23

Lesson 23: Contract

Manufacturing
Part 6: Costing of Fulfillment Business Flows
Supply Chain Managerial Accounting Course

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Objectives

After completing this lesson, you should be able to:

• Describe the process flow of contract manufacturing
• Describe the setup tasks to support the costing of contract
manufacturing
• Explain the cost accounting of contract manufacturing work
orders

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Topics

• Contract manufacturing process flow

• Setup tasks to support the costing of contract manufacturing
• Cost accounting of contract manufacturing work orders

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Solution Overview: Capabilities

Contract Manufacturing
helps OEMs:
• Outsource the
manufacturing process Customer Contract
Order Manufacturer
• Outsource build-to- Management

plan or build-to-order
• Supply components to
the contract
manufacturer
• Track and monitor the Order Promising/
Value Chain
Supply Chain Orchestration
Manufacturing
outsourced Planning

manufacturing process
• Track and monitor
inventories Procurement Logistics

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Contract Manufacturing: Process Flow

Supply Requests from
DOO/GOP/VCP for Contract
Manufactured Item
Contract
Manufacturing
Organization (Virtual)
Work Order in MFG
CM Finished Good CM Finished Good Item
Item
CM Service Item

OEM Component 01

OEM Component 02

SCO

Purchase Order
Purchase Order in Receipt
PRC
CM Service Item
Contract
Manufacturer
CM Service Item = CM Finished Good Item

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Contract Manufacturing: Business Flow

Customer Place an order for Receive the

ordered goods
an item on OEM

Original Equipment Receive the Create a work Record and track

customer order order to track OEM-owned Request that
Manufacturer and outsource it contract stock with a goods be shipped
to a contract manufacturing contract
(OEM) manufacturer progress manufacturer
to a customer

Complete
Receive the order Report progress
manufacturing
Contract from OEM and on every
and stock in their
milestone
Manufacturer start
operation
own facility and
manufacturing ship at OEM’s
completion
request

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 Contract Manufacturing: Process Flow
Receive
customer PO Record
Order Management and enter supply
sales order details

Schedule Planned
Order Promising/ sales order orders
Planning Central

Create Send WO Send Send PO

Send update
supply order request to reservation request to
Supply Orchestration request to
and notify MFG for CM request to PRC for CM
MFG
OM FG Item Inventory Service Item

Create WO Update WO
Manufacturing on CM FG with PO
Item details

Reserve work
Inventory/Logistics order against
the sales
order

Purchasing Create PO on
CM Service 1
Item

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 Contract Manufacturing: Process Flow
Record
Order Management supply 2
availability

Notify supply Record WO

Supply Orchestration availability completion

Receive Complete
Update WO Record Invoke WO and
production
Manufacturing with product component
completion Receiving consume CM
progress consumption Service Item
report

Send PO on
Purchasing 1 CM Service
Item

Decrement CM Service CM FG
Inventory/Logistics component Item received inventory
quantity against PO created

Receive PO
Contract and create
Report
Complete Report CM FG Item
Manufacturer production production stocked in
WO on CM manufacturing
progress completion warehouse
FG Item

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 Contract Manufacturing: Process Flow
Receive CM
Customer FG Item

Send Notify
2 Record
Order Management shipment shipment
shipment
request completions

Record
shipments
Supply Chain and close
Orchestration supply order

Decrement
Receive Send Record Transmit all
FG Item
Inventory/Logistics shipment shipment shipment inventory and
inventory
request request confirmation transactions
notify OM

Receive Compute
Costing transactions costs
from MFG

Contract Receive Ship CM FG Send

Manufacturer shipment Item shipment
request confirmation

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Topics

• Contract manufacturing process flow

• Setup tasks to support the costing of contract manufacturing
• Cost accounting of contract manufacturing work orders

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Costing Setup for Contract Manufacturing

The cost profiles that are defined for in-house manufacturing are
also used for contract manufacturing.

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Cost Planning: Contract Manufacturing

• Cost rollup includes the cost of the service provided by the

contract manufacturer.
• All OEM-supplied items are included in the cost rollup of the
product.
• Items provided by the supplier are excluded from the cost
rollup.

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Topics

• Contract manufacturing process flow

• Setup tasks to support the costing of contract manufacturing
• Cost accounting of contract manufacturing work orders

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Cost Accounting of Manufacturing Work Orders

• Calculate cost based

Work Order
on OEM material, Material Resource
Information
service item,
resource
transactions. and Interface
overheads.
• Analyze WIP
balances, total cost Cost • Resource
Processor Transactions
• Material Transactions
incurred, scrap, and • Overheads
• Scrap
variances for work • Variances
orders. Distributions

SLA

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Summary

In this lesson, you should have learned how to:

• Describe the process flow of contract manufacturing
• Describe the setup tasks to support the costing of contract
manufacturing
• Explain the cost accounting of contract manufacturing work
orders

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