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Product costing based on different component prices

Dear Experts,

Recently in a manufacturing plant, we are obligated to change our processes as follow:

We are a subsidiary company in a holding. Recently the procurement policy of the holding company has changed and a bunch of raw materials would be procured by the holding and will be given us free of charge (in the possession of the parent company). On the other hand, some of these materials maybe procured by our company (will be paid by the child company).

So from the costing viewpoint, we will have different product costs based on the components’ provision.

Is there any practice to calculate the cost of semi-finished and finished products?

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  • Are you saying that some of the components are provided by the parent company and some provided by child, or are you saying that the same material can be provided by the parent or the child?

    If it's the first one then the items provided by the parent should be marked as not relevant to costing in the BOM (or set up as non-valued).

    If it's the second one then you need to decide which happens more frequently and base the standard cost off of that. For example if the norm is for the parent to supply the material free of charge you should use that in the standard and in cases where the child provides the component it would be treated as a variance when settling the production/process order.

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1 Answer

  • Jan 05 at 11:02 AM

    Dear DOC11,

    The case is that the same material may be provided by the parent company or also by the child.

    While products’ value is very considerable, and also there is no norm for possible combinations of products’ components (how many of components are provided by the parent and how many by the child), unfortunately it is not feasible to apply the second solution you mentioned.

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