Cost accounting of subcontracted services


Activity-based subcontracting in Supply Chain Management uses process activities as part of the cost calculation for the finished product, based on the production flow by using a cost group type of Direct outsourcing.

Receipts for subcontractor services and invoices are directly contributing to the cost of the production flow. Output product receipts and vendor invoices are reconciled against the work in progress (WIP) accounts. Variances are accounted for in the backflush costing process.

Direct outsourcing cost group type

The cost group type of Direct outsourcing is assigned to all work that is provided by subcontracting work cells.

Cost management > Inventory accounting policies setup > Cost groups

Screenshot of the Cost groups page with a Direct outsourcing cost group type.

To properly calculate the item cost for subcontracting, you must set up a few prerequisites:

  • A cost group type of Direct outsourcing is assigned to all subcontracting work cells.

  • Subcontracting must be activated in the costing sheet, with the cost groups for direct outsourcing associated with them.

  • Kanban rules are created with the subcontracting activities in the production flow.

When calculating the item cost based on the production flow, finance and operations uses the subcontracting service activity settings to define the item cost. The cost breakdown shows the service item instead of the work cell as a resource.