Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

16.5 Summary

In a sense, estimated cost and job-order cost accumulations are “by-products” of master data and production order management. The job-order cost accumulation is always current, which is not always the case where costing software is run on a monthly basis, for example. This is just one of the reasons why estimated and job-order cost accumulations are incorporated into computer-supported planning & control systems.

The actual costs cannot always be determined early on. We therefore have to use average costs and standard costs when estimating product costing. These also provide more robust estimates along the time axis. For short-term and long-term pricing purposes, we classify costs as variable and full, that is, variable and fixed costs.

A cost accumulation breakdown is made up of the cost types associated with a product, such as material costs, labor costs, and general costs, and differentiates between the fixed and variable parts of each type. These costs can also be used to calculate added value.

Cost estimating for a product is thus an algorithm. It calculates the cost of materials from the positions on the bill of material (and the associated component entities) as well as the labor costs from the operations (and the associated work centers) and bill-of-material positions (for components produced in-house). This means that every component that goes to make up a product is included in the estimated-cost accumulation.

For job-order cost accumulation, we must compare the actual quantities and actual costs collected from the shop floor against target quantities and costs. It is not always possible to determine the actual costs, however. For fixed internal manufacturing costs, “only” standard cost rates are available, and these have to be predetermined at the start of an accounting period. Generally, at least part of the standard cost rate has to be extrapolated from the past. Using standard costs instead of actual costs enables us to distinguish variances in cost and variances in quantity. Every transaction that affects value must be passed on to the costing function. If costing is carried out only on a periodic basis, it is absolutely essential to identify precisely those transactions that belong to a previous period.

Activity-based costing (ABC) is designed to assign fixed costs (overhead) to individual items in a targeted manner. Blocks of fixed costs are subdivided into main processes and subprocesses (or activities) to a level of detail that allows identification of a characteristic activity cost driver (or process variable) for each activity. The activity cost driver is the measure that allows us to relate costs to products. The block of fixed costs is broken down into costs per activity for each of these activities by the shop floor data collection system. This provides a process cost rate for each activity cost driver. The number of item IDs and ultimately the number of items affected by a cost driver unit also have to be determined. The reciprocal of the product of these two numbers is thus the process quantity per item.

An ABC process plan is then assigned to every item in the master data. The ABC process plan contains as many “operations” as there are ABC processes needed in order to produce or procure the item. The standard load is thus the process quantity per “operation.” The actual ABC process itself plays the part of a “work center,” since it has a unit, an activity cost driver, and a process cost rate. The algorithm for calculating product costs other­wise corresponds to the algorithm used for job-order costing.

ABC is less likely than conventional costing to undercost or overcost products and may lead to improvements in pricing. Experience shows that ABC is successful wherever there are repetitive fixed cost processes that are comparable over a long period (that is, at the operational level). If this is not the case, calculating process cost rates and process quantities on an ongoing basis as well as the amount of resources required to keep the ABC database current would be disproportionately expensive relative to the benefit gained from allocating the fixed costs to cost objects more correctly.

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