Analyze Cost Calculation —Extended Exercises

Basic Data Setup

Purchased and Manufactured Inventory Parts

Purpose: The purpose of this exercise is to enter two purchased and two manufactured parts used in the main exercises.

Windows:
Inventory Part

1. Enter inventory parts as described in the table below.

   Part No.	Description	Part Type	Estimated Material Cost
   XX-98-100	Wheel	Manufactured
   XX-98-200	Aluminum Rim	Manufactured	--
   XX-98-300	Aluminum	Purchased	300
   XX-98-400	Tire	Purchased	150

General exercise for Purchased Inventory Part
General exercise for Manufactured Inventory Part
General exercise for Define Material Costs

Cost Elements and Cost Buckets

Purpose: The purpose of this exercise is to create cost elements and buckets for material, delivery and sales overhead used in the main exercise.

Windows:
Cost Elements
Cost Bucket
Overhead Cost Assistant

1. Your company, IFS Racing, works with a material overhead of 5% based on the estimated material cost. Register a new cost element with source element 110 (Estimated Material Cost), element factor 5, and overhead type Material Overhead.
2. IFS Racing uses a fixed delivery overhead of 10 per unit. Register a new cost element with fixed cost 10, OH cost relation Unit, and overhead type Delivery Overhead.
3. IFS Racing also uses part specific sales overheads for packing material. Register a new cost element with source element 601 (Sales OH Trigger), and overhead type Sales Overhead.
4. The actual rate for the sales overhead is defined per part. Open the Part Cost window, query for your parts and cost set 2 and register the part specific sales overhead. Use the cost element created in the previous step and enter the cost 15 per unit for your purchased parts and 25 per unit for your manufactured parts.
5. Create separate cost buckets for the three elements and connect the cost elements to the buckets.

Note: Most of the steps above could also be done using the Overhead Cost Assistant.

General exercise for Set Up Cost Elements
General exercise for Set Up Cost Buckets
General exercise for Define Sales Overhead Costs

Set Up Cost Templates and Assign Cost Templates to the Parts

Purpose: The purpose of this exercise is to modify two system defined cost templates and assign them to the purchased and manufactured part used in the main exercise.

Windows:
Cost Template
Part Cost

1. Add the buckets for material, delivery and sales overhead to the existing cost template P-110 (bucket 110 should already be included)
2. Add the buckets for sales overhead and the material sum bucket (bucket of buckets) to the existing cost template M-110.
3. Connect cost template P-110 to cost set 2 for your purchased parts and cost template M-110 to cost set 2 for your manufactured parts.

General exercise for Set Up Cost Template
General exercise for Assign Template to Inventory Parts

Work Center and Labor Class

Purpose: The purpose of this exercise is to enter the work center and labor class used in the main exercises.

Windows:
Work Center
Manufacturing Labor Class

1. Create an internal work center with the ID XXNC (replacing XX with your initials) and the description NC-Machine.
2. Enter the work center cost 150 per hour and the overhead 1 cost 30 per hour in cost set 2.
3. Create a labor class with the id XXW (replacing XX with your initials) and the description Department Wheel.
4. Enter the labor class rate 160 per hour and the overhead 1 cost 30 per hour in cost set 2.

General exercise for Work Center
General exercise for Define Machine Costs
General exercise for Labor Class
General exercise for Define Labor Costs

Required Data

Create Product Structure and Routing

Purpose: The purpose of this exercise is enter the product structure and routing for your manufactured part.

Windows:
Product Structure
Routing

1. Open the Product Structure window, query for your manufactured parts and enter the structures for your manufactured parts.
   Part XX-98-100 Wheel consists of 1 unit of XX-98-200 Aluminum Rim and 1 unit of XX-98-400 Tire.
   Part XX-98-200 Aluminum Rim consists of 1 unit of XX-98-300 Aluminum.
   Change status to Buildable for both structures.
2. Open the Routing window, query for your manufactured parts and enter the routing operations for your manufactured parts.
   Enter the following operations for the part XX-98-100 Wheel:

   Operation No.	Description	Work Center	Mach Setup	Mach Run Factor	Factor Unit	Labor Class	Labor Setup	Labor Run Factor	Factor Unit	Crew Size
   10	Prepare Assembly	XXNC	0.2	0.5	Hours/Unit	XXW	0.2	0.1	Hours/Unit	1
   20	Assembly	XXNC	0	0	Hours/Unit	XXW	0	1	Hours/Unit	1

Enter the following operations for the part XX-98-200 Aluminum Rim:

Operation No.	Description	Work Center	Mach Setup	Mach Run Factor	Factor Unit	Labor Class	Labor Setup	Labor Run Factor	Factor Unit	Crew Size
10	Machining	XXNC	0.1	0.2	Hours/Unit	XXW	0.2	0.1	Hours/Unit	1

Change status to Buildable for both routings.

General exercise for Creating Product Structure
General exercise for Creating Routing

Calculate Costs for Manufactured Part

Purpose: The purpose of this exercise is to perform a cost calculation for the parts used in the main exercise.

Windows:
All Levels Part Cost Calculation

1. Open the All Levels Part Cost Calculation dialog box and calculate costs for manufactured part XX-98-100 Wheel in cost set 2 (make sure to calculate the costs for all levels).

General exercise for Cost Calculation

Main Exercises

Purpose: The purpose of this lesson is to familiarize yourself with the analysis tools in costing.

Windows:
Inventory Part
Lead Time Cost
Cost Volume Profit Analysis
Price Elasticity Estimation
Component Cost Build Up Graph
Unit Cost per Lot Size
Part Routing Cost

Lead Time Cost

Lead time Cost enables to learn more about work in progress (WIP) for the specified part. When you have entered manufactured lead-time in the Inventory Part window, you may also have adjusted lead-time in your routing. You perform lead-time cost in costing analysis to calculate inventory dollar days. Now you can evaluate whether you need to change or improve certain things to achieve better results and reduce costs.

1. Open the Perform Inventory Part window and query for your manufactured parts.
2. Click the Acquisition tab and enter different manufacturing lead times for your parts.
3. Open the Lead Time Cost window and query for part XX-98-100 Wheel and cost set 2.
4. Analyze the lead-time cost.

Cost Volume Profit Analysis

It is important to perform break-even analysis for every part to determine whether you have enough volume, or if the price is high enough to be profitable.

Step 1: Break-Even Analysis

1. Open the Cost Volume Profit Analysis window and query for part XX-98-100 Wheel and cost set 2.
2. Use Total Cost as the analysis base (the available options are Total Cost, Total Sales Cost, Relevant Cost, Direct Cost, or Variable Cost).
3. Use Price as analysis type (the available options are Price, Volume, or ROS - Return On Sales)
4. Enter a unit price.
5. Enter a fixed cost.
6. Click Calculate and analyze the result.
7. Specify the ROI% (simulation feature).
8. Specify the safety margin (simulation feature).
9. Change the base cost factor (95%) (simulation feature).
10. Click Calculate and analyze the result.

Step 2: Sensitivity Analysis

1. Continue directly from the last exercise and click the Sensitivity Analysistab
2. Analyze the information in the tab.
   Start with the red line where you have no price changes. If your variable cost is close to the B/E price, there will be a significant effect on volume if the price changes.
   A decrease in price by 10% or 20% above the red line shows how much volume you need to compensate for the decrease.
   An increase in price by 10% or 20% below the red line shows how much less volume you can accept.

Estimate Price Elasticity (Optimal Price Calculation)

1. Open the Price Elasticity Estimation window and query for part XX-98-200 and cost set 2.
2. Enter the prices, which you want to compare in your analysis in the Price 1 and Price 2 fields.
3. Now you should estimate what possible volumes could be sold at prices 1 and 2. These values should be entered in the Volume One and Volume Two fields in the price elasticity table. These estimates gives the price elasticity for your part.

Note: If there are different opinions of the possible sales volumes at different prices, all opinions could be entered in the table and a weighted average will be used in the price elasticity calculation.

4. To perform an optimal price calculation, right-click and then click Cost Volume Profit Analysis.
5. Enter a unit price and a fixed cost and click Calculate.
6. Click the Optimal Price Calculation tab and analyze the result.

Component Cost Build-Up Graph

Component cost build-up enables you to determine which part within the product structure is carrying the costs. The Pareto principle explains that 20% of the child parts carry 80% of the costs. This analysis is crucial when you work with cost optimization.

1. Open the Component Cost Build-Up Graph and query for part XX-98-100 Wheel and cost set 2.
2. Analyze the component cost build-up graph.

Part Cost History Graph

Note: This exercise requires historical data in cost set 1 for a part. This could be achieved by setting the time zone offset for the site to -24, performing a cost calculation and copying costs to cost set 1 and then switching the time zone offset back to 0.

1. Open the Component Cost Build-Up Graph window and query for a part with history records in cost set 1.
2. Analyze the graph.

Unit Cost per Lot size

1. Open the Unit Cost per Lot Size window and query for part XX-98-100 Wheel and cost set 2.
2. Click Calculate.
3. Analyze the unit cost per lot size. Would it be better to handle a larger lot size, or does it really matter?

Part Routing Cost

1. Open the Part Routing Cost window and query for part XX-98-100 Wheel and cost set 2.
2. Analyze the routing-related costs.
3. Click the Cost per Operation tab and analyze the chart.
4. Click the Cost per Cost Type tab and analyze the chart.