Resentation for PeopleSoft SCM users group comparing and Standard and Actual Costing for Production Inventories using PeopleSoft Cost Managment functionality.
2. 2
Outline
• Introduction – Who is this guy?
• What is Standard Cost?
• What is Actual Cost?
• What are the different Actual Cost Methods?
• Is it better?
• How would I change from Standard to
Actual Costing?
3. 3
Introduction Ron Caldwell
• Former practicing CPA with 4 years experience in “Big 5”
Public Accounting
• 2 years Private Sector Accounting for US Defense
Contractor
• Beta tested PeopleSoft Cost Management version 5.0
• 9+ years working “hands-on” with PeopleSoft SCM and
Financial Applications the last 4 years in private practice.
• Help setup Cost Management for DMUG member Honda of
America.
• Reengineered setup of Cost Management 8.8 for DMUG
member: Monster Cable Products and Combe, Inc
4. 4
What is Standard Cost?
• Standard Cost is a predefined calculation of the
costs to produce a good under specified “standard”
working conditions.
• It is built up from an assessment of the value of
cost elements and correlates technical
specifications and the quantification of materials,
labor and other costs expected during the period in
which the standard cost is intended to be used.
• Its main purposes are to provide bases for control
through variance accounting, for the valuation of
work in progress and for fixing selling prices.
5. 5
What the heck did that mean?
• Standard cost is a singular frozen estimate
of production costs based on a singular set
of assumptions used to evaluate production
efficiency through variance analysis.
• Standard cost predetermined and intended
for a finite period of time.
6. 6
What are Assumptions are used?
• The Source Code (Make or Buy) of the Final
Product
• The Primary Bill of Material (BOM) and the
Source Codes (Make, Buy, Floor Stock*,
Expensed*) and Standard Costs of the BOM
Components
• The Primary Production Routing which includes
decisions about which Work Centers, what Crews,
how many per Crew, how much Operating Time
per Crew member, and whether or not any of the
production steps are Subcontracted.
*Not included in the Standard Cost of the Assembly
9. 9
Typical Lower Level for Fin Goods
These items are comprised of Raw Material
items on it’s Bill of Material. So the Cost
Elements typical of Raw Material items will
comprise the Lower Level cost of the
Finished Goods item. These are as follows:
100 – Material – Vendor or Transfer Price
300 – Freight – Inbound Freight Cost
400 – Duty – Inbound Duty Cost
700 – Overhead – Purchasing Overhead
10. 10
Rolling up Lower Level Costs
Item 200
Cost Element 100 $8.00
Cost Element 300 $1.50
Cost Element 400 $1.25
Cost Element 700 $1.75
Item 140
Cost Element 100 $1.75
Cost Element 400 $0.75
Cost Element 700 $0.25
Item 160
Cost Element 100 $3.75
Cost Element 300 $1.00
Cost Element 400 $0.50
Cost Element 700 $0.25
Item 180
Cost Element 100 $2.50
Cost Element 300 $0.50
Cost Element 700 $1.25
Cost Elements are retained in the Lower Level Cost as they roll up from Raw
Materials to assembled Finished Goods.
12. 12
Typical This Level for Fin Goods
The cost associated with assembling the
Raw Material items into Finished
Goods items are the This Level cost for
the Finished Goods Item:
200 – Labor – Production Labor
500 – Overhead – Production Overhead
600 – Outside Processing – Subcontracted
Production Cost
13. 13
Routing Summary for a Make Item
The Routing displays the Work Centers
used to assemble the Make Item.
16. 16
Labor Rate for the Work Center
The Labor Rate is $19.80/Hr.
$19.80 X 1 X (4/60) = $1.3200
17. 17
Overhead Rate for the Work Center
The Overhead Rate is 77% of the
Labor Amount.
$1.3200 X 77% = $1.0164
18. 18
Establishing a Standard Cost
• When using Standard Costing establishing a
cost standard for each item is a prerequisite
for transacting the item for Inventory or
Production purposes.
• The standard are set after running these two
processes:
– Cost Rollup
– Cost Update
21. 21
Actual Costing for Production Items
• Okay, now it’s about to get interesting.
• One of the things that production operations
will like is that Actual costing doesn’t
require a pre-established standard cost before
the item can be transacted.
• With Actual Costing the Cost Rollup and
Cost Update process is not required.
22. 22
What is Actual Costing?
• Actual Costing values inventory based on the “best
available” actual cost information at the time
including purchase order price or matched vendor
invoice price, and actual production labor and
machine time.
• The release of PeopleSoft 8.8 Cost Management
made available the use of Actual and Average
Costing Methods for production inventories.
• Prior to 8.8 Standard Costing was the only cost
method available for production inventories
23. 23
Actual Costing emphasizes Material Cost
• Standard cost accounting methods were
developed about 100 years ago, when labor
comprised the most important cost in
manufactured goods. The emphasis on
measuring production labor efficiency in one
of the prime sources of criticism by Eliyahu
“theory of constraints” Goldratt.
• Actual Costing endeavors to reflect the
actual vendor cost for the material
component of production inventories.
24. 24
Actual Costing for “Buy” Items
• Purchased goods are initially valued based on the
Purchase Order Price at the time of Receipt.
• The value of purchased goods is adjusted for any
difference between the Purchase Order price and
the Vendor Invoice price after the related voucher
is MATCHED, POSTED, and EXTRACTED via
the Landed Cost Extract Process.
• The adjusted cost of the purchased goods flow into
Work-in-Process cost based upon the Costing
Method selected.
26. 26
Actual Costing Methods for Outputs
• The Actual Costing methods include:
– FIFO (First-in, First-out)
– LIFO (Last-in, First-out)
• The Weighted Average Costing Methods include:
– Periodic – calculated at month-end – all depletions use
the same average.
– Perpetual – calculated throughout period based on
information available at the time of the depletions
– Retroactive – similar to perpetual except that depletions
are revalued retroactively at month end for all for AP
match and post activity during the month
28. 28
Calculating Labor and Machine Cost
• Labor and Machine Cost can be added to
material cost based on following selections
on the Cost Profile-Manufacturing Page:
– Not Applicable
– Standard Time-Conversion Rate
– Actual Time-Conversion Rate
– Actual Time-Actual Rate (Labor Only)
32. 32
Actual costing eliminates variances
• You can chose to eliminate Purchase Price
Variance Expense for inventory purchases. Any
difference between purchase order and invoice
price updates the basis of the good, even if it has
been consumed into work-in-process and the
assembly had been shipped to a customer.
• You will not have Material, Conversion or Rework
Variances, or Subcontract PPV Expense for
production work orders because these costs are
added to the basis of the assemblies produced.
33. 33
Is it better?
• Actual costing is flexible. Each production
transaction is valued exactly in the manner in which
it is produced for those who might use alternate
sourcing, Bill of Material or Routing.
• It is especially beneficial to those who extensively
use Product Configurator in Production
• Actual Costing ultimately provides the most
accurate inventory information for evaluating
production costs and gross margin.
• Yes, it’s better! Period!
34. 34
Actual Costing Caveats
• You should develop a reasonable means for Current
Purchase Cost for Bill of Material (BOM)
components and Default Actual Cost for All Actual
Cost items.
• Current Purchase Cost (or Last Price Paid) is
used to cost components when no cost is available
such as when inventory of the component is
negative.
• Default Actual Cost is used cost any “Increase”
adjustment transaction like Cycle Count and User
adjustments. It is also used to value RMA
transactions as well
35. 35
One more Caveat
• When running the Cost Accounting
Creation process it is very important to run
using the Mid-Period Mode during the
month and Regular Mode on the last day of
the month especially when using an Average
Costing Method.
37. 37
Migrating from Standard to Actual Cost
• Oracle does not have a certified upgrade
methodology for migrating from standard
cost to an actual or average costing method.
• There will not be a one size fits all solution
for migration.
• At Combe we will develop a methodology
for migrating from Standard to Actual
Costing where the initial Actual Cost of
Inventory will be equal to the Standard Cost.
40. 40
Standard Cost is predicated on the
creation and analysis of variances.
Variances are created on most
purchase and production
transactions.
41. 41
Standard Purchase Price Variance
There are two instances where PPV
may apply:
The Purchase Order Price differs from the
Standard Cost for an Item (PPV 1).
The Voucher Price MATCHED and
POSTED differs from the Purchase Order
Price (PPV2). This variance is extracted
from Accounts Payable using the Landed
Cost Extract process
42. 42
Standard Cost Production Variances
Material Variance – to account for
deviations from the Primary Bill of
Material (BOM)
Conversion Variance – to account for
deviations from the Primary Production
Routing
Rework Expense – to account for the
additional material and processing cost
associated with rework production.
44. 44
Cost Elements for Raw Material Items
Cost Elements typically used:
100 – Material – Vendor or Transfer Price
300 – Freight – Inbound Freight Cost
400 – Duty – Inbound Duty Cost
700 – Overhead – Purchasing Overhead
Cost Elements NEVER used:
200 – Labor – Production Labor
500 – Overhead – Production Overhead
600 – Outside Processing – Subcontracted
Production Cost
45. 45
Material Standard Cost for “Buy” Items
• The material cost for these items are primarily
comprised of purchased cost. The standards for
these items can be derived from one of these
sources:
– Current Cost
– Average Cost
– Last Price Paid
– Forecasted Purchase Price
• Despite by names like “Current” and “Last Price”
the material standards remain frozen (unchanged)
between Standard Cost Updates.
53. 53
Cost Elements for FG “Buy” Items
Cost Elements typically used:
100 – Material – Vendor or Transfer Price
300 – Freight – Inbound Freight Cost
400 – Duty – Inbound Duty Cost
700 – Overhead – Purchasing Overhead
Cost Elements NEVER used:
200 – Labor – Production Labor
500 – Overhead – Production Overhead
600 – Outside Processing – Subcontracted
Production Cost
54. 54
Finished Goods “Buy” Item
Finished Goods Buy items are
similar to Raw items in that they
only have This Level cost.
55. 55
Now it gets exciting because we’re
going to illustrate the Accounting
Debit and Credits for a few typical
transactions.
56. 56
Buying a Raw Material Item
DR 1200-Inventory-Raw Stk 3.9950
CR 2100-Accrued Liabilities-
Inventory
3.4800
CR 5159-Applied-Ocean
Freight In
0.1357
CR 5169-Applied-Customs-
Duty
0.2018
CR 5999-COGSI-Overhead
Absorption
0.1775
57. 57
Issuing Material to a PID
DR 1300 – Inventory WIP 6.0419
CR 1200 – Inventory Raw
Stk
6.0419
58. 58
Applying Labor to a PID
DR 1300 – Inventory WIP 1.3200
CR 5149– COGSD-Direct
Labor Absorption
1.3200
59. 59
Applying Overhead to a PID
DR 1300 – Inventory WIP 1.0164
CR 5999 – COGSI-
Overhead Absorption
1.0164
60. 60
Closing a Production Order (PID)
DR 1400 – Inventory
Finished
8.3783
CR 1300 – Inventory WIP 8.3783
61. 61
Issuing Material to a Customer
DR 5000 – COGSD-
Taxable
8.3783
CR 1400 – Inventory
Finished Goods
8.3783
62. 62
Contact Information
If you have any questions please feel free to
contact me at:
Rondal A Caldwell, CPA
Caldwell + Associates
1900 West 42nd
Street
Austin, TX 78704
832-741-7427
