Use two cost methods

Hello everyone,

My company is thinking about the cost method suitable for the company’s business. so i have a few questions regarding the costing method.

  • Can I use both cost methods together? I want to use Avg for raw material and Std for FG and SA.
  • If possible, how should I set up Epicor?
  • In this case, how should I select it in the inventory report with cost option?(Stock Status, Period Stock Movement, etc)

BTW, Is it possible to set it up like this?
By default, it is set to Avg, Labor/Burden/Subcontract Cost is set to a fixed value for each part, and only the material cost is changed to the calculated value in Avg.
For example, in the case of FG, the Labor/Burden/Subcontract cost is a value we set directly, but the material cost is changed to a value calculated by the Avg of each raw material.

Thanks in advance!

You could set up your manufactured parts are Avg cost, but still have “standard” results.
For your methods, utilizing Quantity only for the operation will cause the applied labor to be equal to the estimated labor when quantities are reported.

Subcontract costs will be actual, so there will be some variance.

By performing a cost roll, you can set the standard cost on all parts as your target.

Bruce

Yes you can setup specific parts Cost Method to Average, which will override the Standard cost. This article explains average costing quite well. It has some quirks though. We have had people create zero cost POs (don’t do that) for items being repaired by the supplier. This messed up our average cost.

Another thing to consider is Kanban Receipt -
depending on how complex your assembly/part is - performing kanban receipt will use the estimated time for labor and burden and backflush the material and then put the finished goods into stock.

Which, unlike back-flushing, allow you to pick lot numbers…

We do not use Kanban Receipt.
From what you guys say, it seems that it is possible to use the two cost methods together.
But, what I am really curious about is whether the material cost of FG is automatically updated with the constantly changing Avg cost of the RM when FG is set to Std and RM is set to Avg.

Standard cost must be set. It is never automatically updated.

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I thought i would too. I think that’s the important point.
Even if it is possible to set a different cost method between FG and RM, if the cost of RM is not reflected in FG, I think another problem may arise.
Guess we’ll have to choose one way.

No, If your FG is set to Std then material cost of FG will not be updated. You have to use Avg for FG to get that cost.

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What problem?

I think that the FG material cost and the RM cost should match or not differ significantly. Of course, this is also the opinion of the accounting department.
RM A(10$) + RM B(10$) + RM C(10$) = FG Material cost(30$) or (+/-30$)
Our company’s raw material purchase price fluctuates far too much than people generally think.
So, the accounting department wants to calculate costs that are close to reality. Conversely, purchasing departments prefer easy-to-operate methods.

There are trade-offs for each method and it’s a business decision on which to use. Standard cost simplifies material movement calculations, is less sensitive to out-of-order transactions, and will surface price differences quickly. OTOH, it is important that standards are set up front and wildly changing costs require more frequent roll ups. Average costing gives better aggregate costs but hides variances. Transaction timing is extremely important with average costing. Fixing errant transactions can easily lose the weighting of prior transactions and alter your FG costs. If you do outside processing and an invoice doesn’t arrive until after the a job has shipped then you will lose the ability to post any variance to the job, again giving a less than accurate cost. Average Lot cost is the most accurate and is even easier to corrupt with poor transaction reporting.

Each has their place and it’s important to know the costs and benefits of each because there is no clear winner.

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Thank you very much for your kind explanation.
BTW, How is average lot cost different from average cost?
My epicor don’t have the average lot cost.
image

It is FIFO. It tracks the lot costs explicitly then averages it. Costs are consumed FIFO.

I confirmed that the average lot cost is FIFO.
FIFO seems to be the most accurate costing method. Even so, Epicor users don’t seem to use FIFO much. Most users seem to use Std or Avg.
Having difficulties or issues using FIFOs?

It takes an incredible amount of transactional integrity to get it to work. Transactions MUST be done in the correct order. Corrections are difficult. It is so hard to do for most companies that Epicor provides a command just to fix the FIFO layers. It’s the most accurate on paper but for most companies, not in practice.

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Lot average appears only on Lot tracker parts

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Yes, that’s very true @Vinaykamboj!!!