I have a question concerning Job Closing and the MFG-VAR transaction.
All our jobs are made to stock:
This transaction records a manufacturing variance for a make to stock job where the costs relieved from WIP are greater than the actual job costs.
This transaction records a manufacturing variance for a make to stock job where the costs relieved from WIP are less than the actual job costs.
But…how do we know where the WIP variance is coming from such as: Mtl, Labor, SubContract, etc. is there a way to get to this information?
I’m asking this for our Controller so I hope this question makes sense.
Thank you for any information you can provide!
Do you have separate GL accounts for each variance? If not and if this is a concern of the Controller, I would recommend that they set the GL Control Codes to put the variances in separate accounts.
That aside, what costing method are you using as that makes a difference.
Thank you for responding - I’m currently checking with the Controller…
I spoke with our Controller, here are his responses:
First - We do not have separate accounts. All variances go into one account.
Second - We use the “Average Cost” for our Costing Method.
Ok. I would just need someone else to confirm what I am about to say as I have never worked at a company that used Average. I believe that Average works exactly the same as Standard except you do not need to roll cost in Average. (If another user could confirm this it would be appreciated. Gonna call out @ckrusen and @timshuwy as I believe I have seen them post on costing before.)
If you use average cost, when the job is cut the system locks in the cost for each piece of the job to book to the appropriate accounts when the job is finished. Any difference in cost is then posted to the variance account. Since the variances are all being booked to the same account, they won’t be able to see where they are coming from at that level. They should be running the Inventory/WIP Reconciliation to see the detail of the posting. There should be lines on the report specifically calling out the MFG-VAR for labor, material, etc.
If they really want to be able to see the detail better, I would recommend creating specific GL accounts for each type of variance and then they can see where the variances are better in the GL
Not really. Average cost is only calculated when material goes to stock. If you ship from a job direct then the average cost is not updated. If you purchase direct and ship to a customer, the average cost is not updated.
And average cost is very sensitive to transaction timing since every receipt is recalculating the cost. If the quantity reaches (or falls below) zero then the last cost becomes the Average. In normal business, this is fine but when you have transaction errors that accidentally pushes the QOH <=0 then your calculation might not reflect what you think it should be.
In Standard cost, everything moves at the standard. No. Matter. What.
Assuming we’re just talking about the “cost” of a job, the “cost” of that job really is just the sum of all the costs put in WIP for that job. The “unit cost” would be that total cost divided by the qty produced. But as far as the GL goes, a job’s cost is never really a thing. The value used to calculate the cost of the item(s) produced is used for updating inventory (the part cost and the GL tran to increase inventory’s value), or for the COS if shipped directly from Mfg.
The formula for determining Average Cost of an item (to update the cost file), is a weighted average of the current cost and the new cost. An example is best.
Say we have a part JP-101 that has a current cost of $1,000 each.
- There are 5 on hand, so inventory of that part has a value of $5,000
- We purchase (to inventory) 3 more at $1,200 each
- Upon receipt, the Avg cost is calculated to be $1,075
(5 x $1,000 + 3 x $1,200 ) / (5 + 3) = $1,075
- The value of inventory before the rcpt was $5,000 and the value after is $8,600. the difference is exactly the value of the receipt ($3,600). And QOH of 8 x $1,075 ea. is $8,600.
Now if you mfg a part to put in stock and there is existing inventory, it works fairly similar:
Say there is 5 of RS-123 with a current average cost of $2,000 each, and a QOH of 3.
- The BOM says it needs
- (1) of JP-101 which has a current cost of $1,000 (this is before the receipt of the 3 above)
- (5) of AB-123 which has a current cost of $200 each
- Inv value of RS-123 is $6,000
- A Job is created to make 5 more of RS-123.
- the estimated cost is $10,000 (5 x $2,000)
- Prior to issuing material to the Job, the receipt of JP-101 (@ $1,200 ea.) happens.
- This changes the current cost of JP-101 to $1,075
- All the materials are issued to the Job
- Inv goes down by $10,375, WIP goes up by that amount
- (5 x $1,075) + (25 x $200)
- All 5 of RS-123 are reported as completed
- the unit “cost” of the job is $2,075 ($10,375 / 5)
- Receiving the 5 to inventor cause the cost of RS-123 to be recalculated as
- (5 x 2,000 + 5 x $2,075) / (5 + 5) = $2,037.50
Variances only come into play when costs are added to the job after the primary transaction that relieves WIP (like a MFG-STK or MFG-CUS transaction), and then the job is closed.
Continuing the last example, say that after the finished RS-123 was received to stock, one more JP-101 was issued to it, then the job closed. Now there is cost to the job still in WIP. when Capture COS/WIP is run it will generate a MFG-VAR for $1,075 (the cost of the extra JP-101 added after receipt to inventory).
And one more thing on timing …
If you receive or ship part of a job, a zero cost is used. It is not until the last of the Prod Qty is made will “a” cost be calculated.
For example: XYZ-123 has a QOH of 5, and a current cost of $100. The BOM also totals to $100 ea.
- Inv value of XYZ-123 is $500 = (5 x $100)
- A job for 10 of XYZ-123 is entered
- Material for all 10 is issued to the job (Inv down $1,000, WIP up $1,000)
- 5 of XYZ-123 are received to stock
- A zero cost is used for those five.
- Avg Cost of XYZ-123 is recalculated to be
(5 x $100 + 5 x $0) / 10 = $50
- Inv value is still $500 (10 x $50), and WIP is still $1,000)
- The last 5 are received to stck
- The “cost” for for these 5 is the $1,000 in WIP, so the unit “cost” is $200
- Avg Cost of XYZ-123 is recalculated to be
(10 x $50 + 5 x $200) / 15 = $100
Imagine what happens if (3) of XYZ-123 is shipped from stock between the receipt of the first 5 and the last 5. The COS would only be hit for $150 ($50 each). And when the last 5 were received, the Avg cost would calculated as:
(7 x $50 + 5 x $200) / 12 = $112.50
The a similar thing happens if you ship a partial from MFG. Except the COS is zero on those first 5 shipped. And the full value in WIP is used for the COS of the final 5.
The GL Account is a good suggestion to see the M,L,OH cost distribution in the GL. I would like to see this as well via a BAQ which would provide much more detail. Doesn’t sound like anyone has anything we can copy or mirror.
Would you have an example of a BAQ that would do what he is asking?
Thank you for all the information…I will forward this on to our Controller!
Have them run the Inventory/WIP Reconciliation report.
Thank you @Mark_Wonsil & @ckrusen ! I’ve never worked with average and was taking a shot.
Will that MFG-VAR cost ever be included into the average cost?