Setting up and maintaining standard costs

ContentsPrerequisites for standard costs..................................................................................................................3

About costing versions............................................................................................................................4

About costing versions for standard costs...............................................................................................6

About standard cost updates using the one-version versus two-version approach................................6

About costing versions containing item sales prices related to BOM calculations..................................7

About costing versions containing item purchase prices related to BOM calculations...........................8

Standard cost conversion overview.............................................................................................................8

About standard cost conversion..............................................................................................................8

Prerequisites for a standard cost conversion..........................................................................................9

About setting up and running a standard cost conversion....................................................................11

About common issues related to standard cost conversion checks......................................................14

Maintaining standard costs in a nonmanufacturing environment.............................................................15

Prepare to maintain standard costs for purchased items......................................................................15

Initially setting standard costs in a nonmanufacturing environment....................................................16

Updating standard costs in a nonmanufacturing environment.............................................................17

Periodically updating standard costs in a nonmanufacturing environment..........................................18

Preparing to maintain standard costs in a manufacturing environment...................................................19

Prepare to maintain standard costs for purchased components...........................................................20

Prepare to maintain standard costs for manufactured items................................................................20

About cost groups.................................................................................................................................22

About BOM calculation groups..............................................................................................................23

About manufacturing overheads based on material.............................................................................25

Preparing to maintain standard costs in a manufacturing environment with routings.............................25

About cost categories used in production routings...............................................................................25

About costing sheet setup.....................................................................................................................26

About a costing sheet setup example....................................................................................................28

About cost categories used in Production and in Project......................................................................30

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Calculating standard costs for manufactured items..................................................................................30

About information used in BOM calculations with standard costs........................................................31

About amortizing constant costs for a manufactured item...................................................................34

About displaying miscellaneous charges for a manufactured item.......................................................34

About a manufactured item treated as a purchased item.....................................................................35

About BOM calculations for items with missing cost records................................................................36

About BOM calculations........................................................................................................................36

About order-specific BOM calculations.................................................................................................40

About BOM calculations that use the fallback principle........................................................................40

About BOM calculation of a suggested sales price................................................................................40

Maintaining standard costs in a manufacturing environment...................................................................41

Initially setting standard costs in a manufacturing environment...........................................................41

Updating standard costs in a manufacturing environment...................................................................43

Updating standard costs for a new manufactured item........................................................................44

Periodically updating standard costs in a manufacturing environment................................................45

Simulating cost changes by using a costing version for planned costs..................................................47

Analyzing variances related to standard costs.......................................................................................49

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Prerequisites for standard costs

This topic covers the basic steps for using standard costs. Subsequent steps depend on the company's operations, such as a nonmanufacturing environment, a manufacturing environment without routings, and a manufacturing environment with routings.

To set up standard costs, follow these steps:

1. Create an inventory model group for standard costs.

Use the Inventory model groups form to create a new group for standard costs and to assign an inventory model of Standard cost. The identifier for the inventory model group should be meaningful, such as Std Cost. Select the check boxes to indicate that the group should allow financial negative inventory, post physical inventory, and post financial inventory. This standard cost group will be assigned to items.

2. Define ledger accounts that are related to standard cost variances.

Use the Chart of Account Details form to define ledger accounts that are related to standard cost variances. These ledger accounts must be defined before they can be assigned in the Posting form. The ledger accounts can reflect item groups and cost groups.

3. Assign ledger accounts to inventory postings that are related to standard cost variances.

Use the Posting form to assign the ledger accounts that are related to standard cost variances. You can choose whether to specify a variance's ledger account by item (or item group) and by cost group (or cost group type), or to specify that the ledger account applies to all items and all cost groups. These choices correspond to cost relations for tables, groups, and all.

Use the Transaction combinations form to enable the use of cost relations (for tables, groups, and all) before you define the inventory posting rules.

4. Define inventory parameters that are related to standard costs.

Use the Inventory parameters form to define cost control parameters (on the Bills of materials tab) to define two parameters that are related to standard costs.

o Use the Cost breakdown field to select No or Sub ledger. The selection of Sub ledger is termed an active cost breakdown. An active cost breakdown is critical for calculating, retaining and viewing cost group segmentation across a multilevel product structure for standard cost items. When the cost breakdown is active, you can report and analyze inventory, work in process (WIP), and cost of goods sold

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(COGS) per cost group in a single level, multilevel or total format. An active cost breakdown means that activating a manufactured item's cost will result in storing the cost group segmentation within the item's cost record.

The selection of none for the Cost breakdown field means that cost group segmentation will not be maintained for standard cost items. That is, a manufactured item's standard cost will be calculated and maintained as a single amount without cost group segmentation, and the cost contributions of manufactured components will be aggregated into the single amount.

o Use the Variances to Standard field to select summarized or per cost group. The selection of per cost group enables you to identify purchase price variances and production variances by cost group, and also identify the four types of production variances (the lot size, quantity, price and substitution variances). The selection of summarized means that you cannot identify variances by cost group, and you cannot identify the four types of production variances. You can only view a summarized production variance.

The policy about variance to standard works independently of the cost breakdown policy. That is, you can select a cost breakdown policy of none, and select variances per cost group, so that production variances by cost group will still be captured.

5. Create costing versions for standard costs.

Use the Costing version setup form to create one or more costing versions for standard costs. Each costing version must be designated with a costing type of standard costs and allow content to include cost data.

6. Prepare an existing Microsoft Dynamics AX customer to use standard costs.

Customers who are using an earlier version of Microsoft Dynamics AX must use the Multisite Activation Wizard, because the standard cost functionality requires multisite functionality. Standard costs are site-specific. The wizard identifies the steps that must be completed in order to enable multisite functionality.

Customers who want to change their existing items to a standard cost inventory model must use the Standard cost conversions form.

About costing versions

A costing version can serve one or more purposes based on the data that is contained within the costing version. The primary purpose of a costing version is to contain cost records about items, cost categories, and indirect cost calculation formulas. A costing version can contain a set of standard cost records or a set of planned cost records that are based on the costing type that is assigned to the costing version.

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Standard costs - A costing version can support a standard cost inventory model for items, where the costing version contains a set of standard cost records about items and manufacturing processes. Cost data about manufacturing processes is expressed in terms of the cost categories for routing operations and the calculation formulas for manufacturing overheads.

Planned costs - A costing version can contain a set of planned cost records about items and manufacturing processes. A costing version with planned costs is often used to support cost calculation simulations, such as simulating the affect of cost changes to purchased material or manufacturing processes on the calculated costs of manufactured items. The item cost records for planned costs can also be used to support an actual cost inventory model by providing the initial values for item costs, including the calculation of planned costs for manufactured items.

Maintenance of cost records within a costing version involves entering costs for purchased items and for items that are transferred between sites. Additional data maintenance for manufacturers involves entering costs for cost categories (associated with routing operations), entering calculation formulas for the indirect costs reflecting manufacturing overheads, and calculating costs for manufactured items.

The item cost data within a costing version will consist of one or more cost records for each item. An item cost record is initially entered with a pending status and an intended effective date. Activating the item cost record updates the status (to active) and the effective date (to the activation date). Different item cost records may reflect different sites (when you use multisite functionality), effective dates, or status. When calculating costs for manufactured items for a future date, the BOM calculation will use cost records with the relevant effective date whether status is pending or active. An item's current active cost record will be used for estimating production order costs and valuing inventory transactions under a standard costing inventory model. The maintenance of cost records for cost categories and indirect cost calculation formulas is similar to the maintenance of item cost records.

Two blocking policies for a costing version determine whether pending costs can be maintained and whether the pending cost can be activated. Use the blocking policies to permit data maintenance, and then to prevent data maintenance for cost records within a costing version.

A costing version can also contain data about item sales prices or purchase prices for BOM calculation purposes.

Item sales prices for BOM calculation purposes - A BOM calculation can calculate a sales price for manufactured items, and a BOM calculation can generate an associated sales price record within the costing version.

Item purchase prices for BOM calculation purposes - A BOM calculation with planned costs can be based on item purchase price records within the costing version, rather than item cost records. The item purchase price records must be manually entered.

The item sales price records and purchase price records are only used for BOM calculation purposes.

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About costing versions for standard costs

Costing versions for standard costs must be designated with a type of standard cost and allow content to include cost data. The costing version can contain a set of standard cost records about items, cost categories for routing operations, and indirect cost calculation formulas.

Several restrictions apply to a costing version for standard costs. The restrictions ensure adherence to standard costing principles.

Miscellaneous charges must be included in an item's cost. The miscellaneous charges for a manufactured item represent the amortized constant costs within bill of material (BOM) and route information, so they must be included within the unit cost. The miscellaneous charges for a purchased item will also be included in its unit cost.

Calculation of standard costs for manufactured items must be based on cost records within a costing version for standard costs. Alternative sources of cost data (defined by the BOM calculation group) can only be used with a costing version for planned costs, such as purchase price trade agreements for purchased items.

BOM calculations must be performed with a single level explosion mode.

The item cost data for standard costs can be copied to another costing version that contains standard costs or planned costs. However, item cost data for planned costs cannot be copied to a cost version that contains standard costs, because the restrictions that are listed earlier in this topic would not apply to planned costs.

About standard cost updates using the one-version versus two-version approach

Updates to standard cost data can be managed by using two different approaches: the one-version approach and the two-version approach. The one-version approach employs one costing version that contains all cost records, consisting of the initially defined costs and all cost updates. The two-version approach employs one costing version with cost records that reflect the initially defined costs and a second costing version with cost records that reflect incremental changes for cost updates. A primary advantage of the two-version approach is the clear delineation and tracking of cost updates in a separate costing version, without affecting the original costing version. The concept of a two-version approach can be used to identify multiple incremental updates, where each incremental update has a separate costing version that contains the incremental cost records.

The difference in approaches can be illustrated for updating standard costs in a manufacturing environment, such as updates that reflect new items or error corrections. As a starting point, we'll assume that a single costing version represents the standard costs for the current year with an identifier of 2008-STD. It contains the current active costs for all items and all routing-related cost categories and overhead calculation formulas that were known at the start of the year 2008. This costing version will be termed the original cost version.

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One-version approach to cost data updates - The one-version approach means that the original costing version 2008-STD will contain all cost records. The cost updates will be entered into the original costing version as cost records with a pending status. For example, the pending costs could be manually entered for new purchased items, or they can be calculated for a manufactured item to reflect corrections. The BOM calculations with the one-version approach do not require a fallback, because all active costs are contained within the costing version. After activating the pending costs, the original costing version 2008-STD will once again contain all of the current active costs.

Two-version approach to cost data updates - The two-version approach requires an additional cost version that will only contain the updates; we will assume the identifier will be 2008-STD-CHANGES. The cost updates will be entered into the additional costing version as cost records with a pending status. With the two-version approach, the BOM calculations (of pending costs for manufactured items) require a fallback principle because the additional costing version contains only a subset of cost data. The fallback can be expressed as the active costs, or as the specified costing version 2008-STD, because both identify the source of cost data when it does not exist in 2008-STD-CHANGES. After activating the pending costs, the additional costing version 2008-STD-CHANGES will contain the current active costs that reflect the updates, whereas the original costing version 2008-STD will be untouched.

The two-version approach means that blocking policies for the original costing version should prevent updates. The additional costing version should have exactly the same policies as the original costing version, with the exception of the specified from date and the selective use of blocking policies to allow updates. The specified from-date should be updated with each batch of changes to reflect the scheduled activation date.

The preceding illustration employed one additional costing version for managing updates throughout the year 2008. More than one additional costing version could be used, such as a separate version for each batch of updates. In this case, the fallback must be expressed as the active costs, because they would be spread over multiple costing versions.

About costing versions containing item sales prices related to BOM calculations

A costing version can contain content about item sales price records. The primary purpose of allowing sales price content is to retain a manufactured item's calculated sales price, which can be analyzed in terms of cost and sales price contributions of components, routing operations, and overheads. A secondary purpose would be to define the sales price records for component items, which can then be used to calculate the sales price of manufactured items.

To support this secondary purpose, you must define the sales price model embedded in a BOM calculation group, assign the BOM calculation group to purchased items, and select the cost price model (of BOM calculation group) when you perform BOM calculations with planned costs.

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Beyond these two purposes, the item sales price records are only used for reference information, whether they are manually entered or calculated. Activating an item's sales price record can update the item's base sales price, but the base sales price is not site-specific, and it can be manually overridden. The item's base sales price acts as a default sales price on sales orders and sales quotations.

About costing versions containing item purchase prices related to BOM calculations

A costing version can contain content about item purchase price records. The primary purpose of allowing purchase price content is to define purchase price records for component items, which can then be used to calculate the costs of manufactured items. To support this purpose, you must define a BOM calculation group that contains a cost price model of item purchase price, assign the BOM calculation group to purchased items, and then use a cost price model of BOM calculation group when you perform BOM calculations with planned costs to calculate the sales price of manufactured items.

Beyond this purpose, the item purchase price records are only used for reference information. Changing the status of an item's purchase price record from pending to active can update the item's base purchase price, but the base purchase price is not site-specific, and it can be manually overridden. The item's base purchase price acts as a default purchase price on purchase orders.

Standard cost conversion overview

About standard cost conversion

A standard cost conversion refers to changing an item's inventory valuation method from an actual costing approach to a standard costing approach. Use the Standard cost conversions form to convert the inventory model for a batch of selected items from an actual costing basis to standard cost. The conversion process involves performing a prerequisite inventory close, performing several steps during a transition period (defined by a transition start date and a planned conversion date), and performing the conversion and an associated inventory close.

Inventory close before the transition period - An inventory close represents a prerequisite step, because it settles an item's open transactions under the old valuation method. You can enter and post back-dated transactions, such as invoices, during the transition period so that you can close the prior period. The inventory close date must be one day before the transition start date, thereby ensuring a clean break with the old inventory valuation method.

Conversion steps during the transition period - Use the Standard cost conversions form to create a conversion record that also contains a user-defined identifier for a new costing version. You identify the items that require conversion and enter the item's pending

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standard costs (within the newly created costing version). You perform a check of the selected items to identify issues that would prevent conversion, and then resolve the issues before performing another check. After the items have successfully passed the checks, you change the status (of the conversion record) to Ready. On the planned conversion date, perform the conversion and optionally include an inventory close.

An item's inventory movements during the transition period are posted and valued according to the old inventory model, and they are revalued to standard cost after successfully performing the conversion.

Inventory close before the conversion - The inventory close can be included as part of performing the conversion on the planned conversion date, or it can be performed as a separate step beforehand.

After successful completion of the conversion process, each item will have a standard cost inventory model and the item's standard costs will be enabled. Subsequent inventory transactions will be valued at the item's standard cost. In addition, the system converts the item's physical inventory transactions for receipts and issues to standard cost as per the conversion date. The system also converts the item's financial on-hand inventory to standard costs, and it posts the value difference as an inventory revaluation.

Any transactions after the conversion are valued at the item's standard cost. You cannot enter back-dated transactions before the conversion date, because an inventory close must be performed one day prior to the conversion date. That is, a conversion can only be performed when an inventory close has been performed one day earlier. This inventory close cannot be cancelled.

Prerequisites for a standard cost conversion

As prerequisites for running a standard cost conversion, perform the following steps.

1. Enable multisite functionality, if not already enabled.

Use the Error handling to enabled the multisite functionality because it is required to support standard cost functionality.

2. Define an inventory model group for standard costs.

Use the Inventory model groups form to create an inventory model group with a standard cost inventory model. When setting up a standard cost conversion, you will assign this inventory model group to the items that are being converted.

3. Assign a cost group to each item. o The cost group that is assigned to a purchased item can act as the basis for

assigning ledger accounts that are related to standard costs, such as assigning ledger accounts for purchase price variances. In a manufacturing environment, the

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cost group that is assigned to purchased components also provides cost segmentation in the calculated costs of a manufactured item.

o The cost group that is assigned to a manufactured item can act as the basis for assigning ledger accounts that are related to standard costs, such as assigning ledger accounts for production variances.

4. Assign a standard order quantity to a manufactured item when it has constant costs.

The standard order quantity for a manufactured item acts as an accounting lot size for amortizing (or prorating) constant costs, such as setup times in routing operations or a constant component quantity in a bill of material (BOM).

5. Assign general ledger accounts that are related to standard costs, especially the revaluation variance.

Use the Posting form to assign general ledger accounts that are related to standard costs. As a minimum for the standard cost conversion process, you must assign the account for the revaluation variance for all items and all cost groups.

Use the Chart of accounts form to define the general ledger accounts that will be needed for standard costs.

Use the Transaction combinations form to enable the use of cost relations (for tables, groups, and all) before you define the inventory posting rules.

6. Define the inventory parameters that are related to standard costs.

Use the Number sequences tab on the Inventory parameters form to assign a number sequence to revaluation vouchers. A revaluation voucher is generated when the standard cost conversion results in a change of an item's inventory value.

Use the Inventory parameters form to define cost control parameters (on the Bills of materials tab) to define two parameters that are related to standard costs.

o Use the Cost breakdown field to select No or Sub ledger. The selection of Sub ledger is termed an active cost breakdown. An active cost breakdown is critical for calculating, retaining, and viewing cost group segmentation across a multilevel product structure for standard cost items. When the cost breakdown is active, you can report and analyze inventory, work in process (WIP), and cost of goods sold (COGS) per cost group in a single level, multilevel, or total format. An active cost breakdown means that enabling a manufactured item's cost will result in storing the cost group segmentation within the item's cost record.

The selection of none for the Cost breakdown field means that cost group segmentation will not be maintained for standard cost items. That is, a manufactured item's standard cost will be calculated and maintained as a single

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amount without cost group segmentation, and the cost contributions of manufactured components will be aggregated into the single amount.

o Use the Variances to Standard field to select summarized or per cost group. The selection of per cost group enables you to identify purchase price variances and production variances by cost group, and also enables you to identify the four types of production variances (the lot size, quantity, price, and substitution variances). The selection of summarized means that you cannot identify variances by cost group, and you cannot identify the four types of production variances. You can only view a summarized production variance.

The policy about variance to standard works independently of the cost breakdown policy. That is, you can select a cost breakdown policy of none, and select variances per cost group, so that production variances by cost group will still be captured.

About setting up and running a standard cost conversion

Perform the following tasks to set up and run a standard cost conversion. It is assumed that you have already completed the prerequisites for a standard cost conversion.

1. Define a standard cost conversion record and the associated costing version.

Use the Standard cost conversions form to create a conversion record. A new conversion record can only be created when existing conversion records have been completed.

The duration of the planned transition period is defined by the transition start date and the planned conversion date. A planned transition period can be as short as a single day. The intended purpose of a planned transition period is to allow sufficient time to perform the multiple steps within the conversion process. An inventory close must be performed one day prior to the transition start date, so that settlements are completed prior to starting the conversion process. You can change the transition start date so that it reflects a date occurring one day after an existing inventory close, or perform an inventory close, so that the dates are properly aligned.

When entering a conversion record, you will also enter a user-defined identifier for a new costing version that will contain the standard costs for converted items. Saving the conversion record information will automatically create the costing version.

2. Review and edit the newly created costing version for the conversion record.

The newly created costing version is dedicated to the conversion record, as reflected in a costing type of conversion. The dedicated costing version acts like a costing version for standard costs, and it will contain the item cost records for items that are associated with the conversion record. The dedicated costing version for a conversion record has the following characteristics, which should be reviewed and edited as necessary.

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o Version identifier - The identifier reflects the information that is entered on the conversion record for the costing version ID.

o Version name - The name is initially blank, and you can optionally enter a name. o Costing type - Standard cost. o Block changes - No. You can enter cost records into the costing version until you

change the status of the conversion record to Ready. A Ready status means that the selected items have been checked, and that changes to cost records should not be allowed.

o Activation - No. You cannot manually activate a pending cost record within the dedicated costing version. Activation occurs when you successfully perform the conversion.

o From date - The from date reflects the planned conversion date that is entered on the conversion record.

o Site - Blank. A blank allows cost records to be entered for any site. o Allowed contents - Only cost records can be entered. o Fallback principle - Blank. Enter a fallback principle of Active when you require

cost information that has been activated in other costing versions. For example, the cost information about components, cost categories, and indirect costs may be required to calculate the costs of manufactured items.

o Fall back version - Blank.

Item cost information within the dedicated costing version can only be maintained from the Standard cost conversions form. You cannot use the Costing version setup form or the Costing version maintenance form to enter or calculate costs for the dedicated costing version during the conversion process. These forms can be used to maintain the dedicated costing version after successfully performing the conversion.

3. Identify the items being converted to standard cost.

Use the Standard cost conversions form to identify the individual items that you want to convert to standard cost. You can add multiple items by using the Add items to standard cost conversion form. As a general guideline, you should include all manufactured items in a single conversion record so that costs will be correctly calculated.

4. Enter or calculate the pending standard cost for each item that is being converted.

Use the Price form to enter pending standard costs within the dedicated costing version for purchased items and transfer items. Cost records are site-specific, and an item's pending costs must be entered for every site.

Use the Price form to calculate pending standard costs for manufactured items. A manufactured item's pending costs should be calculated for every manufacturing site, or manually entered when the site represents a transfer site.

Some items may have item dimension of color, size, or configuration. In the Standard cost conversions form, the check box labeled Use combination cost price displays the

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item policy about entering a standard cost for every combination of item dimensions. When this check box is cleared, you only need to enter a pending cost for the item.

5. Check and resolve any issues for the items that are being converted.

Use the Standard cost conversion checks report to identify issues for the items that are being converted. When an item does not have an issue, its status within the conversion record is changed to Checked. When an item has an issue, you must resolve the issue and then run the report again until its status is changed to Checked. When you cannot resolve an item's issues in a timely manner, you can optionally delete the item from the conversion record and convert the item at a future time.

6. Change the status of the conversion record to Ready.

Changing the status of the conversion record to Ready performs a final check before running a standard cost conversion. The status will only change to Ready when the following conditions have been met:

o Each item within the conversion record has a status of Checked. o An inventory close must have been performed on a date that is one day prior to

the transition start date. You can change the transition start date, or perform an inventory close, to align the dates correctly.

7. Perform a backup of the database prior to conversion.

The backup allows you to restore the database if errors are encountered in the conversion process.

8. Perform the conversion process when the conversion record has a Ready status.

The conversion process requires that an inventory close be performed on a date that is one day prior to the planned conversion date. This step ensures that back-dated transactions cannot be entered within the transition period. If an inventory close has not yet been performed, the system asks if you want to perform one as part of the conversion process.

The conversion process proceeds with one item at a time, starting with the items at the lowest level in a product structure (based on the item's low-level code). After successful conversion of an item, the item's status within the conversion record changes to Converted. If the conversion process is interrupted, items that have not been successfully converted will still have a status of Checked.

Successful completion of the conversion process has the following impacts.

o The status of the conversion record changes from Ready to Completed, and the status of each selected item changes from Checked to Converted.

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o The inventory model group for converted items has been changed so that it reflects a new group with a standard cost inventory model.

o The standard costs for converted items have been enabled within the dedicated costing version.

o The costing type of the costing version changes from conversion to standard cost, and the costing version now acts just like any other costing version for standard costs.

9. Validate and reconcile the inventory values for the converted items. o Analyze revaluation variances. Use the Variance analysis statement report to view

inventory revaluation variances for the converted items. You can also use the Standard cost transactions form to view the inventory revaluation transactions for the converted items with inventory.

o Analyze inventory value prior to the transition start date. Use the Inventory value by inventory dimension report to view inventory values for the converted items, with an As on date that reflects one day prior to the transition start date.

o Analyze inventory value prior to the conversion date. Use the Inventory value by inventory dimension report to view inventory values for the converted items, with an As on date that reflects one day prior to the conversion date.

o Analyze inventory value at the conversion date. Use the Type of the amount report to view inventory value as of the conversion date. Use the report option for from and to dates, so that they both match the conversion date. The report selection criteria should reflect the converted items.

o Analyze backdated inventory movements. Use the Type of the amount report to view backdated inventory movements that were entered after the conversion. Use the report option for from and to dates, so that they correspond to the transition start date and the conversion date (minus one day). The report selection criteria should reflect the converted items. The report displays inventory movements made at standard cost during the transition period.

About common issues related to standard cost conversion checks

Several issues are commonly identified by the Standard cost conversion checks report that would prevent converting items to a standard cost inventory model. The report applies to a standard cost conversion record and the items associated with the conversion record. The report displays the issues associated with each item. The issues need to be resolved in order to convert the item. The common issues can be grouped into four categories about items, model groups, standard costs, and other. This topic describes common issues that are identified by the Standard cost conversion checks report.

Common issues related to an item

A service item cannot have a standard cost inventory model. Delete the item from the conversion record.

The posting profile for the item does not have a valid cost revaluation account. Use the Posting form to assign a general ledger account number to the revaluation account.

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The item already has a standard cost inventory model, and it does not require a conversion. Delete the item from the conversion record.

Common issues related to the model group assigned to an item

A standard cost inventory model is not assigned to the item. Create an inventory model group with a standard cost inventory model, and assign it to the item.

The negative inventory policy differs between the item's old inventory model group and the new inventory model group. Change the negative inventory policy in one group so that it matches the policy in the other group.

Common issues related to the standard costs assigned to an item

The item's pending standard costs have not been entered for each site. Enter a standard cost for each site.

The item's pending standard costs have not been entered for each combination of inventory or item dimensions. Enter a standard cost for each combination.

The item's pending standard cost has a from date that differs from the conversion date. Change the from date on the item cost record.

Common issues related to other aspects of the standard cost conversion process

An item has an open production order at a status of Release, Start, or Report as finished. Complete the open production order so that the status is End, or reset the status so that it is Schedule, Estimate, or Create.

An item's inventory transactions cannot exist on or after the planned conversion date for the conversion record. Change the planned conversion date so that it occurs after the dates of existing transactions.

The item has inventory transactions that are not yet posted. Post the inventory transactions.

An inventory close has not been performed one day prior to the planned conversion date. You can perform the inventory close as part of performing the conversion process.

Maintaining standard costs in a nonmanufacturing environment

Nonmanufacturing and distribution environments involve maintaining standard costs for purchased items. The guidelines for maintaining the items' standard costs consist of several scenarios, such as initially setting standard costs, updating standard costs through the frozen period, and periodically updating standard costs. The guidelines assume completion of preparation steps to maintain costs for purchased items.

Prepare to maintain standard costs for purchased items

To maintain purchased items' costs, perform the following steps:

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1. Assign an inventory model group to each purchased item.

The inventory model group determines whether the item's costs reflect a standard cost or an actual cost inventory model.

2. Assign an item group to each purchased item.

The item group contains ledger accounts that apply to the purchased item. The ledger accounts for an item with a standard cost inventory model include the purchase price variance, the inventory cost revaluation, and the cost change variance.

3. Assign a cost group to each purchased item.

The cost group can act as the basis for assigning ledger accounts, such as assigning ledger accounts for purchase price variances.

4. Assign the inventory unit of measure to each item.

The item's costs are always expressed in the item's inventory unit of measure.

The purchased items' costs can be maintained after you complete the preparation steps. Additional preparation steps are necessary when a purchased item will be a component in a manufacturing environment.

Initially setting standard costs in a nonmanufacturing environment

Nonmanufacturing and distribution environments involve maintaining standard costs for purchased items, which includes initially setting standard costs. These guidelines assume the use of a single costing version when initially setting standard costs. This costing version will contain standard costs for the current period. Pending cost records for all items will be entered in this costing version, and the status will be changed to active.

1. Define the costing version by using the Costing version setup form. Guidelines for this costing version include:

o Assign a costing type of standard costs. o Assign a meaningful identifier for the costing version, such as 2008-

STANDARD. o Ensure that the content includes cost records. o Allow the entry of cost records. Do not block the entry of pending costs. o Allow the entry of cost records for all sites. Assigning a site will limit the entry of

cost records to the specified site. o Optionally prevent the ability to change status of item cost records from pending

to active. The status change will be allowed after the pending costs have been completely and accurately defined.

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o Optionally define a from-date. As a general guideline, use a future date that represents the planned cutover date or the first day in the frozen period when you prepare cost data beforehand.

o Indicate a fallback principle of none, because the fallback principle applies to BOM calculations in manufacturing environments.

2. Enter item cost records within the costing version by using the Item price form. A separate cost record must be entered for each site that purchases or stocks the item. The cost should reflect the standard costs for the period. If a cost was entered incorrectly, change the pending cost for the item. A pending cost can also be deleted.

3. Verify item cost records within the costing version for completeness and accuracy. Use the Item prices report to review a list of item cost records.

4. Use the Costing version setup form to change the blocking flag to allow the status change of pending cost records.

5. Change the status to active for all pending item cost records within the costing version on the cutover date. Use the Activate prices form to change the status for multiple cost records. You can open the Activate prices form from the Costing versions form. The status of individual cost records can be changed by using the Item price form and by clicking the Activate button.

6. Use the Costing version setup form to change the blocking flags within the second costing version to prevent further data maintenance.

Repeat the steps in this procedure for separate costing versions when they contain site-specific costs for a multisite operation.

Updating standard costs in a nonmanufacturing environment

Nonmanufacturing and distribution environments involve maintaining standard costs for purchased items, which includes the scenario for updating standard costs throughout the frozen period. Updates may reflect new items, corrections, or cost changes. The guidelines assume the use of a two-version approach to standard cost updates, where one costing version contains the initially defined standard costs for the frozen period, and the second costing version contains the incremental updates. Each update will be entered as a cost record within the second costing version, and ultimately activated. An alternative solution employs a one-version approach by using the initially defined set of standard costs.

The two-version approach requires the definition of a second costing version, where the guidelines for defining this costing version include:

Assign a costing type of standard costs. Assign a significant identifier for the costing version that communicates the contents,

such as 2008-UPDATES. Ensure that content includes cost records. Allow the entry of cost records for all sites. Entering a site will limit the entry of cost

records to the specified site.

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Indicate a fallback principle of none. The fallback principle only applies to cost calculations for manufactured items.

To correct, adjust, or update standard costs for new items, complete the following steps:

1. Use the Costing version setup form to allow the entry of cost data into the second costing version. Optionally prevent the activation of pending costs, where the activation will be allowed after pending costs have been completely and accurately defined. Optionally enter a from-date. As a general guideline, use a date that represents when you intend to activate the incremental updates. Alternatively, indicate a blank from-date as a policy in the costing version, and then enter the from-date when you enter each cost record.

2. Enter updates as item cost records within the second costing version by using the Item priceform.

3. Verify item cost records within the second costing version by using the Item prices report. Verify the completeness and accuracy of item cost records.

4. Change the blocking flag to allow the activation of pending cost records within the second costing version by using the Costing version setup form.

5. Activate all pending item cost records within the second costing version by using the Activate prices form, which you can access from the Costing versions form. The pending cost records for individual items can also be activated by using the Item price form and by clicking the Activate button.

6. Use the Costing version setup form to change the blocking flags within the second costing version to prevent further data maintenance. The blocking policies will prevent the entry of new pending costs and the activation of pending costs.

Periodically updating standard costs in a nonmanufacturing environment

Nonmanufacturing and distribution environments involve maintaining standard costs for purchased items, which includes periodically updating standard costs. Periodic updates reflect a new frozen period and the need to update standard costs for all items. These guidelines assume the use of a separate costing version to contain the next period's standard costs. Pending cost records for all items will be entered in this costing version.

1. Define the costing version for the next period by using the Costing versions form. Guidelines for this costing version include:

o Assign a costing type of standard costs. o Assign a meaningful identifier to the next period's costing version, such as 2009-

STANDARD (assuming that 2009 is the next frozen period). o Ensure that content includes cost records. o Allow the entry of cost records. Do not block the entry of pending costs. o Allow the entry of cost records for all sites. Entering a site will limit the entry of

cost records to the specified site. o Prevent the activation of pending costs. The status will be changed to active after

pending costs have been completely and accurately defined. o Enter a from-date. As a general guideline, use a future date that represents the first

day in the next frozen period.

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o Indicate a fallback principle of none. 2. Analyze the need to change standard costs. Use the Standard cost variance analysis report

to analyze historical purchase price variances and to suggest a new standard cost. 3. Enter item cost records within the next period's costing version by using the Item price

form. A separate cost record must be entered for each site that purchases or stocks the item. The cost should reflect the standard costs for the period. If a cost was entered incorrectly, change the pending cost for the item. A pending cost can also be deleted.

As an alternative, you can automatically enter costs by copying cost records, which can then be maintained by using the Item price form. Use the Copy costing version form to copy active item cost records (for standard costs) into the next period's costing version. Employ the option to copy active costs when you have used a two-version approach to cost data updates for the current period, because active cost records will be located in more than one costing version.

Item cost records can be selectively copied, and the copy process can be performed multiple times, to populate the next period's costing version. Existing costs can be selectively changed by a factor or amount, and existing miscellaneous charges can also be changed by a factor or amount.

4. Review item cost records within the costing version by using the Item prices report. Verify the completeness and accuracy of item cost records.

5. Change the blocking flag (for the next period's costing version) to allow activation of pending cost records by using the Costing version setup form.

6. Activate all pending item cost records within the next period's costing version on the first day of the next period, but not beforehand. Use the Activate prices form, which you can access from the Costing version setup form. The pending cost records for individual items can also be activated by using the Item price form and by clicking the Activate button.

7. Use the Costing version setup form to set the blocking flags within the next period's costing version to prevent further data maintenance.

Repeat the steps in this procedure each time that you need to enter and activate costs for a new period.

Preparing to maintain standard costs in a manufacturing environment

Information about purchased and manufactured items must be prepared before you maintain the items' standard costs in a manufacturing environment. For example, the cost groups that are assigned to purchased components provide the basis for segmenting the calculated costs of manufactured items, and the BOM calculation group that is assigned to items defines the applicable warning messages that are generated by BOM calculations.

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A manufacturing environment that uses routing information requires additional preparation steps in order to maintain standard costs. For example, additional information must be defined for cost categories that are assigned to work centers and routing operations.

Prepare to maintain standard costs for purchased components

The preparation steps for maintaining purchased item costs involve additional considerations when the purchased items are used as components in a bill of material (BOM). Policies that are assigned to these purchased items affect the cost calculations for their parent manufactured items. To prepare for maintaining purchased item costs, perform the following steps:

1. Assign an inventory model group to the purchased item. The inventory model group determines whether the item's costs reflect a standard cost or an actual cost inventory model.

2. Assign an item group to the purchased item. The item group contains ledger accounts that apply to the purchased item. The ledger accounts for an item with a standard cost inventory model include the purchase price variance, the inventory cost revaluation, and the cost change variance.

3. Assign the inventory unit of measure to the item. The item's costs are always expressed in the item's inventory unit of measure.

4. Assign a cost group to the purchased item. The item's cost group provides cost segmentation in the calculated costs of a parent manufactured item. The item's cost group can also be used to assign ledger accounts related to standard cost variances.

The item's cost group serves an additional purpose when BOM calculations are used to calculate a suggested sales price based on a cost-plus markup approach, because profit-setting percentages can be assigned to the cost group.

5. Assign a BOM calculation group to the purchased item. The item's BOM calculation group defines applicable warning conditions so that a BOM calculation will generate warning messages about possible sources of calculation errors. For example, a warning message can identify a zero cost or zero component quantity for the purchased item.

The BOM calculation group supports additional purposes, such as indicating when to treat a manufactured item as a purchased item, and the source of cost contribution data for the purchased item in BOM calculations with planned costs.

Prepare to maintain standard costs for manufactured items

The preparation steps for maintaining costs for manufactured item are slightly different than for purchased items. Policies assigned to manufactured items can affect the cost calculations for their parent manufactured items. To prepare for maintaining costs for manufactured items, perform the following steps:

1. Assign an inventory model group to the manufactured item.

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The inventory model group identifies the use of standard costs.

2. Assign an item group to the manufactured item.

The item group contains ledger accounts that apply to the manufactured item. The ledger accounts for a manufactured item with a standard cost inventory model include several production variances, the cost change variance, and inventory cost revaluation.

3. Assign the inventory unit of measure to the item.

The item's costs are always expressed in the item's inventory unit of measure.

4. Do not assign a cost group to the manufactured item. There is no need to assign a cost group to a manufactured item, unless it will be treated as a purchased item.

5. Assign a BOM calculation group to the manufactured item.

The item's BOM calculation group defines applicable warning conditions so that performing a BOM calculation will generate warning messages about possible sources of calculation errors. For example, a warning message can identify when an active BOM or route does not exist.

The BOM calculation group contains a stop explosion policy that indicates when to treat a manufactured item as a purchased item.

6. Assign a standard order quantity to the manufactured item when it has constant costs.

The standard order quantity acts as an accounting lot size for amortizing constant costs, such as setup times in routing operations or a constant component quantity in the bill of material.

7. Define the BOM for the manufactured item. One or more BOM versions can be defined for the manufactured item. Verify that the versions that you want have been marked as approved and active and that they have the effective dates that you want. The BOM version can be company-wide or site-specific.

8. Define the routing for the manufactured item. One or more route versions can be defined for the manufactured item. Verify that the versions that you want have been marked as approved and active and that they have the effective dates that you want. The route version must be site-specific.

The use of routing information for costing purposes will require additional preparation steps. For example, the cost categories that are assigned to routing operations must be correct and complete.

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About cost groups

Cost groups provide the basis for segmenting and analyzing cost contributions in a manufactured item's calculated cost, such as the cost contributions for material, labor, and overhead. Cost group segmentation has several synonyms within manufacturing environments, such as cost breakdown, cost decomposition, or cost classification.

Cost group segmentation can serve several purposes, including the following:

Segment costs for different types of material, such as ingredients and packaging material for a canned goods product, based on the cost groups that are assigned to items.

Segment costs for different types of work centers, such as different types of labor or machines, based on the cost groups that are assigned to cost categories related to work centers and routing operations.

Segment costs for setup and run time in routing operations, based on the cost groups that are assigned to cost categories related to the routing operations.

Segment costs for different types of overheads, such as labor-related and machine-related overheads, based on cost groups that are assigned to indirect costs in the costing sheet setup.

Act as the basis for calculating various manufacturing overheads in the costing sheet setup, such as different overheads related to routing information about work centers or about setup and run time. Manufacturing overheads can also be related to cost contributions of component material, reflecting a lean manufacturing philosophy that eliminates the need for routing information.

Cost group segmentation applies to a manufactured item's calculated cost whether it was based on standard costs or planned costs. The Summary form displays this segmentation by cost group or by level or by both.

The ability to retain cost group segmentation across multiple levels in a product structure only applies to manufactured items that employ a standard cost inventory model. The term splitting refers to this ability to retain cost group segmentation across multiple levels. Without splitting, the cost for a manufactured component is treated as a material cost contribution. The inventory parameter for cost breakdown by subledger indicates that cost group segmentation will be retained across multiple levels in standard cost calculations, whereas a policy of none means that cost group segmentation only applies to a single level calculation. The Cost rollup by cost group form, for example, displays the cost group segmentation across multiple levels for standard cost items.

Cost group segmentation can also apply to variances for a standard cost item. A second inventory parameter defines whether variances will be identified by cost group, or merely summarized.

A cost group can be assigned a cost group type and a behavior for supplemental segmentation purposes.

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Cost group type - Each cost group must be assigned a cost group type, which designates the cost group as pertaining to direct material, direct manufacturing, indirect or undefined. A cost group designated as direct material can be assigned to items. A direct manufacturing cost group can be assigned to cost categories. An indirect cost group can be assigned to indirect costs for surcharges or rates. A cost group designated as undefined can be assigned to items, cost categories or indirect costs.

The assignment of a cost group type serves several purposes - First, it constrains the ability to assign a cost group and to view a drop-down list of applicable cost groups. Second, it provides supplemental segmentation for reporting purposes. Third, it can be used to assign ledger accounts for variances.

Behavior - Each cost group can optionally be assigned a behavior, which designates the cost group as pertaining to fixed costs or variable costs. A cost group with a null value for behavior is treated as a variable cost. The assignment of a behavior only serves a reporting purpose. For example, costs can be displayed with segmentation of fixed and variable costs on the costing sheet, and in the Cost rollup by cost group form.

The optional assignment of profit-setting percentages to each cost group enables the BOM calculation to calculate a suggested sales price based on a cost-plus-markup approach.

About BOM calculation groups

One purpose of assigning a BOM calculation group to items is to define applicable warning conditions so that a BOM calculation will generate warning messages about potential sources of calculation errors. A BOM calculation generates an Infolog that contains the warning messages. You can view this warning Infolog about a selected item when you use the Complete form to review BOM calculation results. The form displays an icon that indicates that a warning Infolog exists for an item.

Two warning conditions only apply to manufactured items, and four warning conditions apply to any item.

Identify when a manufactured item does not have an active BOM. Identify when a manufactured item does not have an active route. Identify a warning when the item in a BOM line has a 0 (zero) quantity. Identify a warning when the item in a BOM line has a 0 (zero) cost or when it does not

have a cost record. Identify a warning when the item in a BOM line has an out-of-date cost. The warning

reflects a comparison of the calculation date to the specified days for a maximum age of cost.

Identify a warning when the item in a BOM line has less than the profitability percentage that you want.

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The definition of various BOM calculation groups depends on the need for variations in applicable warning messages. For example, one BOM calculation group may be sufficient, with warning conditions about an active BOM, a zero component quantity, and a zero component cost.

The applicable warning conditions that are associated with the BOM calculation group can be optionally overridden when you initiate a BOM calculation. The typical rationale reflects the need to add or remove an applicable warning condition for a specific situation. For example, you could remove the applicable warning condition about an active route when the specific situation does not involve routing data.

The assignment of a BOM calculation group to items can serve other special purposes. The special purposes include the following:

Indicate the source of a purchased component's cost contribution data in calculating the planned cost of a manufactured item (by using the cost price model field). Some manufacturers want to calculate planned costs by using the purchase price trade agreements for purchased components or another basis, such as the purchase price records within a costing version. The approach that you want is termed the cost price model. The decision about the source of cost data should be reflected in the definition and assignment of BOM calculation groups.

Indicate how the item's data will be used to calculate a suggested sales price (by using the sales price model field). Some manufacturers want to calculate a suggested sales price for manufactured items. The calculated sales price can reflect a rolled-price approach that is based on the component's sales price record, or a cost-plus-markup approach that is based on the component's cost and applicable profit percentage (associated with the item's cost group). The approach that you want is termed the sales price model, with a choice between item sales price and cost group. The decision about a rolled-price versus cost-plus-markup approach should be reflected in the definition and assignment of BOM calculation groups.

Indicate that a manufactured item should be treated as a purchased item for BOM calculation purposes (by using the stop explosion field). A manufactured item can be treated as a purchased item for cost-rollup purposes. The typical situations include a purchased item that is occasionally manufactured or a manufactured item that is now being purchased. The item will initially be designated as a manufactured item (with an item type of BOM) in order to define BOM and route information, and to support production orders for the item. However, the stop explosion flag (embedded in the BOM calculation group that is assigned to the item) prevents cost calculations from using the item's BOM and route, and the BOM calculation uses the item's specified costs.

Note Shop floor control contains the Calculation groups form, but it has no relationship to the functionality that is described here. It defines calculation groups that must be assigned to employees, typically to reflect the grouping of employees with the same supervisor who is responsible for calculating the employees' time registrations.

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About manufacturing overheads based on material

A manufacturing environment with only bills of material information (and without routing information) can calculate manufacturing overheads that are based on material. The manufacturing overheads are expressed as indirect cost calculation formulas for a surcharge percentage, and they are defined in the Costing sheet setup form. A cost group that is assigned to material components acts as the basis for a calculation formula. The calculation formulas can be defined for individual products or for item groups that are assigned to products, thereby providing greater flexibility in calculating manufacturing overheads that are based on material.

Preparing to maintain standard costs in a manufacturing environment with routings

Information about routing operations must be prepared before you maintain standard costs in a manufacturing environment with routings. For example, the cost categories that are assigned to routing operations provide the basis for assigning hourly costs or piece rate costs. Cost groups that are assigned to cost categories provide the basis for segmenting calculated costs of manufactured items and provide the basis for calculating manufacturing overheads by using indirect cost calculation formulas that are embedded in the costing sheet setup. The costing sheet setup also defines the format for displaying information on a costing sheet.

A manufacturing environment without routings does not require these additional preparation steps.

About cost categories used in production routings

Cost categories apply to manufacturing environments that use routings. Cost categories are assigned to work centers and routing operations for the purposes of defining hourly costs and segmenting cost contributions in a manufactured item's calculated costs. That is, the cost groups that are assigned to cost categories classify manufacturing cost contributions by work centers and type of activity, such as setup and run time. The granularity of cost group assignment provides the foundation for calculating manufacturing overheads based on routing information.

Note Cost categories have several synonyms within manufacturing environments, such as labor rate codes or machine rate codes.

Each cost category has its associated cost records and an assigned cost group. Different cost categories will be needed to support different production purposes.

Assign different hourly costs by work center, such as different costs for various types of labor skills, machines, or manufacturing cells.

Assign different hourly costs for the setup time or run time that is associated with a routing operation.

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Assign work center costs on the basis of output quantity rather than hourly costs, such as the piece rates for paying labor.

Provide cost group segmentation of cost contributions to a manufactured item's calculated cost, such as segmentation of labor and machine costs.

Provide the cost group basis for overhead calculation formulas, such as labor-related and machine-related overheads or overheads that are related to setup and run time.

A cost category can be assigned to the setup time, process time, and the quantity for a routing operation. When costs or cost group segmentation differ between setup and process time, for example, then different cost categories should be defined and assigned to them. The selective usage of cost categories for setup time, process time, and quantity is determined by the route group that is assigned to an operation. Assignment of cost categories to time and quantity can be mandated based on the company-wide policies that are embedded within the Production parametersform.

Each cost category has its associated costs that are based on the definition of cost records within a costing version. Use the Cost category price form to define the cost records for a specified costing version and site (when you use multisite functionality). The cost record for a cost category is initially entered with a pending status and an intended effective date. Activating the cost record updates the status (to current active) and the effective date (to the activation date). Different cost records may reflect different sites (when you use multisite functionality), effective dates, or status. Bills of material (BOM) calculations for a future or historical date will use cost records with the relevant effective date. The current active cost record will be used for estimating production order costs and valuing reported time against a production order.

The cost record for a cost category can be site-specific or company-wide (when you use multisite functionality). The cost record will be site-specific if you assign a site to it. Otherwise, a blank value means that the cost record will apply to all sites within the company. Costs may differ between sites, for example, so that the cost records must be defined as site-specific.

A routing operation normally inherits the cost categories that are assigned to the work center or master operation. When creating a production order, the routing operations within the production route reflect the selected route version. You can override the cost categories assigned to the operations within the production route.

Certain types of production work may apply to project time estimates and reporting, thereby requiring a cost category that can be used for production and project purposes. Additional project-related information must be defined when a cost category is flagged for use in projects.

About costing sheet setup

Setting up the costing sheet involves two objectives. As the first objective, you define the format for displaying cost of goods sold information about a manufactured item or production order. The formatted display is termed a costing sheet. As the second objective, you define the basis for calculating indirect costs. The costing sheet setup builds on the cost group feature for displaying

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information and for the indirect cost calculation formulas. The two objectives of costing sheet setup are:

Define the format for the costing sheet. The user-defined format for a costing sheet identifies the segmentation of costs that comprise a manufactured item's cost of goods sold. The item's cost of goods sold information, for example, could be segmented into material, labor, and overhead based on cost groups that are assigned to items, cost categories for routing operations, and indirect cost calculation formulas. The format for the costing sheet typically requires intermediate totals when multiple cost groups have been defined, such as aggregating multiple cost groups pertaining to material. The definition of a costing sheet format is optional, but a costing sheet format must be defined if indirect costs will be calculated.

Define the basis for calculating indirect costs. Indirect costs reflect manufacturing overheads that are associated with producing a manufactured item. An indirect cost calculation formula can be expressed as a surcharge or a rate. A surcharge represents a percentage of value, whereas a rate represents an amount per hour for a routing operation. A cost group defines the basis for the calculation formula, such as a 100 percent surcharge for a labor cost group or a USD 50.00 hourly rate for a machine cost group. In order to define a calculation formula and its cost group basis, the costing sheet setup requires the identification of the cost group that represents the overhead and the selection of a surcharge or rate approach.

Each calculation formula must be entered as a cost record. The cost record consists of a specified costing version, a surcharge percentage (or a rate amount), the cost group basis, a status, and an effective date. A cost record is initially entered with a pending status and effective date. Activating the cost record updates the status (to current active) and the effective date (to the activation date). When you use multisite functionality, the cost record can also specify a site for a site-specific calculation formula, or indicate a company-wide calculation formula by leaving the site field blank. The cost record can optionally consist of a specified item or item group when the calculation formula has been flagged as per item.

The current active cost records for indirect cost calculation formulas will be used for estimating production order costs and for calculating actual costs that are related to actual consumption of time and material. The pending cost records will be used in BOM calculations for a future date.

Two blocking policies for a costing version determine whether pending costs can be maintained and whether the pending cost can be activated. Use the blocking policies to permit data maintenance, and then to prevent data maintenance for the cost data within a costing version.

After you define the costing sheet format and calculations for indirect costs, you must initiate a separate step to validate and save the information. The costing sheet represents a company-wide format for consistently displaying the costs of goods sold information.

The costing sheet is displayed as part of the Complete BOM calculation form, which can be displayed for a manufactured item's calculated cost record in the Item priceform, or for an order-

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specific calculation record in the BOM calculation resultsform. It can also be displayed as part of the Price calculation form for a production order.

About a costing sheet setup example

The costing sheet displays the cost of goods sold information for a manufactured item in a user-definable format, as defined in the Costing sheet setupform. Definition of the costing sheet format reflects a multilevel tree structure where each entry within the tree structure consists of a node. The concept of a tree structure is reflected in the terminology that describes the nodes within the tree, such as a root node, parent node, and child node.

A simple format and corresponding tree structure illustrates the use of nodes to set up a costing sheet. The lower half of the following diagram shows the costing sheet format, whereas the upper half shows the tree structure that defines the format. In this example, two cost groups (Material1 and Labor1) have been created and assigned to purchased material and cost categories. A third cost group called Overhead1 has also been created, and it will be used for calculating indirect costs that are based on labor.

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The starting point for using the tree structure is labeled the root node. We require five entries in the tree structure to define the format in this example. The indented tree structure is shown in the upper half of the diagram.

1. Create the first node under the root.

The first entry automatically creates a price node, which represents the overall cost of goods sold. After the first entry is created, we edit the information to specify the user-defined code and description as COGS and Cost of Goods Sold. This information will be displayed as a header (at the top of the format) and as a total (at the end of the format) based on the policies for header and total. The total will contain costs for all children nodes. The following four steps define the children nodes.

2. Create the child node for material.

The second entry must be created under the price node, and it requires a node type of Cost Group. After the second entry is created, edit the information to indicate the cost group. This second entry represents material, so select the cost group as Material1 and enter the user-defined code and description as M and Material.

3. Create the child node for labor.

The third entry must be created under the price node, and it is assigned a node type of Cost Group. This third entry represents labor, so select the cost group as Labor1 and enter the user-defined code and description as L and Labor.

4. Create the child node for overhead.

The fourth entry must be created under the price node, and assigned a node type of Cost Group. This fourth entry represents overhead, so select the cost group as Overhead1 and enter the user-defined code and description as OH and Overhead. The user-defined code should represent meaningful information, because it is displayed on detailed reports and forms to indicate the source of an indirect cost calculation.

5. Define the calculation of indirect costs.

The calculation of indirect costs must be a separate entry that is created under the relevant cost group node. Hence, this fifth entry will be created under the cost group node for overhead and assigned a node type of Surcharge or Rate. A surcharge will be used in this example. After the fifth entry is created, edit the information to select the cost group acting as the basis for the calculation (Labor1) and the subtype (level), as well as the applicable price version (Std) and the calculation formula (a 50% surcharge in this case). The status of the calculation is treated as pending until it is activated.

The definition of the calculation formula varies slightly between a surcharge and a rate because the applicable elements differ, as defined by the subtype field.

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Applicable subtype for a rate calculation formula - The applicable subtype refers to the choice of a cost category, because the rate amount can apply to the setup, run time, or quantity category.

Applicable subtype for a surcharge calculation formula - The applicable subtype refers to the choice of costs, because the surcharge percentage can apply to the single level costs, the total costs, or the sublevel costs.

About cost categories used in Production and in Project

Certain types of production work may apply to project time estimates and reporting, thereby requiring a cost category that is used for production and project purposes. Additional project-related information must be defined when a cost category is used in production and projects. For example, the hourly costs that are associated with projects can be different from the hourly costs that are associated with production. A cost category that is used in Production and Project can be defined in the Cost categories form by selecting the option to use in projects.

Note Cost accounting contains a Categories form, but it has no relationship to the functionality described in this topic.

When you select the option that a cost category will be used in projects, the Cost categories form displays additional tabs and buttons that define and access the additional project-related information. Additional tabs include project-related information, such as the assignment of a category group, a line property, and ledger accounts. The cost category must be assigned to a category group that supports a transaction type of hours. A line property indicates the default about how reported time will be chargeable to a project. The ledger accounts that are related to costs and sales are normally defined for the category group that is assigned to the cost category, but specific accounts can be defined for an individual cost category.

Additional buttons provide access to project-related information about a selected cost category. For example, click the buttons to view project-related transactions, to define employees or projects authorized to report against the cost category, to define hourly costs and sales prices, and to view reports.

Calculating standard costs for manufactured items

Standard costs for a manufactured item can be calculated by using BOM calculations, which generate an item cost record within a costing version for the calculated cost. This section explains BOM calculations with standard costs and discusses the information that is used in these BOM calculations. This section also covers related topics, such as the amortization of constant costs and the use of the fallback principle by BOM calculations.

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About information used in BOM calculations with standard costs

Bills of material (BOM) calculations utilize data from several sources to calculate the standard costs of a manufactured item. The sources include information about items, bills routings, indirect cost calculation formulas, and the costing version.

The purchased item information that is used in a standard cost BOM calculation includes the following:

Cost - A purchased item's costs are maintained as site-specific cost records within a costing version for standard costs. Each cost record has an effective date, and the BOM calculation date determines which cost record will be used. For example, a BOM calculation with a future calculation date might use a cost record with a pending status and a future effective date.

Cost group - The cost group that is assigned to a purchased item provides the basis for cost segmentation in the calculated costs of a manufactured item.

Warning conditions that are embedded in the item's BOM calculation group - The warning conditions enable the BOM calculation to identify potential problems, such as when the purchased item has a zero cost, a zero quantity in a BOM, or an out-of-date cost record. The applicable warning conditions can be overridden when initiating a BOM calculation.

The manufactured item information that is used in a standard cost BOM calculation includes the following:

Standard order quantity for inventory - The item's standard order quantity (for inventory) acts as the default accounting lot size for amortizing constant costs in a BOM calculation. The accounting lot size will also reflect the order quantity multiple if specified.

Warning conditions that are embedded in the item's BOM calculation group - The warning conditions enable the BOM calculation to identify potential problems, such as when the manufactured item does not have a BOM or route. The applicable warning conditions can be overridden when initiating a BOM calculation.

The bill of material information that is used in a standard cost BOM calculation includes the following:

BOM version - The BOM version that is assigned to the manufactured item has effective from and to dates, and a status for approved and active. The bill version can be company-wide or site-specific, and it can optionally reflect quantity breakpoints.

BOM line item quantity - A component typically has a variable quantity required, but it can be a constant. The component quantity is typically expressed for producing one parent item, but it may be expressed per 100 or per 1000 to handle decimal precision issues. The component quantity can also be calculated based on measurements.

BOM line item scrap - A component can have a variable or constant quantity for planned scrap.

BOM line item valid dates - A component can have valid from and to dates.

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BOM line item type of production - The costing lot size for amortizing constant costs will reflect the BOM calculation quantity and a make-to-order explosion mode, because the BOM calculation assumes that the manufactured component will be produced to the exact quantity (rather than its standard order quantity).

Sub-BOM for a manufactured component - A manufactured component can optionally have a specified BOM version, which would be used instead of the item's current active BOM version in a BOM calculation.

Sub-route for a manufactured component - A manufactured component can optionally have a specified route version, which would be used instead of the item's current active route version in a BOM calculation.

Operation number and the impact of operation scrap percentages - The operation number links a component to a specific operation, and operations can have a scrap percentage. The linkage enables BOM calculations to account for scrap percentages and cumulative scrap percentages (across multiple operations) on the component's required quantity.

Ignore BOM line item in cost calculations - A component can be ignored for BOM calculation purposes.

The work center information that is used in a standard cost BOM calculation includes:

Hourly costs - The hourly costs that are associated with a work center are expressed in terms of cost categories that are assigned to setup time and run time. These cost categories should be identified for work center groups and work centers. The hourly costs that are associated with a cost category can be site-specific or company-wide.

Per unit costs - Some manufacturing environments assign work center costs per unit of output, which would be expressed as a different cost category for quantity. For example, the quantity-related costs can reflect piece rates for labor, or a paint manufacturer may assign work center costs per gallon of output.

Overriding work center information on routing operations - The work center information about cost categories will be inherited by operations, where it can be overridden. BOM calculations will use the cost category information that is specified on the routing operations.

Cost group for a cost category - The cost group that is assigned to a cost category provides cost segmentation in the calculated costs of a manufactured item. For example, different cost groups might be used to segment the calculated costs that are associated with machines and labor or with setup and run time.

The route information that is used in a standard cost BOM calculation includes:

Route version - The route version that is assigned to the manufactured item has effective from and to dates, and a status for approved and active. The route version must be site-specific, and it can optionally reflect quantity breakpoints.

Routing operation time - The time can be specified for runtime and setup time. The hourly time is typically expressed for producing one parent item, but it may be expressed per 100 or per 1000 to handle decimal precision issues.

Routing operation time for secondary resources - A secondary resource (identified by a secondary priority) has the same operation number as the primary resource, and it has the

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same routing operation time. For example, an operation might require a machine as the primary resource and labor and tools as secondary resources.

Routing operation scrap percentage - BOM calculations will account for scrap percentages and cumulative scrap percentages (across multiple operations) on the required time for routing operations and the required quantity for components that are linked to operation numbers.

Cost categories for a routing operation - The work center information about cost categories will be inherited by operations, where it can be overridden. BOM calculations will use the cost category information that is specified on the routing operations.

The manufacturing overhead information that is used in a standard cost BOM calculation includes:

Surcharge - A surcharge calculation formula reflects a percentage of value, such as 100 percent, that is tied to a specific cost group, such as labor.

Rate - A rate calculation formula reflects an amount per unit, such as USD 10.00 per hour, that is tied to a specific cost group, such as labor.

Time-based versus material-based overhead - The manufacturing overhead can be tied to routing operations or material components.

The costing version information that is used in a standard cost BOM calculation includes:

Costing type - The costing version must contain standard costs. Several restrictions apply to BOM calculations that use standard costs. For example, these restrictions specify that miscellaneous charges must be included in unit costs and that the BOM calculation explosion mode must be single level.

Mandated fallback principle - The costing version can mandate the use of a fallback principle, such as using a specified costing version or the active cost records. The mandated fallback principle typically applies to a costing version that represents the incremental updates in a two-version approach for cost updates.

Blocking flag for pending costs - A blocking flag can prevent BOM calculations of the pending cost for manufactured items.

Specified from-date - The specified from-date will act as the default calculation date for all BOM calculations that involve the costing version.

Specified site - A specified site will limit BOM calculations to the single site. Content of the costing version must include costs - The content must include costs. It can

optionally include sales prices in order to calculate suggested sales prices for manufactured items.

Several sources of information can be specified when initiating a BOM calculation. This includes the site, the calculation date, and the costing version.

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About amortizing constant costs for a manufactured item

A manufactured item's constant costs reflect the operation setup times and the components with a constant quantity or a constant scrap amount. The concept of a costing lot size is used to amortize these constant costs in the calculated cost of a manufactured item. The costing lot size concept has several synonyms, such as accounting lot size. The concept of amortizing constant costs also has several synonyms, such as proportional constant costs.

The costing lot size quantity for a manufactured item is used in a BOM calculation. The quantity depends on how you initiate and perform the BOM calculation, as illustrated by the following:

Default calculation quantity in an item's BOM calculation - The item's standard order quantity (for inventory) acts as the default for its costing lot size, but the default may be a greater quantity to reflect the item's order quantity multiple. The item's standard order quantity and multiple can be defined within its default order settings or site-specific order settings.

Specified calculation quantity in an item's BOM calculation - The specified calculation quantity acts as the costing lot size for the item. The calculation quantity initially defaults to the item's standard order quantity, but it can be manually overridden. The specified calculation quantity represents the costing lot size for the specified item, and for manufactured components with a bill of material (BOM) line type of production (because it is assumed that the component will be produced to the exact quantity). The costing lot size for other manufactured components (with a BOM line type of item) will reflect their standard order quantity.

Specified make-to-order calculation quantity in an item's BOM calculation - The specified calculation quantity acts as the costing lot size for the item and its manufactured components when BOM calculations use a make-to-order explosion mode. It is assumed that the manufactured components will be produced to the exact quantity, just like a manufactured component with a BOM line type of production.

Specified calculation quantity in an order-specific BOM calculation - An order-specific BOM calculation can be performed for a line item on a sales order, sales quotation, or service order. The specified calculation quantity defaults to the quantity on the originating line item but the default quantity can be overridden. You can select whether the order-specific BOM calculation uses a make-to-order or multilevel explosion mode.

The calculated amount of a manufactured item's amortized constant costs is termed miscellaneous charges.

About displaying miscellaneous charges for a manufactured item

The calculated amount of an item's amortized constant costs is termed miscellaneous charges. A manufactured item's constant costs reflect the operation setup times and the components with a constant quantity or a constant scrap amount. For more information, see About amortizing constant costs for a manufactured item.

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The calculated amount of item's miscellaneous charges is sometimes displayed as part of the item's unit costs and sometimes displayed as separate fields (and not included in the item's unit costs). When the calculated amount is displayed as separate fields, one field displays the total miscellaneous charges amount and the second field displays the costing lot size (termed the price unit) that was used to amortize the amount. The Item price form, for example, displays the miscellaneous charges as two separate fields, whereas the Complete BOM calculation form displays the item's total cost per unit, with amortized costs included in the unit cost.

Miscellaneous charges for a manufactured item are always included in the item's unit cost for standard cost purposes. They can optionally be included for planned cost purposes. A policy within the costing version enforces the decision to include miscellaneous charges in the cost of a manufactured item.

When you activate an item's cost record, it will update the miscellaneous charges for the item's base cost information, as displayed on the Item details form. The miscellaneous charges are displayed as two separate fields, and they are not displayed as part of the item's unit cost. Each activation updates the item's base cost information, even though the activation reflects different sites. Hence, the base cost information should be viewed as reference information.

About a manufactured item treated as a purchased item

A manufactured item can be treated as a purchased item for master scheduling and cost-rollup purposes. The typical situations include a purchased item that is occasionally manufactured or a manufactured item which has switched to being a primarily purchased item. The item will initially be designated as a manufactured item in order to define bill of material and route information, and to support production orders for the item.

The item cost record can be calculated for the manufactured item, but it may not match the standard cost that you want for purchasing purposes. The standard cost that you want must be manually entered and activated for the item cost record. In addition, a manufactured item at one site may be transferred to another site, so that the item's cost must be manually entered and activated for the transfer site.

When you use the manufactured item as a component in higher-level products, the component's costs should be treated as a purchased item whether they were calculated or manually entered. That is, a BOM calculation should treat the item's costs as a purchased component, rather than calculating costs that are based on its bill and route information. You can prevent this calculation by selecting the stop explosion flag that is embedded in the BOM calculation group that is assigned to the item.

Prevent master scheduling calculations from exploding requirements through the item by selecting the stop explosion flag (for item coverage) for the item. The master scheduling calculation will treat the item as a purchased item (such as recommending planned purchase orders) and will not perform further calculations for its bill and route information.

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About BOM calculations for items with missing cost records

Two different approaches can be used when initiating a BOM calculation for new manufactured items. Select the approach by using the update/insert calculated price field in the BOM calculation form. You can select that the BOM calculations should overwrite the existing pending cost records for the items, or that the BOM calculations should create the pending cost records when they do not exist for the specified costing version, site, and effective date. The lack of a pending item cost record is termed a missing cost. A missing cost can indicate a new manufactured item, or an item that requires recalculation. An item's pending cost record can be deleted so that it is treated as a missing cost.

When you initiate a BOM calculation to update costs for items with missing costs, it may be useful to be notified that a selected item already has a pending cost record, thereby preventing the outcome of updating the missing costs. Use the BOM calculation policy (to identify missing updates) in order to identify when an item's pending cost record already exists, so that a warning message will be displayed in the Infolog that is generated by the BOM calculation.

About BOM calculations

The BOM calculation form is used to calculate a manufactured item's cost and to generate an associated item cost record within a costing version. The BOM calculationform can also be used to calculate a manufactured item's sales price and to generate an associated item sales price record within a costing version. The cost roll-up and sales price calculations are termed BOM calculations, or bill of material (BOM) calculations, because you initiate them from the BOM calculation form.

Usage of the BOM calculation form varies slightly based on how you initiate the BOM calculations. Usage also depends on whether the BOM calculations involve a costing version for standard costs or planned costs, and depends on several policies defined within the costing version that is being used in the BOM calculations.

Note A variation of the BOM calculation form is used in the context of a sales order, sales quotation, or service order line item. These are termed order-specific BOM calculations. An order-specific BOM calculation generates a calculation record that is displayed on the BOM calculation results form (rather than an item cost record within a costing version). The calculation record includes a calculated cost and a calculated sales price.

The BOM calculation form can be initiated for a single manufactured item or for a costing version, as summarized in the following diagram and described in the text that follows.

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Initiate BOM calculations from the Item price form in order to calculate costs for a single manufactured item. The BOM calculation form inherits the item identifier, and the BOM calculation form requires specification of the costing version, BOM version, route version, calculation quantity, calculation date, and site.

The BOM version and route version will initially display the active versions for the item, site, date, and calculation quantity, but the default can be overridden with approved versions.

The calculation quantity will initially display the item's standard order quantity, but the default can be overridden.

The calculation date or site can be mandated by the costing version, or allow user-specified values when the date or site are not mandated in the costing version. A future calculation date determines the use of pending cost records. BOM calculations will use a pending cost record with the nearest from-date on or before the calculation date.

Initiate BOM calculations from the Costing version setup form (or the Costing version maintenance form) in order to calculate costs for all manufactured items or for selected items, or for updating items on a where-used basis. The BOM calculation form inherits the costing version.

The calculations assume the use of the active BOM version and route version for a manufactured item (and the related site, date, and quantity), unless a manufactured component has a specified sub-BOM or subroute.

The calculations assume the use of the standard order quantity for manufactured items, which provides the basis for calculating component quantities, for determining the relevant BOM versions and route versions (when you use quantity-sensitive BOMs and routes), and for amortizing constant costs. The assumption does not apply when a manufactured component has a BOM line type of production or vendor, or when you use a make-to-order explosion mode for the BOM calculations, because quantities will reflect the specified calculation quantity.

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The calculation date or site can be mandated by the costing version, or the calculation date or site can allow user-specified values when not mandated by the costing version.

Other variations in BOM calculations reflect the costing type and restrictions of the costing version, as summarized in the following diagram and described in the text that follows.

BOM calculations with standard costs must be restricted by costing version policies because the restrictions ensure standard costing principles. Standard costing principles require the enforcement of restrictions about the use of standard costs for purchased items, a single level explosion mode, and the inclusion of miscellaneous charges in unit costs. In contrast, BOM calculations with planned costs do not have to follow standard costing principles. These BOM calculations can use different explosion modes, alternative sources of cost data for purchased items, and optional enforcement of restrictions within the costing version.

BOM calculations with standard costs. Policies within the costing version (for standard costs) can mandate enforcement of five BOM calculation policies. The recording restriction check box within the costing version mandates one of these policies, where miscellaneous charges must be included in the unit price. Miscellaneous charges for purchased items can be manually entered, whereas the miscellaneous charges for manufactured items reflect the calculated amortization of constant costs.

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The calculation restriction check box within the costing version mandates the other four BOM calculation policies.

The source of purchased items' cost contributions must be based standard costs. That is, BOM calculations must use the item cost records within the specified costing version, or within the fallback that contains standard costs.

The explosion mode must be single level, which ensures accurate and consistent calculation of standard costs.

The profit setting must be mandated in order to obtain consistent results in calculating the items' sales price. The costing version must allow content of sales prices in order to use the profit setting and to generate the item sales price records.

The fallback principle must be mandated, where the principle can be none, active cost records, or a specified costing version.

BOM calculations with planned costs. Policies within the costing version (for planned costs) can optionally mandate enforcement of five BOM calculation policies, or simply provide default values. The recording restriction check box within the costing version determines whether the BOM calculation policy about miscellaneous charges will be mandated, or act as a default value. Miscellaneous charges can be optionally included in the unit price.

The calculation restriction check box within the costing version determines whether the other four BOM calculation policies will be mandated or act as default values.

The source of a purchased item's cost contributions can be the item cost records within a costing version or the source can be defined by the BOM calculation group that is assigned to the item. For example, the BOM calculation group could define purchase price trade agreements as the source of cost contribution data.

The explosion mode can be single level, multilevel, make-to-order, or based on the BOM line item. The explosion mode for BOM line type replicates the cost calculation logic for production order estimates.

The profit setting can be mandated or a default value. The costing version must allow content of sales prices in order to use the profit setting and to generate the item sales price records.

The fallback principle can be mandated or a default value, where the principle can be none, active cost records, or a specified costing version.

BOM calculations generate an Infolog that contains warning messages and other types of messages. Several BOM calculation policies determine the types of messages in the Infolog. The applicable warning conditions are defined within the BOM calculation group that is assigned to items, but you can override these warning conditions when you initiate a BOM calculation. When using the fallback principle, it is often helpful to display the fallback information as messages in the Infolog. When trying to update calculated costs for items with missing cost records, it is also helpful to identify items that did not get updated as messages in the Infolog.

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About order-specific BOM calculations

An order-specific BOM calculation represents a variation of a BOM calculation for a manufactured item. An order-specific BOM calculation is performed in the context of a sales order, sales quotation, or service order line item. An order-specific BOM calculation generates a calculation record that is displayed in the BOM calculation resultsform. The calculation record includes a calculated weight, a calculated cost that is based on active cost records, and a calculated sales price. Each order-specific BOM calculation for an item generates a calculation record in the BOM calculation resultsform, uniquely identified by a calculation number. The results of a calculation record can optionally be transferred to the originating line item.

An order-specific BOM calculation differs from a BOM calculation for a manufactured item. First, an order-specific BOM calculation does not generate an item cost record within a costing version. This means that the BOM calculation policies do not apply for creating an item cost record or for overwriting a cost record. Second, an order-specific BOM calculation always uses the active cost records for components, cost categories, and indirect cost calculation formulas.

About BOM calculations that use the fallback principle

BOM calculations that use cost records within a single specified costing version employ a fallback principle of none. However, several situations can benefit from BOM calculations that employ a fallback principle of another costing version or of active cost records. The fallback principle indicates the alternative source of cost data when it does not exist within the specified costing version. The following situations illustrate two uses of the fallback principle:

Two-version approach to standard cost updates - A costing version can contain the incremental changes to standard costs, such as pending cost records that represent new items or cost changes. In this situation, the fallback principle can identify the use of the active standard costs that are contained within other costing versions.

Simulating the impact of cost changes with planned costs - A costing version for planned costs can contain incremental changes for simulation purposes, such as pending cost records that represent the simulated cost changes to items, cost categories, and indirect cost calculation formulas. In this situation, the fallback principle can identify the use of the active standard costs that are contained within other costing versions.

About BOM calculation of a suggested sales price

BOM calculations can be used to calculate a manufactured item's suggested sales price based on a cost-plus markup approach. With a cost-plus markup approach, the item's calculated sales price reflects the set of profit-setting percentages that is specified for the BOM calculation and the costs that are associated with its component items, routing operations, and applicable manufacturing overheads. The markup reflects profit-setting percentages that are assigned to cost groups and the cost groups that are assigned to items, cost categories for routing operations, and the indirect cost calculation formulas for manufacturing overheads. The sets of profit-setting percentages are labeled Standard, Profit 1, Profit 2, and Profit 3. Within the Profit 1 set, for

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example, a profit-setting percentage of 50 percent could be defined for a cost group that is assigned to purchased material, and a profit-setting percentage of 80 percent could be defined for a cost group that is assigned to cost categories for routing operations.

The context of the BOM calculation determines how the results of a calculated sales price will be handled.

BOM calculation for an item and specified costing version - The BOM calculation generates a pending sales price record within the costing version. This sales price record provides the starting point for viewing the calculation details, such as viewing the Complete BOM calculationform. The sales price record primarily acts as reference information, and it is not used as the basis for a sales price on sales orders.

Order-specific BOM calculation - A variation of the BOM calculation form is used in the context of a sales order, sales quotation, or service order line item. An order-specific BOM calculation generates a calculation record that is displayed on the BOM calculation results form (rather than a record within a costing version). This calculation record provides the starting point for viewing the calculation details, such as viewing the Complete BOM calculationform. Information about a selected calculation record can be transferred to the originating line item, such as transferring the calculated sales price to a sales order line item.

Maintaining standard costs in a manufacturing environment

Manufacturing environments involve maintaining standard costs for purchased items and manufactured items. Different approaches can be used to maintain standard costs, and guidelines can be proposed for some of the approaches. The guidelines for maintaining the items' standard costs include several scenarios, such as initially setting standard costs, updating standard costs throughout the frozen period, periodically updating standard costs, and analyzing variances related to standard costs.

The guidelines assume the completion of preparation steps for purchased components and manufactured items. Additional preparation steps are required for manufacturers that use routing information and manufacturing overhead calculations. The guidelines also assume an understanding about cost calculations for manufactured items.

Initially setting standard costs in a manufacturing environment

Manufacturing environments involve maintaining standard costs for purchased items and manufactured items, which includes initially setting standard costs. Additional steps are required in manufacturing environments that use routing information for costing purposes. These guidelines assume the use of a single costing version when initially setting standard costs. This costing version will contain standard costs for the current period. Pending cost records for all items will be entered in this costing version.

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1. Define the costing version by using the Costing versions form. Guidelines for this costing version include:

o Assign a costing type of standard costs. o Assign a meaningful identifier for the costing version, such as 2008-

STANDARD. o Ensure that the content includes cost records. o Allow the entry of cost records. Do not block the entry of pending costs. o Allow the entry of cost records for all sites. Assigning a site will limit the entry of

cost records to the specified site. o Prevent the change to active status. The change to active status will be allowed

after pending costs have been completely and accurately defined. o Optionally enter a from-date. As a general guideline, use a future date that

represents the planned cutover date or the first day in the frozen period when you prepare cost data beforehand.

o Indicate a fallback principle of none.

2. Use the Price form to enter item cost records for purchased items within the costing version. A separate cost record must be entered for each site that purchases or stocks the item. The cost should reflect the standard costs for the period. If a cost was entered incorrectly, change the pending cost for the item. A pending cost can also be deleted.

Verify item cost records within the costing version for completeness and accuracy. Use the Item price report to review a list of item cost records.

3. When you use routing information for costing purposes, use the Price form to enter cost records within the costing version to define the hourly rate (or piece rate) that is applicable to each cost category. The cost record can reflect a company-wide hourly rate or a site-specific hourly rate. The cost should reflect the standard costs for the period. If a cost was entered incorrectly, change the pending cost for the cost category. A pending cost can also be deleted.

Verify cost records within the costing version for completeness and accuracy. Use the Cost category rates report to review a list of cost records for cost categories.

4. When you need to calculate manufacturing overheads, use the Costing sheet setup form to enter the indirect cost calculation formulas for surcharge and rate nodes. The cost record can reflect a company-wide calculation formula or a site-specific calculation formula, and it can reflect item-specific calculation formulas. If a cost record was entered incorrectly, change the pending cost record or delete it.

Validate and save the costing sheet setup. Correct any errors that are identified by the validation process.

Verify cost records within the costing version for completeness and accuracy. Use the Indirect cost rate and ratio report to review a list of cost records.

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5. Calculate the cost of all manufactured items by using the BOM calculation form. You can access the BOM calculation form from the Costing version setup form, and by selecting the current period's costing version.

Verify the calculated costs for manufactured items for completeness and accuracy. Use the Complete form to review the calculated costs for each item cost record, and any Infolog warning messages. Alternatively, use the BOM calculation report to review a list of the calculated costs.

6. Use the Costing versions form to change the blocking flag so that the status of pending cost records can be changed to active.

7. Change the status to active for all pending item cost records within the costing version on the cutover date. Use the Activate prices form to change status all cost records. You can access the Activate prices form from the Costing version setup form for the current period's costing version.

Alternatively, change the status of individual cost records within the costing version. Use the Price form to change the status of pending cost records for individual items. Use the Price form to change the status of pending costs for individual cost categories. Use the Costing sheet setup form to change the status of individual calculation formulas for indirect costs.

8. Use the Costing versions form to change the blocking flags within the second costing version to prevent further data maintenance.

Repeat the steps in this procedure for separate costing versions when they contain site-specific costs for a multisite operation.

Updating standard costs in a manufacturing environment

Manufacturing environments involve maintaining standard costs for purchased items and manufactured items, which includes the scenario for updating standard costs throughout the frozen period. Updates may reflect new items, cost categories, or indirect cost calculation formulas, as well as corrections and cost changes. The type of update will affect the steps that are necessary to update standard costs, as illustrated in the following cases.

Enter anticipated standard cost changes for purchased items, and then change the status of the item cost records (to active) on the appropriate date. However, do not recalculate the costs of manufactured items that use the purchased items.

Enter standard costs for a new purchased item, but do not recalculate the costs of manufactured items with a bill of material (BOM) version that contains the new purchased item as a component.

Correct or change the cost of a purchased item, or change the cost group that is assigned to a purchased item, and calculate the cost for all manufactured items with a BOM version that contains the purchased item as a component.

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Change the cost for a cost category, and calculate the cost for all manufactured items with a route version that contains routing operations that use the cost category.

Change the cost categories that are assigned to routing operations or the cost group that is assigned to cost categories, and calculate the cost for all manufactured items with a route version that contains routing operations that use the cost category.

Change an indirect cost calculation formula, and calculate the cost for all manufactured items that are affected by the change.

Change the item type to BOM for an item, and calculate the item's manufactured cost. Change or add a manufacturing site for a manufactured item, and calculate the item's

manufactured cost for the site. Calculate (or recalculate) the cost for a manufactured item, and recalculate the cost for all

manufactured items with a BOM version that contains the manufactured item as a component.

Calculate costs for a new manufactured item based on its defined, approved, and active BOM and route information.

Each case requires careful consideration about how to update standard costs.

Updating standard costs for a new manufactured item

Manufacturing environments involve maintaining standard costs for new manufactured items. A typical scenario involves a new manufactured item with a new bill of material (BOM) that contains new purchased items and new manufactured items as components. The following guidelines focus on this typical scenario.

The following guidelines assume use of a two-version approach to standard cost updates, where one costing version contains the initially defined standard costs for the frozen period, and the second costing version contains the incremental updates that pertain to the new manufactured items. The incremental updates will be entered as cost records within the second costing version, and ultimately activated.

The two-version approach requires the definition of a second costing version, where the guidelines for defining this costing version include:

Assign a costing type of standard costs. Assign a significant identifier to the costing version that communicates the contents, such

as 2008-UPDATES. Ensure that the content includes cost records. Allow the entry of cost records for all sites. Entering a site will limit the entry of cost

records to the specified site. Use a fallback principle of active costs.

To add new manufacturing items throughout the frozen period, complete the following steps:

1. Use the Costing version setup form to allow the entry of cost records into the second costing version that contains the incremental updates. Prevent the activation of pending

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costs, where activation will be allowed after pending costs have been completely and accurately defined. Indicate a blank from-date as a policy in the costing version, and then enter the from-date when you enter each cost record. The from-date should represent a date before the new items will be purchased or manufactured.

2. Use the Price form to enter cost records for new purchased items. For each cost record, enter the costing version that contains incremental updates, and use a from-date that precedes the anticipated manufacturing date for new manufactured items.

3. Calculate the cost of new manufactured items by using the BOM calculation form. You can open the BOM calculation form from the Costing version maintenance form, and by selecting the costing version that contains the incremental updates. Use the selection criteria to selectively identify the new manufactured item and any of its manufactured components. It may also be necessary to selectively identify any parent item (within a multilevel product structure) that contains the new manufactured items as a component.

Enter a from-date for the BOM calculation that corresponds to the start of manufacturing for the new manufactured items. The from-date should be within the effective dates for the item's BOM version and route version.

Note A missing cost record can indicate a new manufactured item. BOM calculations can be limited to items with missing costs. For more information, see About BOM calculations for items with missing cost records.

Verify the calculated costs for new manufactured items for completeness and accuracy. Use the Complete form to review the calculated costs for each item cost record and any Infolog of warning messages. Alternatively, use the BOM calculation report to review the calculated costs.

4. Change the blocking flag to allow the activation of pending cost records within the second costing version by using the Costing version setup form.

5. Activate all pending item cost records within the second costing version by using the Activate prices form, which you can open from the Costing version maintenance form. The pending cost records for individual items can also be activated by opening the Price form and by clicking the Activate button.

6. Use the Costing version setup form to change the blocking flags within the second costing version to prevent further data maintenance. The blocking policies will prevent the entry of new pending costs and the activation of pending costs.

Periodically updating standard costs in a manufacturing environment

Manufacturing environments involve maintaining standard costs for purchased and manufactured items, which includes periodically updating standard costs. Periodic updates reflect a new frozen period, and the need to update standard costs for all items. Additional steps are required in manufacturing environments that use routing information for costing purposes. These guidelines assume the use of a separate costing version to contain the next period's standard costs. Pending cost records for all items will be entered in this costing version.

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1. Define the costing version for the next period by using the Costing version setup form. Guidelines for this costing version include:

o Assign a costing type of standard costs. o Assign a meaningful identifier to the next period's costing version, such as 2009-

STANDARD (assuming that 2009 is the next frozen period). o Ensure that content includes cost records. o Allow the entry of cost records. Do not block the entry of pending costs. o Allow the entry of cost records for all sites. Entering a site will limit the entry of

cost records to the specified site. o Prevent the activation of pending costs. The status of cost records will be changed

to active after pending costs have been completely and accurately defined. o Enter a from-date. As a general guideline, use a future date that represents the first

day in the next frozen period. o Indicate a fallback principle of none.

2. Analyze the need to change standard costs for items. Use the Standard cost variance analysis report to analyze historical purchase price and production variances and to suggest a new standard cost.

3. Use the Price form to enter item cost records for purchased items within the next period's costing version. A separate cost record must be entered for each site that purchases or stocks the item. The cost should reflect the standard costs for the period. If a cost was entered incorrectly, change the pending cost for the item. A pending cost can also be deleted.

As an alternative, you can automatically enter costs by copying item cost records, which can then be maintained by using the Price form. Use the Copy costing version form to copy active item cost records (for standard costs) into the next period's costing version. Employ the option to copy active costs when you have used a two-version approach to cost data updates for the current period, because active cost records will be located in more than one costing version.

Item cost records can be selectively copied, and the copy process can be performed multiple times, to populate the next period's costing version. Existing costs can be selectively changed by a factor or amount, and existing miscellaneous charges can also be changed by a factor or amount.

4. Review item cost records within the costing version by using the Item prices report. Verify the completeness and accuracy of item cost records.

5. When you use routing information for costing purposes, use the Cost category price form to enter cost records within the next period's costing version to define the hourly rate (or piece rate) that is applicable to each cost category. The cost record can reflect a company-wide or site-specific hourly rate. The cost should reflect the standard costs for the next period. If a cost was entered incorrectly, change the pending cost for the cost category. A pending cost can also be deleted.

6. Review cost records within the next period's costing version for completeness and accuracy. Use the Cost category rates report to review a list of cost records for cost categories.

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7. When calculating manufacturing overheads, use the Costing sheet setup form to enter the indirect cost calculation formulas for surcharge or rate nodes. The cost record can reflect a company-wide or site-specific calculation formula. The cost record can also reflect item-specific calculation formulas. If a cost record was entered incorrectly, change the pending cost record or delete it.

8. Validate and save the costing sheet setup. Correct any errors that are identified by the validation process.

9. Review cost records within the next period's costing version for completeness and accuracy. Use the Indirect cost rate and ratio report to review a list of item cost records.

10. Calculate the cost of all manufactured items by using the BOM calculation form. You can open the BOM calculation form from the Costing version setup form, and by selecting the next period's costing version.

11. Review the calculated costs for manufactured items for completeness and accuracy. Use the Complete form to review the calculated costs for each item cost record and any Infolog warning messages. Alternatively, use the BOM calculation report to review a list of the calculated costs.

12. Use the Costing versions form to change the blocking flag (for the next period's costing version) to allow activation of pending cost records.

13. Activate all pending item cost records within the next period's costing version on the first day of the next period, but not beforehand. Use the Activate prices form, which you can open from the Costing version setup form for the next period's costing version. The pending cost records for individual items can also be activated by using the Price form and by clicking the Activate button.

Alternatively, activate individual cost records within the costing version. Use the Price form to activate pending cost records for individual items. Use the Price form to activate pending costs for individual cost categories. Use the Costing sheet setup form to activate individual calculation formulas for indirect costs.

14. Use the Costing version setup form to change the blocking flags within the next period's costing version to prevent further data maintenance.

Repeat the steps in this procedure each time that you need to enter and activate costs for a new period.

Simulating cost changes by using a costing version for planned costs

The effects of cost changes on a manufactured item's calculated costs can be simulated with a separate costing version for planned costs. Use the separate costing version for entering pending cost records that reflect incremental cost changes, and for calculating the cost impact on manufactured items. A fallback principle of active costs will be used in the BOM calculations so that only the incremental cost changes need to be entered.

Use the following guidelines for defining the simulation costing version.

Assign a costing type of planned costs.

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Assign a meaningful identifier for the costing version, such as SIMULATION. Ensure that the content includes cost records. Allow the entry of cost records. Do not block the entry of pending costs. Allow the entry of cost records for all sites. Entering a site will limit the entry of cost

records to the single site. Prevent the activation of pending costs. Only pending costs need to be entered for cost

records within the simulation costing version. Do not enter a from-date. A calculation date will be entered for each BOM calculation

that uses the simulation costing version. Indicate a fallback principle of current active. The fallback principle allows the entry of

incremental cost changes for simulation purposes, while using the current active costs as the source for all other cost records. It is assumed that all current active costs exist for all other cost records.

Indicate a cost price model of version cost price, but do not restrict calculations. For example, the simulations could also employ a cost price model of BOM calculation group to indicate the source of cost contribution data for purchased items.

Indicate an explosion mode of multilevel, but do not restrict calculations. The simulations could use other explosion modes.

Costing versions

The following scenarios illustrate the use of the simulation costing version to simulate the impact of cost changes. Prior to entering a simulated cost change, delete the pending cost records within the simulation costing version so that you have a clean starting point. Use the Item price form to view and delete the pending cost records (within the simulation costing version) that are related to item prices and cost category prices.

Simulate the cost change for a purchased item. For example, the cost change may reflect an anticipated increase or decrease in the costs of critical purchased materials. To define the different cost for a purchased item, use the Item price form to enter a pending cost record within the simulation costing version.

Simulate the cost change for a cost category. For example, the cost change may reflect an anticipated increase or decrease in labor rates, or in hourly rates for work centers. To define the different cost for a cost category, use the Cost category price form to enter a pending cost record within the simulation costing version.

Simulate the cost change in an indirect cost calculation formula. For example, the cost change may reflect an anticipated increase or decrease in manufacturing overheads. To define the change in an indirect cost calculation formula, use the Costing sheet setup form to enter a pending cost record within the simulation costing version, and to validate and save the change.

After entering the simulated cost changes, calculate the costs for manufactured items that are affected by the cost changes. Use the BOM calculation form for the simulation costing version, and identify the selected manufactured items that will be affected by the cost changes. The BOM calculations apply to all manufactured items unless you identify the selected items. Alternatively, you can employ the BOM calculation option for where-used updates.

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View the item cost records within the simulation costing version to analyze how the simulated cost changes affected the costs of the selected manufactured items. Use the Item price form and the Complete BOM calculation form to view and analyze the costs.

Analyzing variances related to standard costs

An item's standard cost provides the basis for calculating purchase price variances at the time of purchase order receipt and invoice entry and for calculating production variances at the time of ending a production order.

Purchase price variance - A purchase price variance is calculated at the time of purchase order receipt and reflects the difference between an item's standard cost and the purchase order price. A purchase price variance is also calculated at the time of invoice entry and reflects the difference between the purchase order price and the invoice price.

Production variance - Production variances are calculated at the time of ending a production order. They reflect the difference between the manufactured item's active cost record (at the time of ending the production order) and the actual consumption of material and operations to produce the good reported-as-finished quantity. The types of production variances include a Lot size variance, Production price variance, Production quantity variance, and Production substitution variance.

You can optionally identify the cost group breakdown for each type of production variance. Use the variances to standard field on the Inventory parameters form to select that variances should be per cost group. For example, you can identify quantity-related or price-related variances that are related to the cost groups for material, labor, and overhead. Production variances for a production order are displayed in the Variance form and Production variance report.

Use the Standard cost variance analysis report to view historical variances for standard cost items. Use the Variance analysis statement report to view historical variances by time period.

Transferring an item from one site to another site can cause a cost change variance when the item's costs differ between the two sites. Changing an item's standard cost (by activating a pending cost record for the item) can cause a revaluation of the item's inventory and work in process, as captured by the variance for inventory cost revaluation.

Use the Posting form to define the ledger accounts that are related to variances. A separate tab identifies the different variances, and each variance's ledger account can be defined by item (or item group) and by cost group (or cost group type). These choices correspond to a table and group definition. For example, the ledger account for production price variance can be defined for a table (the cost group) or for a group (the cost group type), such as direct manufacturing. Prior to defining the inventory posting rules, you must use the Transaction combinations form to enable you to define cost relations for tables, groups, and all.

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