Cost component split

A standard cost of USD 150 is one number. A cost component split says what it is made of: so much material, so much labor, so much machine time, so much overhead. That breakdown is saved with the estimate, released with it and used for years afterwards in places that have nothing to do with costing.

Cost components and the structure

Cost elements (G/L accounts of the costing) are grouped into cost components by a cost component structure, assigned in the costing variant. SAP documentation describes components such as raw materials, material overhead, external activities, setup, machine, labor, production overhead and other costs. The structure is defined once and changed rarely, because historic estimates are stored with it.

Rolled up through levels

In a multilevel product, the split rolls up. If Contoso made the rotor in-house, its own material, labor and machine components would be carried into the alternator's split as material, labor and machine, not as one "rotor" line. SAP's learning material describes this as retaining the original identity of costs. That is what makes a plant-to-plant comparison meaningful: you can see that none of Chicago's extra USD 6 is material: labor and machine add USD 2.50 (+1.00 and +1.50), and overhead adds USD 3.50 (material overhead +0.80, production overhead +2.70).

Where the split is used later

• Margin analysis: SAP S/4HANA can split cost of goods sold by cost component at goods issue, posting each component to its own G/L account. A contribution margin report then shows material, labor and overhead in sold goods.
• Inventory and price analysis: comparing old and new standards by component shows whether a price rise came from purchasing or from the shop floor.
• Production variances: target costs for production orders come from the standard estimate; the split helps explain where actual cost differs.
• Fixed and variable: components can be split into fixed and variable parts for contribution margin analysis.

Designing components with the end in mind

Choosing cost components is a design decision with a long tail. Too few components and margin reports cannot tell material from conversion cost; too many and every report becomes a wall of small numbers that nobody reads. A practical rule is to ask Dan and the plant managers which questions they ask about product cost every month, and to create one component per answer they need. At Contoso the questions were "how much is material?", "how much is purchasing overhead?", "how much is our own labor and machine time?" and "how much is plant overhead?". That gives the five components used in this course, with fixed and variable parts kept apart for overhead so contribution margins can be calculated later.