Processing Considerations
Before running the calculation, consider the following:
• At which level will you calculate overhead? The lowest level parent item? The highest level parent item? The planning level? This decision varies from company to company.
It is important not to base costs indirectly on themselves. The previous example illustrates why you have to be careful. Item A has a lower-level overhead of 15.00 (4.50 + 10.50). However, Item Overhead Cost Update also calculated this-level overhead of 15.00 (150% of 10.00, the this-level material cost).
When you run the calculation for item A, you would calculate an overhead cost that is too high, unless you want the overhead for A to be 300% of 10.00. In a product structure with many levels, the inaccuracies would be even more striking. To prevent this, calculate costs from only one level.
• Which overhead percentage will you use for each level?
In the item burden and overhead cost update functions, the default percentage is 100%. When calculating lower-level costs, typically change this to 0%.