Ingredients of a cost estimate

A standard cost is the price at which a manufactured product is valued in inventory, issued to production and sold. At Contoso Motor Co., one alternator CMC-ALT-100 carries a standard cost of USD 150 in Detroit (plant 1710) and USD 156 in Chicago (plant 1720). Those numbers are not typed in by someone in finance. They are calculated by a standard cost estimate from the way the product is built and what each input costs.

To trust the result, you need to know the ingredients. When an estimate looks wrong, the cause is almost always one ingredient, not the costing engine.

Quantity structure: BOM and routing

The bill of material lists the components and quantities for one costing lot. For CMC-ALT-100 it includes the rotor CMC-RTR-200, bought from Lakeside Components, plus a stator, a housing, a regulator and small parts. The routing lists the operations, the work centers that perform them and the standard values, such as setup time and machine and labor time per unit. Each work center points to a cost center and the activity types it provides. A production version tells costing which BOM and routing to use for the lot size and date.

Prices: materials and activities

Purchased components are valued according to the valuation variant of the costing variant. SAP's learning material describes it as a list of price strategies searched in order; the first price found is used. A typical sequence for purchased parts is planned price 1, then the standard or moving average price, then the purchasing info record. Activities are valued with planned activity prices from cost center planning: for example USD 52 per labor hour at Detroit Assembly and USD 96 per machine hour at Detroit Machining.

Overhead

Some costs cannot be traced to a unit, such as warehouse handling or plant supervision. A costing sheet applies them as surcharges: for example 10% material overhead on material cost and 24% production overhead on labor and machine cost. The same costing sheet later applies actual overhead to production orders, so the standard and the actuals are built on the same logic.

The costing variant

Each estimate is based on a costing variant. SAP's course describes it as the main control element: it combines a costing type, which says which price field the result may update (for a standard cost estimate, the standard price) and a valuation variant, which says where prices come from. It also holds date control, quantity structure determination and transfer control. Most companies use one costing variant for standard costs and protect it from casual change.