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Accounting in ERP Systems
ingredients gives a total direct material cost of $537.65 for a 500-pound batch. Applying
the production overhead rate of 100 percent to this direct material cost gives a production
overhead cost equal to the direct material cost, or $537.65. As shown in the Figure 5-8,
the direct labor cost to mix the dough and bake the snack bars is $54.50. It is important to
note that the labor cost is only about 10 percent of the direct material cost, which is why
Fitter has chosen to apply production overhead costs based on direct material only.
The sum of direct materials, production overhead, and direct labor is the cost of goods
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manufactured (COGM). Currently, Fitter uses a rate of 30 percent of the cost of goods
manufactured to estimate the sales and administrative costs. Adding the sales and
administrative costs to the COGM gives the cost of goods sold (COGS). Because the COGM
and COGS were estimated based on the BOM (recipe) from Chapter 4 that produces seven
cases of snack bars, the figures must be divided by seven to give the COGM and COGS on
a per-case basis. Figure 5-8 shows that these are $161.40 and $209.82, respectively.
The product cost analysis allows you to determine whether selling 300,000 NRG-A bars
to a new customer for a price of $0.90 per bar would earn a profit for Fitter. Given that there
are 24 bars in a box and 12 boxes in a case, the current cost for an NRG-A bar is:
$209:82=case
¼ $0:73=bar
ð24 bars=boxÞð12 boxes=caseÞ
Based on this calculation, you can see that Fitter can sell the bars at $0.90 and make a
profit of $0.17 per bar.

Exercise 5.2
Estimate the COGM and COGS on a per-case basis for the NRG-B bar using the production
information in Figure 4-16 and the following product costs:

Protein powder (lb.) $4.40
Hazelnuts (lb.) $1.64
Dates (lb.) $3.55

Use the same direct labor costs and overhead percentages shown in the NRG-A bar
product cost analysis in Figure 5-8.

Product Cost Analysis in SAP ERP
A large company may produce thousands of complicated products, and the task of gathering
the information required to develop product costs can be a major challenge. An advantage of
an integrated information system such as SAP ERP is that timely, accurate information is
available in the information system. The key pieces of information for a cost analysis are the
direct material costs and the direct labor costs. In SAP ERP, the direct material costs are
determined from the bill of material (BOM), which is managed in the Production Planning
(PP) module. Direct labor costs are determined from the product routing, which documents
the machines and work centers used in the production of a product—along with equipment
set-up time, production rates, and labor requirements. The BOM and routing information,
combined with other data maintained in the Production Planning module, allows the SAP

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