Understanding production costs
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Planned costs essentially estimate what it will cost to produce the released item for the work order.
Planned costs are displayed for each production operation, operation resource and component as they're added to a work order. The total planned production cost of the finished item is calculated and displayed in the Planned versus actual block when the work order is created.
- Planned process costs are calculated from each individual resource cost for each production operation.
- Planned component costs are calculated from the current cost of each individual component, as determined by the defined valuation method for the component. This can mean that the total planned material cost is a combination of component standard costs, average costs and FIFO tier costs.
This method of estimating production costs means that labour and material transactions can be reported on and tracked after the released item is received into stock. This is particularly important when a released item is produced faster than the associated "paperwork" leaves the shop floor and the figures entered into your system. In some organisations, employees might indicate on the job traveller their labour hours and material quantities used. A supervisor might collect the job traveller at the end of each shift, then the next working day review the reported figures, potentially challenge some, and finally enter the data when they are absolutely sure the paperwork and reported figures are correct. During the time the paperwork is delayed, and actual labour times and material quantities are entered and tracked for the work order, a released item might have been packed, moved to stock, and shipped to a customer.
To minimise the impact of understated costs, planned costs are used when receiving finished items from production for a work order on the Production tracking page.
On the Work order page, if you want to make sure you are viewing the current planned costs, you can select the Update planned costs action at any time until a production tracking is entered for the work order. The planned costs will only change if a component standard cost is changed, an average cost has changed or if a FIFO tier cost has changed.
The Work in progress inquiry and Work in progress transaction inquiry pages are updated after a tracking is posted. The "Actual" tracked cost figures are compared with the "Planned" cost figures, and the difference between the actual and planned work order cost totals calculated for the components and the individual resource types.
Component planned costs
The planned cost for each individual work order component is calculated from the item Unit cost, which is determined by the item Valuation method.
You can view these details on the Item page, on the Sites tab, in the Item-sites grid. The item valuation method is displayed as the Cost type.
Cost type: Standard cost
For a component with a Cost type set to Standard cost, the component planned cost is the item Unit cost on the work order Start date.
Your organisation increases prices across all stock items on the 1st May.
| Component Cost type | Work order start date | Work order quantity | Component Unit cost | Work order Planned material cost |
|---|---|---|---|---|
| Standard cost | 20 April | 1 | £10.0000 | £10.0000 |
| Standard cost | 20 May | 1 | £11.0000 | £11.0000 |
A work order with a Start date before 1st May will use the previous component Unit cost of £10.00 for the Planned material cost.
A work order with a Start date on or after 1st May will use the new component Unit cost of £11.00 for the Planned material cost.
Cost type: Average unit cost
For a component with a Cost type set to Average unit cost, the component planned cost is set to the average cost of the item, as displayed in the Unit cost, on the date the work order is created.
Your organisation receives stock of a component on the 1st May which is more expensive than the previous receipt. This increases the average cost of the component.
| Component Cost type | Work order created date | Work order quantity | Current component Unit cost | Work order Planned material cost |
|---|---|---|---|---|
| Average unit cost | 20 April | 1 | £10.0000 | £10.0000 |
| Average unit cost | 20 May | 1 | £11.0000 | £11.0000 |
A work order created before 1st May will use the component average Unit cost of £10.00 for the Planned material cost.
A work order created on or after 1st May will use the new component average Unit cost of £11.00 for the Planned material cost.
Cost type: FIFO cost
For a component with a Cost type set to FIFO cost, the component planned cost is the item Unit cost in the first or oldest FIFO cost tier with available stock of the item, on the date the work order is created.
Your organisation creates a work order that needs 10 of a single component.
| Component Cost type | FIFO cost tier batch sequence | FIFO cost tier batch quantity | FIFO cost tier Unit cost | Work order Planned material cost |
|---|---|---|---|---|
| FIFO cost | 1 | 5 | £10.0000 | £10.0000 |
| FIFO cost | 2 | 5 | £11.0000 | £11.0000 |
The 5 available component items in the first or oldest batch in the FIFO cost tier will have a Unit cost of £10.00 and the 5 available component items in the next oldest batch in the FIFO cost tier will have a Unit cost of £11.00. The Planned material cost will therefore be the sum of (5 x £10.0000) + (5 x £11.0000).
Released item planned cost
The planned cost for the released item is calculated from the released item Unit cost which is determined by the released item Valuation method.
You can view these details on the Item page, on the Sites tab, in the Item-sites grid. The released item valuation method is displayed as the Cost type.
Released item cost type: Standard cost
The production receipt cost is always the current standard cost of the released item.
If the actual production cost of the work order is different from the planned production cost, a work order cost variance journal entry is created for the variance when the work order is closed, if the WIP posting switch for the company is on.
Released item cost type: Average unit cost or FIFO cost
The production receipt cost is calculated as:
(Planned cost / Released quantity) * Actual quantity produced
When the work order is closed, the final cost of the released item is calculated from the sum of the material and time trackings for the work order. The released item Unit cost is adjusted if there are any differences between the released item planned cost and actual cost, or any rate or usage variances.
Your organisation receives stock of a component on the work order start date for less than the expected receipt cost. The unit cost of the component is reduced by £2.
| Released item Cost type | Work order quantity | Cost | Planned | Actual |
|---|---|---|---|---|
| FIFO cost | Material cost | £200.0000 | £180.0000 | |
| Process cost | £50.0000 | £50.0000 | ||
| Average unit cost | 10 | Total | £250.0000 | £230.0000 |
When the work order is closed:
- The released item Unit cost is reduced to £23.00
- The stock value is adjusted by £2.00
| Work order quantity | Work order cost | Work order amount | Item Valued cost | Item Movement amount |
|---|---|---|---|---|
| 0 | £-2.0000 | £-20.0000 | £-2.0000 | £-2.0000 |
| 10 | £25.0000 | £250.0000 | £25.0000 | £250.0000 |
If the item has already been issued and is no longer in stock when the work order is closed, a non-absorbed amount journal entry is created and posted to the Production variance account.
Production variances causes
- The resource setup and run times tracked for the work order exceeds or does not meet the time specified in the routing.
- More or less material is used than indicated in the bill of material (BOM).
- The standard cost of the components or resources is updated but the Standard cost calculation was not updated for the released item.
- The planned process cost is calculated from the standard cost rates for the specified resources or resource groups but a different resource or resource group performs a production operation for the work order.
- The Update planned costs action is not selected after components are added or replaced for the work order.
- The released item was sold or issued from stock before the work order was closed.
