantity structure by double-clicking on the material number.
Figure 56: How Does the System Find a Routing?
If a production version is found or defined, the routing contained in it is used. The selection ID for the routing determines which routing is selected first, the parameters being the task list type, task list usage, and plan status.
Standard criteria:
• Period of validity: The routing must be valid on the quantity structure date. • Lot-size range: The costing lot size must fall within the lot size range. • The status allows costing.
Explanation facilities: To check the routing that was costed in the cost estimate, you need to do the following:
• Use the Info icon to go to the routing.
• Go directly to the quantity structure by double-clicking on the routing group. The effect of the Alternative sequences switch is that, if the system finds a routing, it uses alternative sequences (in accordance with their validity) as opposed to the standard ones.
Figure 57: Master Recipe – Task List Type of the Process Industries
The process industry uses a master recipe instead of a routing.
The production version in the material master defines a fixed and unique link between an alternative of the recipe group and an alternative of a multiple BOM. You can include the master recipe in Customizing for the quantity structure control in order to access the recipe in the cost estimate. However, this can be overridden
Exercise 4: Displaying a Material Cost
Estimate
Exercise Objectives
After completing this exercise, you will be able to: • Use the display functions of a material cost estimate
• Interpret the result of a material cost estimate and use various standard reports for analysis purposes
• Learn how to use the explanation facilities to work more efficiently • Trace the data origin of individual costing items and describe how the
production costs of the finished product are calculated
Business Example
As the cost planner for your company, your task is to check the latest cost estimate for a pump that is currently produced in a repetitive manufacturing process. The manufacturing engineer requires confirmation that the costs are accurate because his boss wants to compare the costs of manufacturing this material internally against buying the pump from a vendor, either as a complete unit or in assemblies.
Task 1:
Display the most current cost estimate for material P-100 in plant 1000 with the status FR (released without errors) and valid on today’s date. Use the costing variant PPC1 and costing version 1.
1. The manufacturing engineer wants to know how many units the setup costs are based on. Therefore, determine the costing lot size.
2. The costs are usually determined per unit. Set the cost base so that the cost per 1 piece is displayed. Keep this setting so that you can answer the following questions.
Hint: Changing the cost display does not result in a new calculation of producing just one pump. It simply changes the reported values from presenting the value for 100 pumps to presenting the value of 1 pump.
Task 2:
Now answer some questions relating to the cost situation of your pump. The manufacturing engineer wants to know which components have the highest costs and which areas incurred significant costs.
1. What is the total cost of goods manufactured for the pump, and what are the fixed costs?
2. Management is considering whether to outsource certain components. Which assembly has the highest costs? What is the cost of goods manufactured for this assembly? What is the material number of this component?
3. Which routing operation has the highest costs, and why?
4. Select an appropriate report layout and determine the total material costs (COGM view).
Task 3:
The purchasing department has informed you that the price of one of the material components, 100-700, purchased for production will decrease due to supplier overstock. Your task is to suggest how future cost estimates can take this price change into account. In order to update the correct price field in the material master, you need to identify which price is used based on the valuation strategy in the valuation variant.
1. First note which BOM was used in the cost estimate for the pump. 2. Using the explanation facility of costing variant PPC1, find out which
valuation variant was used.
3. Which strategy is defined for material price valuation in this valuation variant?
4. Which price field could be changed in the material master for 100-700 in order to take the planned price change into account that would not affect the current standard price of the inventory?
Task 4:
The production costs for pump P-100 are derived from the routing used for the cost estimate with quantity structure. The manufacturing engineer wants to know how the costs were calculated and the areas in the system from which the data was taken. Use a costing lot size of 100 pumps and enter the data in the table at the end of this exercise. Change the cost display back to the costing lot size.
1. Which routing was used to determine the activities? Check the quantity structure data for this.
2. In the itemization, select a report layout that arranges the costs into operations. Which internal activities are performed in operation 10? 3. Go back to the routing via the explanation facilities. Operation 10 was
performed at which work center?
4. The standard values represent the expected duration of the production process. Find the default values for operation 10 and write them down in the table below. The activity types are used to represent different production processes that can occur from a cost accounting perspective. Note the planned activities for operation 10. select only the activities for which a standard value was set.
5. What is the base quantity on which the standard value is based?
6. The basic data for the work center in the routing operation contains a key for performance efficiency rate that controls the relationship between the