When you enter a production BOM, the program can determine the cost of that BOM. The primary source for this calculation is the total cost of the materials entered on the BOM lines. You can also assign activity based costs to a production BOM. Activity based costs represent non-material costs associated with production, such as machine or labour costs.
By default, the program posts all of an item's activity based costs to a single G/L account. You can, however, post activity based costs to several accounts.
Resources
An activity based cost is defined in the program as a resource. On the resource card, you can enter both direct and indirect cost data. A resource's direct and indirect costs are added together to determine a unit cost. When entered as an activity based cost on a production BOM, a resource's direct cost is reflected as either labour, machine, or other cost (depending on the resource type), while the indirect cost (regardless of type) is reflected as overhead cost.
Overhead rate
If activity based costs are assigned to a production BOM, the program uses them to calculate the Overhead Rate on the associated item card. This value is calculated by summing together the BOM's per-unit activity based costs for the unit of measure that shares the same type as the item's base unit of measure. If the base unit of measure is a weight, for example, the system adds all of the production BOM's per-weight-unit activity based costs to obtain an overhead rate. The program sums together the production BOM's direct and indirect activity based costs to determine the item's overhead rate.
Whenever an item cost is posted and the adjust cost routine is completed, the program creates an indirect cost value entry for the overhead rate. This indirect cost is posted to an overhead applied account, which is defined during the general posting setup process.
Detail posting
If a greater level of detail for activity based cost posting is required, you can implement the Activity Based Cost Detail Posting feature. Start it by selecting the ABC Detail Posting field on the inventory setup card. Once this feature is active, entries can be made in the ABC Direct Account and ABC Overhead Account fields for a product posting group in the General Posting Setup page (the business posting group for such a line is left blank). Assign a product posting group to each resource set up to define an activity based cost.
When ABC Detail Posting is active, the adjust cost routine causes the indirect cost value entry to post to several G/L accounts based on the assigned general product posting groups on the associated resource cards. The program calculates the values applied to each account by applying the percentage of the total cost that each related activity based cost represents to the indirect cost value entry.
For example, a production BOM has several activity based costs, one of which is for production labour. The labour cost of the production labour value comprises 30% of the BOM's total activity based cost, and the overhead cost of the production labour value comprises 10% of the total activity based cost. With ABC Detail Posting active, an indirect cost value entry of $10 results in a $3 posting to the production labour cost's defined direct account and a $1 posting to the production labour cost's defined overhead account.
Using ABC costing with variants and SKUs
Because it is possible to use both the variant and the SKU level to set different production and packaging BOMs, the ABC costing functionality has been extended to that level as well. This means that when an item-variant is used and the variant has a specific BOM, the indirect cost calculated from both the item level and the variant level is used to calculate the resulting ABC cost posting. The basis for the calculation is still the Overhead Rate field on the item level. If the item uses both SKUs and variants, the assumption is that each SKU is linked to a variant and has a different item cost. The ABC costing routine in this case still takes all the BOM cost lines into account, but bases the calculation on the item indirect cost Overhead Rate field rather than the field on the item level.