Getting into finance lately and learning A TON about standard costing.
One thing that gets me is the fact that parts on the fly post their entire cost to COS accounts. Even when there is a variance for the job (calculated by looking at estimated costs v.s. actual) the whole cost gets posted to the COS.
Why can’t the posting engine use estimated costs to determine if it should post to a variance account? I hope I won’t be yelled at (for uploading Epicor documentation), but here is something on MFG-VAR transactions for Non-standard parts from a very old guide on the posting engine.
It states that a manufacturing variance for a make to order job / not a standard costed part (POTF for example) / where costs relieved from WIP are greater than the actual job costs- it would make a debit and a credit to the following accounts (in our case, since we us a product group, it would post to Product group’s GL control).
The issue here is that the amount relieved from WIP for a POTF will never differ from the actual costs of the job because it isn’t relieving based on a standard. However, my question is, why can’t it use the estimate costs to determine how much it relieves from WIP and then post the difference to variance accounts?
I am relatively new to the costing world and am ready to be humbled so fire away!
Thanks in advance to anyone who read through this and took the time to think about it and/or respond.
I don’t understand why you would want to do that. Variances are only for holding the under or over when you have standard costing (or you close a job after the reciepts/shipments are done). If it’s a part on the fly, you will never have any other parts with that part number, so why would you use the variance? You can make reports for estimated VS actual if you want to study that, but to arbitrarily put that cost into a variance account is kind of silly.
So there’s this predicament, we use standard costing and 60% of our sales are repeat parts with standard costing and we can look at variance accounts for those product groups to see which jobs for which parts have posted the largest dollar amounts to variances.
But then when it comes to the other 40% of our sales, we can’t look at variance accounts to tell us what went poorly, we have to build a report to do estimates vs actuals.
Only because standard cost hit’s COGS with the standard cost. If it’s a part on the fly, it can’t have a standard cost. And the reason to use standard cost is more for inventory valuation purposes rather than GL purposes. Using average costs get you a more accurate picture of where you’re actual money is, but can have some wide variability that some companies don’t like.
There is a job status report that you can use to look at jobs that don’t hit estimates.
I agree that costing methods are centered around how you would like to value inventory, but I disagree that standard costing isn’t a GL focused tool. Standards help you establish a baseline and offer a way to look into where you are exceeding or falling short (as you said, “over/under”). By doing so, you can see (in dollars) where you should spend your time improving. This is something you would want to do regardless of whether it is a part or a POTF. It’s the reason we have to build a whole separate tool to look into actuals v.s. estimates. And it helps because it’s on the GL as a variance. You can see it and how it impacted your margin.
Epicor has so much built out around standard costing and variances that it would be awesome to be able to have POTF use the same posting rules from the product group, but use estimates as an impromptu standard cost. In this way you would see it come through on variances on the P/L statement just the same as the rest of our parts come through. No need for extra reports, all nice and consolidated.
Thanks for the tool (job status report). I’ll certainly mess around with it.
This is the popular view of accountants who want to see all the detail in the GL because, well, that’s the tool they are most comfortable with. The POTF parts have a revenue account and a COGS account, so the “real” over/under is there.
The question is, why wait until the job is finished and posted to the G/L before measuring efficiency/profitability/variance/etc.? That is why many ERP systems, like Epicor, use the subledger to show management earlier in the process when things are going awry while there is still time react. By the time it hits the G/L, it’s usually too late to do anything.
The variance accounts are summarized on P/L (no detail behind them on the P/L statment). I am working on providing the detail behind those entries so that they can understand which parts had the highest impact on those balances.
I love this thought provoking question. I don’t know why CFOs and publicly traded companies wait until the end of the quarter or month to report results.
I know internally we don’t wait until a job is finished and posted, we run the production detail report and measure estimates v.s. actuals. Additionally you can use the IWR to look at the GL transactions before they are posted to understand if anything needs to change.
However, the fact remains, financials are posted at the end of the month, WIP is captured at the end of the month. And that’s when we typically review what went wrong with the greater team.
I think the answer is always analyze whatever you can at the soonest possible time so that nothing goes unanswered or repeats- fix it right away or at least report an issue right away. There’s no arguing with that. I like it Mark.
Still, at the end of the month you’ll want to know what the value of all those issues were, and I think that’s where something like a variance account on a financial statement comes in handy. It summarizes everything over a specific period so you can look at it as a whole. That’s the reason why I wish POTF would post variances according to the estimates like standard costed parts do.
But isn’t profitability what you really want to be analyzing? Estimates are just that, estimates. If you have the actual cost, and the actual price to the customer, you get the actual profit. The most important thing.
If you are using standard costing, you need to add in the variance to see what the problem was because you don’t have the actual costing. But on a POTF if your estimates were stupid low, but you still priced is way high and your profit margin was good, it no longer matters what the estimates were other than to be able to analyze so that you can get better at estimating in the future. But that’s less of a financial problem, and more of an engineering problem. (BOM and BOO).
That’s just what I think anyways. I am by no means a financial guy. It’s just my 100% unqualified opinion that the GL should be as simple as you can get to get what you need and other analysis can be done without messing with the GL.
EXACTLY. So if your profitability was off the next question is why was it off? You would use variances to point this out to you as you mention in your next bit.
You do have actual costs, what do you mean here?
What you are trying to analyze is whether you manufactured to your standard. My point here is that it doesn’t matter whether your standard is an estimated cost (in the case you are using a POTF) or a standard cost (in the case that you are using an actual part)…
When you are talking about margin you would never use estimates to determine margin BUT estimates do play a part in the variances and ultimately what you were hoping the margin would be. In order to know what you were hoping to make you need estimates or standards.
What I am saying is, use variance accounts to hold the difference between your estimates and actuals (what you were hoping to make and what you actually made) - no different than what standard costed parts do with their standards.
If you estimated that it was going to cost $100 a unit to manufacture (no different than saying your standard cost was $100) and then it really took you $90 to manufacture then you have a variance. The profit margin will work out to the same thing regarless of whether you are using variances or not. But in this case you would SEE a positive variance and say, I wonder what happened here, why were we so good.
If it was the other way around and you estimated it would cost $100 a unit and instead actual costs came out to $500 a unit then you would have a terrible variance and you would conclude A. your estimates were extremely low or B. you ran the job horribly. It doesn’t always mean you estimated incorrectly.
This holds true even to POTF IMO. Wish that the posting engine would do this.
Brandon I appreciate you taking the time to banter with me, I also am not a costing GURU. I am confused here and don’t know why a POTF couldn’t use the same posting rules as a standard cost part (without the standard cost table part). PURELY out of curiosity. And for the off chance that someone did something to make this happen- IF it even makes sense to do at all.
On the invoice to the customer, there is cost on it. If you are using part on the fly, you have a make to order part. This invoice will then get the cost from the job on the invoice. All make to order jobs get the cost from the job put onto the invoice. This happens when the job is shipped. For orders that ship from stock (which have to be master parts) the cost is coming from either average, or standard costs. Depending on how you have your parts set up.
If you are going to have your GL post based on estimates in the job. If someone makes a job with no estimate. (0). the job can still be run, and the invoice can still be made and posted, but all of your cost would go to variance, and none on the invoice. Standard reports would say that you have $0 cost on that invoice. So you are 100% reliant on an estimate being in the job in order to be able to use variances to see how well you did.
If you use the cost that already populated, you can analyze profitability on any make/buy to order parts without needing to do the work to put in an estimate.
The reason that you have to layer in the variance on ship from inventory parts is because you are using standard costs. If you were using average costs, then you wouldn’t have variance either because the parts would be put into inventory at whatever cost the job had. (it uses a weighted average to adjust the cost of all of the parts).
That’s really the downside of standard costs, is you have extra things that you have to monitor and adjust. Using a variance is a workaround for a weakness of standard costing. Not a benefit.