Product Costing

+ Transcript

Product costing is vital to a manufacturing company. Without accurate costs, you are shooting in the dark. With good product costing you get many benefits, including accurate inventory values and costs of goods sold, the ability to gauge the impact of manufacturing overhead on gross margins, the ability to assess the relative profitability of products, and you can make better quoting and pricing decisions.

Manufactured item costing is complex because cost elements include materials, setup, labor, subcontract services, and manufacturing overhead, often within a multi-level product structure.

DBA gives you all the tools you need to shed the light on your costs and give you the feedback you need to help you reach your efficiency potential.

Manufacturing companies need more decimal places for costing and pricing than other businesses, especially when small parts like washers, o-rings, springs, and fasteners are involved.

Here you can specify the number of decimal places you need for costing purposes.

Three unit costs are maintained against each stock item.

The Last Cost is the last PO or job receipt cost. The Inventory Cost is an average cost that gets updated with each PO or job receipt. The Estimated Cost, which is the focus of this workflow presentation, is what you would expect the item to cost the next time it is purchased or manufactured. In the remaining segments, we will show you how this cost is determined.

Estimated costs for purchased items are periodically updated in the Estimated Purchase Costs screen.

You can populate the screen with a single item, or items pertaining to one or selected item categories, or to all items in all categories.

You can enter a new Estimated Cost in this column. More typically, the Mass Update option is used.

Here you can perform a mass update where each listed item's Estimated Cost is updated by the item's Last Cost or Inventory Cost.

Estimated costs for subcontract services such as painting, plating, and heat treating are entered directly against subcontract routing sequences, here in the Bills of Material screen.

Here we are looking at the Routing tab.

Here we are looking at a subcontract sequence. You enter the supplier price in this field. A conversion multiplier is available if the service is priced in a different unit of measure than the item's unit of measure. The program multiplies the supplier price by the conversion multiplier to calculate the Estimated Cost for the service.

For manufactured items, setup, labor, and manufacturing overhead costs are calculated from each routing sequence's setup hours and cycle time, using hourly rates stored against the sequence work center. Let's take a look at how these rates are maintained in the Work Centers screen.

Here we are looking at the Detail tab for a work center. Each work center has hourly rates for setup, labor, and manufacturing overhead.

Instead of entering hourly rates directly, they are derived from an overall shop labor rate and an overall shop overhead rate. How shop rates are calculated is covered in the next segment.

The shop rates can be factored up or down with these settings. For example, if you feel that the setup rate should be 50% higher than the labor rate, perhaps because setup personnel are higher paid than direct labor workers, you can enter a factor of 1.5.

If you feel that the labor in this work center's direct labor cost should be higher or lower than the shop average, factor the labor rate up or down.

In the case of manufacturing overhead, if you feel a work center has a disproportionately higher share of the overhead burden, perhaps because it is a complex machine that consumes extra energy and maintenance, you can factor the rate accordingly.

The Shop Rates screen is used to calculate an overall shop rate for direct labor and an overall shop rate for manufacturing overhead. As we saw in the previous segment, these shop rates provide the basis for your work center hourly rates.

Shop rates are calculated as follows. First you enter a date range, typically your most recent three months, which provides sufficient data to make an accurate calculation.

Next, click the Enter Labor Cost button. Using information from your accounting system's general ledger or from your payroll system, enter the total cost for direct labor for this date range.

Next, click the Enter Overhead Cost button. Using information from your accounting system's general ledger, enter the total cost for your manufacturing overhead accounts for this date range.

Now click the Calculate button. The program calculates a new shop labor rate, and a new shop overhead rate. These numbers are derived as follows.

Here in the Hours panel, the program displays the total labor hours that were reported to jobs for this date range. These hours are translated into factored labor hours to reflect the setup and labor factor settings in your work center rates.

The program takes your actual Labor Cost and divides it by the factored labor hours to arrive at a calculated shop labor rate.

The overhead rate is calculated in a similar fashion. Here in the Hours panel, the program takes the same total labor hours and translates that amount into factored overhead hours to reflect the overhead factor settings in your work center rates.

The program takes your actual Overhead Cost and divides it by the factored overhead hours to arrive at a calculated shop overhead rate.

Once the two shop rates are finalized, click the Save button. Your work center hourly rates will be automatically adjusted to reflect the new shop rates.

For manufactured items, the Cost Rollup blends all the previously reviewed cost inputs - purchased item costs, subcontract service costs, work center hourly rates, into a total Estimated Cost, rolled up through all levels of each item's product structure.

Cost detail is displayed in the upper panel

The cost summary is displayed in the lower grid. Cost classes include material, labor, setup, subcontract services, and manufacturing overhead.

The routing cost column displays the setup, labor, and overhead costs that pertain to this item's routing. The Lower Levels column displays those costs summarized for all lower levels in the product structure.

The Run Size is an item setting that represents the most typical large-size job quantity for the item. This provides the basis for amortizing total setup cost into a per unit cost.

The item's total estimated cost, which is a per unit cost, is displayed here.

The Cost Rollup has no direct accounting effect and can be run as often as you wish. You can run a single rollup for a given item, or you can run a Batch Rollup that applies to all your manufactured items.

Quotes are used to send customers prices prior to receiving a confirmed order.

Here we are creating a One-Off Item for a custom manufactured product. After the one-off item is generated, it can be given a bill of material, either by copying an existing bill of material and editing it or by entering a bill of material from scratch. Once the bill of material is finished, you can run the Cost Rollup to get an estimated unit cost for the item. You can then apply an appropriate Margin to establish the quoted price.

For standard products, the Estimated Cost can be used to help establish Base Prices, which are your selling prices or the basis for your price level prices.

Here we are performing a mass update to Base Prices by applying a percentage increase or desired profit margin to each item's Estimated Cost. After the mass update, you can edit individual prices for any exceptions.

When MRP generates a job, the job details are originated from the parent item's bill of material.

Here we are looking at the Job Costs tab within the Job Inquiry screen. When the job gets initially created or modified, an estimated cost is calculated, broken out into the same cost classes used by the Cost Rollup.

The Estimated Job Cost may differ from the item's Estimated Cost if the job quantity is different than the item's average Run Size setting and to the extent that job details are modified after the job is created.

Actual job costs accumulate in this column. When the job is finished, you can compare estimated versus actual job costs, which provides feedback that can be used to adjust cycle times are other cost inputs to refine the item's estimated cost.

Let's now review how finished items are costed when received to stock.

Here in the Job Defaults screen, you have the option of receiving finished items at Estimated Job Cost or Actual Job Cost. In general, if you have standardized products, the Estimated Job Cost basis is recommended because it gives you a variance at time of job close that can be used as a feedback mechanism. If you have highly customized products, the Actual Job Cost method is appropriate. The final receipt cost exactly balances input and output costs with no variance.

Finished items are received to stock here in the Job Receipts screen. The unit cost of each receipt is calculated by the program at the Estimated Job Cost or Actual Job Cost basis. This receipt cost is averaged with the cost of any stock on hand to establish a new Inventory Cost for the item. The Inventory Cost is the unit cost applied when the item is issued as a subassembly to other jobs or it is the cost of goods sold when the item is sold to customers.

If you've been operating in the dark, not knowing what it really costs to make your products, DBA will shed the light on your manufacturing costs. DBA provides all the costing tools you need to achieve more accurate inventory values and costs of goods sold, to gauge the impact of manufacturing overhead on gross margins, to assess the relative profitability of products, and to make better pricing and quoting decisions.