Standard Costing

Overview

Assigning costs to items is an essential step in the process of inventory accounting. In this article, we'll cover the basics of standard costing — looking first at how costs are assigned to simple purchased items. We will then examine more complex manufactured items and the layers of costs associated with them.

Standard Cost vs. Actual Cost

First, let's get a couple of key definitions out of the way:

  • Actual Cost: The real-time cost associated with an item, including current material and production charges. The actual cost of an item may fluctuate given changes in the cost for materials or other costs related to changes in bills of materials or bills of operations. The actual cost provides a current record of charges actually incurred by an item.
  • Standard Cost: The cost used for posting general ledger transactions. Standard cost is distinguished from actual cost in the sense that standard cost is fixed, whereas actual cost is subject to fluctuations arising from material or production changes. The two costs may diverge; however, they can also be brought back into alignment by posting actual cost to standard.

To see general ledger (G/L) traffic for inventory transactions, standard costs must be assigned to the affected items. If no standard costs are assigned, the costing aspects of the transactions will not be recorded.

Assigning Item Costs

To begin, let's assign costs to the purchased item TBOX1. This item and the others referred to in this document can be found in any xTuple demo database. In this example, TBOX1 currently has no costs assigned to it, as we can see from the maintain item costs screen shown below.

When you assign costs to an item, you begin by entering actual costs for the item. To open the "Maintain Item Costs" screen follow these steps:

  • Go to "Products" from the top menu
  • Select the "Costing" submenu
  • Choose the "Maintain Item Costs" option
  • The "Maintain Item Costs" window will open, in the "Item Number" box type: TBOX1
  • The costing elements for TBOX1 will be shown below:

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Initial Maintain Item Costs screen for purchased item TBOX1

Once the actual costs have been entered, you can then assign standard costs. You assign standard costs by posting the actual costs to standard. We'll talk more about standard cost posting later.

By definition, purchased items have material cost. So, the first actual cost we will assign to item TBOX1 is its material cost. To do so, we select the NEW COST button, as shown below.

To open the "Create Item Cost" window, follow these steps:

  • In the "Maintain Item Costs" window click the NEW button
  • The "Create Item Cost" window will open for the TBOX1 item number
  • In the "Actual Cost" box, enter in "6" and click the SAVE button

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Create Item Cost for material

As you can see, the "Material" costing element appears in the drop-down menu. This is a system-defined costing element available to all purchased items. For the purposes of this exercise, we'll assign a material cost of $6.00 to item TBOX1. After we select the SAVE button, we are returned to the maintain item costs screen, where the newly-added actual cost is recorded.

Posting Actual to Standard

Since we want to track the costing aspects of inventory transactions involving item TBOX1 in the general ledger, we need to post the actual cost to the standard cost. 

Once the "Material" element has been added to the costing elements, its actual cost can be posted. To post actual costs follow these steps:

  • Right-click on the "Material" costing element in the "Maintain Item Costs" window
  • Select "Post Actual Cost to Standard" from the menu

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Actual Cost Entered for Item TBOX1

There are several ways to accomplish posting actual cost to the standard cost, but for now we'll use the right-click menu's "Post Actual Cost to Standard" option.

Info: In most cases, to ensure all costs are updated properly, it is generally recommended that you update all costs by all class codes. But note: when updating all costs by class code you can improve the speed of the update by not selecting the "roll up" option. The roll up is not required when updating all items costs across all class codes.

As you can see in the next screen, the standard cost column now shows the same amount as the actual cost column:

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Actual Cost Posted to Standard Cost for item TBOX1

Note: The time-table for posting actual cost updates to standard cost is guided by accounting practices at your site. Variances between actual cost and standard cost may provide you with useful supply chain or production-related information.

Updating Actual Costs

So, we've discussed how to enter actual costs and how to post them to standard. The next question is: "How do you update costs when the costs for an item change?" Also: "How do you ensure that any changes are recognized wherever the item is used?"

To answer these questions, let's continue looking at our purchased item, TBOX1. This item has an actual cost of $6.00 — and this actual cost has been posted to standard. As you can see in the following screenshot, item, TBOX1, is a component in the bill of materials for item TSUB1.

Costed View of Component Items

To open the "Costed Single Level Bill of Materials" window, follow these steps:

  • Go to "Products" from the top menu
  • Go to the "Costing" submenu
  • Select "Reports"
  • Select "Costed BOM"
  • Choose "Single Level" from the submenu
  • The "Costed Single Level Bill of Materials" window will open
  • Enter TSUB1 in the "Item Number" box and click QUERY 
  • Results will be shown in the box below:

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Costed Bill of Materials

Let's say our vendor increases the price for item TBOX1 from $6.00 to $7.00. Using the maintain item costs screen, we can record this increased actual cost. To open the "Enter Actual Cost" window, follow these steps:

  • Open the "Maintain Item Costs" window for item TBOX1
  • Select "Material" and click EDIT
  • Enter 7.0000 in the "Actual Cost" box
  • Make sure "Post Cost to Standard" box is unchecked (will be covered later)
  • Click SAVE

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Update Actual Cost for item TBOX1

Note: The system will automatically update actual costs for purchased items when vouchers are posted — that is, if the vouchered cost-per-item differs from the current actual cost on file. The actual cost on record may increase or decrease, depending on the cost-per-item entered when purchase orders are vouchered.

The actual cost for item TBOX1 has now been updated, reflecting the change in the vendor pricing. If we return now to the costed bill of materials for item TSUB1, we can see how the change affected one of the manufactured items where item TBOX1 is used:

  • Open the "Costed Single Level Bill of Materials" window for TSUB1
  • Select the "Use Actual Costs" option
  • Click the QUERY button
  • Select TBOX1 from the "Costed Bill of Materials" box:

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Actual Cost of Component Item updated

You have to look closely at the example to fully appreciate the subtle changes that have occurred. For one thing, you can see that the unit cost for item TBOX1 has been updated to $7.00. This change affected the "Total Cost" for the parent item TSUB1. However, the actual and standard costs for item TSUB1 have not been affected:

  • Total Cost = $7.65
  • Actual Cost = $0.85
  • Standard Cost = $0.82

Rolling Up Actual Costs

Why does the above-mentioned difference exist? The reason is that the cost update for item TBOX1 has not yet been "rolled up." Once a cost update has been rolled up, the change will be recognized wherever the item is used. In our current example, the costed bill of materials for item TSUB1 reflects the update, but the actual and standard costs for item TSUB1 have not yet absorbed the change.

To determine whether costs have been rolled up, look closely at the dates when costs were last updated on the maintain item costs screen. You can also look for differences between the total cost and the actual and standard costs for an item on the costed bill of materials display.

Another point to consider is that the screen in our example is displaying data using the "Use Actual Cost" parameter. Note the difference when the "Use Standard Cost" option is selected instead, as shown in the following screen (be sure to select the QUERY button):

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No Affect on Standard Cost from Actual Cost Update

As you can see, no change is showing in the standard cost for item TBOX1. The standard cost is still $6.00. The reason for this is that the actual cost update has not yet been posted to standard.

To roll up the item TBOX1 cost update so that item TSUB1 recognizes the change, we will open the "Update Actual Costs by Item" screen:

  • Go to "Products" from the top menu
  • Go to the "Costing" submenu
  • Select "Update Actual Costs"
  • Select "By Item"
  • The "Update Actual Costs by Item" window will open 
  • Type TBOX1 in the "Item Number" box
  • Check the "Roll Up Actual Costs" check box 
  • Select the UPDATE button

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Roll Up Actual Cost Update

As you can see in the example, we have selected the "Roll Up Actual Costs" option. Here we are performing a cost roll up — which is to say that we are seeking to impact actual costs for all items that use item TBOX1. After we select the UPDATE button, all items that use item TBOX1 will recognize the actual cost update. To verify the change has been recognized, we return to the costed bill of materials for item TSUB1, as shown below:

Info: You don't need the "Roll Up" option when updating costs by all class codes. Using the "Roll Up" option with all class codes is redundant and can hurt performance.

Open the "Costed Single Level Bill of Materials" window for the item TSUB1 and select the "Use Actual Costs" option, as shown below:

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Actual Cost Rolled Up and Recognized by Parent Item

Sure enough, the total cost for item TSUB1 is now equal to its actual cost. We have successfully rolled up the cost update for the component item TBOX1. The update has been recognized by the parent item. And the update has been recognized not only by item TSUB1 — but also by any other parent items where item TBOX1 is used.

Info: Our example has focused on cost roll ups for individual items, but you may also perform multiple simultaneous roll ups by class code. Keep in mind that multiple updates may put a strain on server resources. Consider performing cost updates by class code during off-peak hours.

Incidentally, we could have achieved the same result by updating lower level material costs for the parent item, TSUB1, as shown below.

With the option: "Update Lower Level Material Costs" selected, any component item material changes will be recognized by the parent item. In this case, the changes made to item TBOX1 will be reflected in the actual cost for item TSUB1.

  • Go back to the "Update Actual Costs by Item" window and open it for the the item: TSUB1
  • Select the "Update Lower Level Material Costs" check box 
  • Choose the "Select all Costs" button to check all the other boxes
  • Click the UPDATE button

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Manufactured Item Perspective on Cost Roll Up

Standard Cost Roll Ups

The process for updating and rolling up standard costs mirrors the actual costs process described above. Let's assume we have already posted the actual cost update to standard for item TBOX1 — using the maintain item costs screen, for example. This is done by going to the "Enter Actual Cost" window and selecting the "Post Cost to Standard" option:

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That means, the standard cost for item TBOX1 is now also $7.00, as we see reflected in the costed bill of materials for item TSUB1:

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Standard Cost Updated for Item TSUB1

When the "Use Standard Costs" option is selected as in the example, you can see that the total cost for item TSUB1 differs from the standard cost. This means that the standard cost update for item TBOX1 has not been recognized. To ensure that parent items recognize the standard cost change, we must roll up the standard cost, as shown below.

To open the "Post Actual Costs by Item" window, follow these steps:

  • Go to "Products" from the top menu
  • Go to the "Costing" submenu
  • Select the "Post Actual Costs" option
  • Choose the "By Item" option
  • The "Post Actual Costs by Item" window will open 
  • Type TSUB1 in the "Item Number" box 
  • Check the "Roll Up Standard Costs" check box
  • Choose the "Select all Costs" button
  • Click the POST button 

Rolling Up Standard Costs

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Then return to the "Maintain Item Costs" window for TSUB1 and choose the "Post Actual Cost to Standard" option for the "Material" element: 

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As the following screenshot shows, the standard cost update has successfully been recognized by the parent item:

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Standard Cost Update Recognized by Parent Item

Info: You don't need the "Roll Up" option when updating costs by all class codes. Using the "Roll Up" option with all class codes is redundant and can hurt performance.

User-Defined Costing Elements

In addition to the system-defined "Material" costing element, you can also create your own, user-defined costing elements. These accessory elements enable you to specify additional item costs. To view the list of user-defined costing elements, follow these steps:

  • Go to "Products" from the top menu
  • Go to the "Costing" submenu
  • Select the "User-Defined Costing Elements" option
  • The "List User-Defined Costing Elements" window will open
  • Click the NEW button to add a new costing element "Miscellaneous"
  • Click the SAVE button to add the "Miscellaneous" elements to the costing elements list:

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The available elements are shown in the screenshot above. As you can see, the "Material" element is not available from the list. That's because the "Material" costing element is a system-defined, not a user-defined costing element.

Return to the "Create Item Cost" window from the "Maintain Item Costs" window for item TSUB1. Click the NEW button to add the new "Miscellaneous" element we just made from the "Costing Element" drop-down list, and specify a cost of $0.25. The following screen shows this new cost has been added to the actual cost for item TBOX1:

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Add User-Defined Costing Element

Note: There is no requirement that all actual costs must be posted to standard. You may post certain costs and not others — depending on the needs of your site.

As you can see below, the actual cost we added earlier is now present in the costing elements' actual cost for the "Miscellaneous" element:

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User-Defined Cost Added to Actual Cost

The master list of user-defined costing elements can be found in the master information section of the product module. The following screen shows the list of costing elements created for this scenario:

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Master List of User-Defined Costing Elements

To edit costing elements, follow these steps:

  • Open the "List User-Defined Costing Elements" window
  • Select "Miscellaneous" from the list below and click the EDIT button
  • The "User Costing Element" window will open for the "Miscellaneous" element

When creating a user-defined costing element, you may specify the "Accept P/O Distributions" option. Select this option if you want the costing element to be used for distributing costs related to purchase order vouchers. If this option is selected, the costing element is included as one of the available costing elements when voucher item costs are distributed.

Info: In addition to using costing elements, you may also create costing items — that is, items assigned the item type "costing." A costing item is a kind of pseudo item used solely to provide a costed value for a costing element. Simply insert a costing item into a bill of materials, add costs to the item, and then link the item to a costing element. You may then track the costs of the pseudo item as a user-defined cost.

Manufactured Item Costing

Okay, we've covered how to assign costs to a purchased item; now let's look at costing for a manufactured item.

The manufactured item we will be using in this next scenario is item YTRUCK1, a yellow toy truck having four component items. The fourth component — item TSUB1 — is also manufactured. Item TSUB1 is the packaging used to package the yellow toy truck. The next screen shows an indented bill of materials for item YTRUCK1:

To open the "Indented Bill of Materials" window, follow these steps:

  • Go to "Products" from the top menu
  • Select the "Reports" submenu
  • Select "Bills of Materials" from the submenu
  • Choose the "Indented" option to open the "Indented Bill of Materials" window
  • Enter YTRUCK1 in the "Item Number" box and click QUERY to get the results shown below:

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Indented Bill of Materials

Since manufactured items consist of component items — sometimes extending to several layers — the costing issues are more complex than they are for purchased items. New costs are assigned in the same way as they are for purchased items, but the layers of costs and the relationships between them make costing for manufactured items unique.

Note: New costs are assigned to manufactured items in the same way that new costs are assigned to purchased items. You simply select the NEW button on the maintain item costs screen and specify a costing element and cost amount.

All costs have already been assigned to item YTRUCK1 — and to all its component items, so we'll jump right into understanding how these costs fit together.

Let's start by looking at costs associated with the manufactured component item TSUB1, the packaging subassembly for our yellow truck. As we saw in the example, item TSUB1 is the fourth component listed on the bill of materials for the parent item.

Open the "Maintain Item Costs" window for the TSUB1 item. The costs for item TSUB1 are shown below:

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Item Costing for Manufactured Component Item TSUB1

A few key points about manufactured item costing can be made by looking closely at the information displayed in the example:

  1. Three system-defined costing elements are available to manufactured items: "Material," "Direct Labor," and "Overhead."
  2. Material costs for manufactured items are always lower level — which means they are associated with component items, not with the parent item.
  3. Direct labor and overhead costs are this level — meaning, if in use, these costs are associated with the parent item they refer to.

Note: This level costs are associated with the parent item they refer to. Lower level costs are associated with component items.

As you can see, item TSUB1 has material, direct labor, and overhead costs associated with it. The labor and overhead costs are displaying as this level (that is, not lower level), and the material costs, as expected, are shown as lower level costs. Let's look first at how the lower level material costs totaling $7.50 were arrived at. If you recall, item TSUB1 has two component items: TBOX1 and TINSERT1. The following screenshot shows item costing for these two items:

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Costs for Component Items

Items TBOX1 and TINSERT1 are basic purchased items having material costs only. Doing some simple math, we see how the lower level material costs for item TSUB1 were calculated:

  • $7.00 (TBOX1) + $0.25 (TINSERT1) + $0.25 (TINSERT1) = $7.50

Labor and Overhead Costs

So, that explains the material costs for item TSUB1. Now let's look at the item's direct labor costs. We'll explore the overhead costs a little later. Referring back to the example, you may recall that direct labor costs for item TSUB1 total to be $0.13. How was this amount determined? The answer to that question is the subject of our next scenario.

Direct labor costs are tied to the manufacturing process — to the operations required to make an item. So, to calculate labor costs, we need to know how long it takes to make the item and what the labor rates are. To gather this information, we need to look at a series of different screens. We'll begin by examining the bill of operations, or "Routing", for item TSUB1.

To open the "Routing" window, follow these steps:

  • Go to "Products" from the top menu
  • Go to the "Routing" submenu
  • Choose "List"
  • The "Routings" list window will open, for this example, choose TSUB1 and click EDIT
  • The "Routing" window will open for the TSUB1 item:

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Bill of Operations for item TSUB1

As you can see, there is only one operation listed on the bill of operations: the standard operation ASSEMBLY, which is performed in work center ASSEMBLY1. To learn more about it, select the operation and click the EDIT button to open the "Routing Item" window shown below: 

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Operation Detail from TSUB1 Routing

The routing item screen shown in the example contains extensive controls used to define the operation. Looking closely at the screenshot, we see standard operation ASSEMBLY is in use. Standard operations are not required, but in this case, one is being used.

Note: Setup time and run time values will carry over from the standard operation master if a standard operation is in use.

Setup and Run Time Charges

The work center ASSEMBLY1 has been specified from the drop-down menu, and the following setup time and run time values have been entered:

  • Setup time = 6 minutes (charged only once per operation)
  • Run time = 0.6 minutes (charged per each unit of item TSUB1)

It's important to highlight the differences in how setup times and run times are charged. As you might expect, run time is the amount of time required to execute an operation. In our scenario, the operation involves assembling packaging for the yellow toy truck. With a run time of 0.6 minutes and a per value of each unit, that means it takes 0.6 minutes to assemble the packaging for 1 unit of item TSUB1. So, if a work order calls for 10 units of packaging, then run time will be charged 10 times—for a total of 6 minutes.

Setup time is charged differently. Setup time refers to the amount of time needed to prepare the work center to perform the operation. Setup time is charged only once per operation—regardless of the number of units required by a work order. In other words, to use our previous example, if a work order calls for 100 units of packaging, the setup time charge would be 6 minutes.

Note: Setup time is charged only once per operation, regardless of the quantity ordered.

Also, pay attention to how reporting of setup and run time is specified. We see in the example that both times are to be reported as direct labor. This means that all labor required to set up the work center and to run the operation, will appear as direct labor cost for the item.

We referred earlier to standard operation ASSEMBLY. To show the master for that standard operation open the "Standard Operation" window, which can be done by following these steps:

  • Go to "Products" from the top menu
  • Select the "Reports" submenu
  • Select the "Standard Operations" option
  • The "Standard Operations by Work Center" window will open, choose ASSEMBLY1 from the "Work Center" drop-down list
  • Click the QUERY button, ASSEMBLY will appear in the "Standard Operations" box
  • Right-click ASSEMBLY and choose the "Edit Standard Operation" option
  • The "Standard Operation" window will open for the ASSEMBLY standard operation:

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Standard Operation Master

The setup and run time values entered on the standard operation master transfer to the bill of operations if and when the standard operation is specified. As you can see, the same values appear here as we saw in the example. These values may be changed at the operation level, but any permanent changes must be made to the standard operation master itself.

So we now know the amount of time required for the operation, next we need to determine the rate charged for labor. For that information, we must turn to the work center master for the ASSEMBLY work center.

To open the "Work Center" window for ASSEMBLY1, use the following steps:

  • Go to "Products" from the top menu
  • Select "Setup"
  • Select "Work Centers" from the left-side list
  • Choose ASSEMBLY1 from the list of work centers and click the EDIT button
  • The "Work Center" window for the ASSEMBLY1 work center will open:

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Work Center Master

Just as standard operations may be used for bill of operations items, so may standard labor rates be used for work centers. As you can see in the example, the standard labor rate ASSEMBLY is specified for both run and setup labor. To determine what the dollar amount is for this standard rate, we open the standard labor rates master list found in the master information section of the Product module.

The specific details for rate ASSEMBLY can be found on the "Standard Labor Rate" window. You can open this window by using the following steps:

  • From the "Setup" window select "Standard Labor Rates" from the left-side list
  • Choose ASSEMBLY and click the EDIT button
  • The "Standard Labor Rate" window will open:

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Standard Labor Rate

As you can see, the Standard Labor Rate = $14.50. This means that for our assembly operation, $14.50 is the hourly rate charged for setup; it is also the hourly rate charged for run time.

Let's review the information we have gathered so far in our effort to reconstruct how direct labor costs for manufactured component item TSUB1 were arrived at: (To find these times, refer back to the "Standard Operation" window)

  • Setup time = 6 min (0.1 hour)

  • Run time = 60 min (1 hour)

  • Per = 100

  • Setup rate = $14.50/hr

  • Run rate = $14.50/hr

We now have enough information to calculate the direct labor cost. The following formula is the one used:

  • (setup time x setup rate) + (run time x run rate) / per = direct labor cost

This formula works because, if you recall, the "assembly" operation specifies that setup time and run time are both reported as direct labor. All we have to do now is insert the correct values and the equation looks like this:

  • (0.1 hr. x $14.50) + (1 x $14.50) / 100 = $0.1595 each

To verify that $0.1595 is indeed the direct labor cost for item TSUB1, let's look at the "Maintain Item Costs" screen for item TSUB1 again:

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Item Costing for Item TSUB1

Sure enough, the reported direct labor cost for item TSUB1 = $0.1595.As you can see, this amount has been posted to the standard cost for the item.

Finally, we need to determine how overhead cost for item TSUB1 is arrived at. Referring back to the work center master shown in the example, the overhead rate is 10% of the labor or 10% of $0.1595 which is $0.01595. The system automatically rounds this value up to $0.016. 

Referring to the item costing detail shown in the example, we can verify that reported overhead costs for item TSUB1 = $0.016.

Multi-Level Costing

We've now covered the fundamentals of manufactured item costing. Remember, item TSUB1 is a fairly simple manufactured item. Next, we'll look at costing for the more complex parent item YTRUCK1. The same processes are used to determine its costs, but the factors we have to consider are more complicated.

To begin, let's look at the costs for item YTRUCK1, as shown in the following screen:

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Item Costing for Parent Item YTRUCK1

For starters, note the distinctions between the lower level and this level's costs. As we discussed earlier, this level's costs are associated with the parent item they refer to. Lower level costs are associated with component items. For item YTRUCK1, the levels may be broken down as follows:

  • This level: direct labor and overhead costs for parent item YTRUCK1
  • Lower level: direct labor and overhead costs associated with component item TSUB1 — total material costs for all non-manufactured component items.

To better understand how these levels fit together, let's open the costed indented bill of materials display, which is found in the costing section of the Product Module. This is a useful display because it shows not only bill of materials items, but also the costs associated with each.

To open the "Costed Indented Bill of Materials" window, follow these steps:

  • Go to "Products" from the top menu
  • Select the "Costing" submenu
  • Select "Reports," then "Costed BOM," then "Indented"
  • The "Costed Indented Bill of Materials" window will open
  • Enter YTRUCK1 in the item number box and click QUERY:

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Costed Indented Bill of Materials display for item YTRUCK1

As you can see, item YTRUCK1 consists of four component items — one of which, item TSUB1, has two component items of its own.

We've already determined that material costs for manufactured items are always lower level. So, to determine material costs for item YTRUCK1, we must look to the non-manufactured component items: TBODY1, YPAINT1, TWHEEL1, TSUB1, and TINSERT1.

Conveniently, the only costs assigned to these items are material costs. As a result, we simply have to add up the extended costs for these items to determine the overall material cost for item YTRUCK1.

Info: When using the "Costed Indented Bill of Materials" display, be sure to distinguish between unit cost and extended cost. The extended cost represents the unit cost multiplied by the quantity required by the bill of materials.

When we add all these material costs together — TBODY1 ($1.00), YPAINT1 ($0.0080), TWHEEL1 ($0.40), TSUB1 ($7.93), and TINSERT1 ($0.50) — we get an overall material cost for item YTRUCK1 of $9.67. Referring back to the example, we can verify on the maintain item costs screen that this amount is in fact the reported material cost for item YTRUCK1.

Next, we need to examine how direct labor costs for item YTRUCK1 are determined. Open the "Routing" window again; this time for the YTRUCK1 item number:

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Bill of Operations for item YTRUCK1

As shown above, the bill of operations for item YTRUCK1 contains three operations — as compared to the one operation we saw for component item TSUB1. We've already discussed how to locate costing information on both the operation and work center screens. So, rather than repeat that process here, we've extracted the pertinent information into the following table:

Work Center Setup Time Run Time Setup Rate Run Rate Per Overhead %
Paint 6 min. (0.1 hr.)

 

120 min. (2 hr.) $12.50

 

$12.50 100 10%
Assembly 12 min. (0.2 hr.) 30 min. (0.5 hr.) $14.50 $14.50 100 10%
Ship 3 min. (0.05 hr.) 15 min. (0.25 hr.) $12.50 $12.50 100  10%

Since the setup and run rates are not identical, the setup and run times will have to be multiplied individually by the appropriate rate.

To determine the direct labor cost for item YTRUCK1, we follow the same equation we introduced earlier:

  • (setup time x setup rate) + (run time x run rate) / per = direct labor cost 

With this in mind, we can insert the values above, the equation now looks like this:

  • (0.1 + 2.0 x $12.50) + (0.2 + 0.5 x $14.50) + (0.05 + 0.25 x 12.50) / 100 = $0.4015 each

Looking back at the maintain item costs screen shown in the example, we can verify that the direct labor cost for item YTRUCK1 is $0.4015

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To calculate overhead cost, we would again use a formula we introduced earlier:

  • (setup time + run time x overhead rate) / per = overhead cost

With values for each of the operations for item YTRUCK1 inserted, the overhead cost equation would appear as follows:

  • (0.2 + 0.5 x 1.45) + (0.1 + 2.0 x 1.25) + (0.05 + 0.25 x 1.25) / 100 = $0.04015 

As expected, this result corresponds to the overhead costs reported for item YTRUCK1 in the example (keep in mind that the program will round up the answer). We have now accounted for all the costs associated with our manufactured item YTRUCK1.