How exactly does a mfg’d part from a partially completed job get costed?
We’ve found that receiving a mfg’d part (from an incomplete job), into stock usually goes in with zero cost - when no qty has been reported. And when the last mfg’d part is received into stock, all the costs go into that qty.
For example:
New mfg’d, and qty bearing part, using AVG costing, with zero cost on file.
A Job is created for 10 of that part, material costs are $100 each
Materials are issued to make all 10 mfg’d parts. WIP now has $1,000 in it
(5) are completed and received into stock. They go in with zero cost. WIP still has $1,000, Inventory value not increased (because 5 x $0 is $0)
(3) more are completed and received into stock. They go in with zero cost. WIP still has $1,000, Inventory value not increased (because 8 x $0 is $0)
The last (2) are completed and received into stock. They go in with a cost of $500 each (the $1,00 in wip / Qty 2). WIP now at zero. A cost adj happens setting the new avg cost to $100 ((*8 x $0 + 2 x $500) / (8 + 2)). Inventory value increased by $1000 (10 x $100)
So that all works out in the end.
But what if there were issues of the mfg’d part prior to the final receipt? Starting after step 5 from the above:
(5) are shipped from stock to customer. Inventory value is unchanged as it was 5 x $0. QOH drops from 8 to 3. The COGS for this order is $0.
The last (2) are completed and received into stock. They go in with a cost of $500 each (the $1,00 in wip / Qty 2). WIP now at zero. A cost adj happens setting the new avg cost to $200 ((*3 x $0 + 2 x $500) / (3 + 2)). Inventory value increased by $1000 (5 x $200)
Again the GL balances, but the COGS for the period are incorrect, as well as Inventory being over stated. And future shipments of the mfg’d part will be higher than actual.
Reporting Qty’s completed is supposed to keep this from happening, but what if there are partial issues and not in even qtys?
Like if the mfg’d part used 1 FT of part XYZ, and 2 LB of part PLASTER (the plaster comes in 20 lb bags). So if you knew you were just going to make the first 5, you only issued 5 FT of XYZ, but the whole 20 LB of PLASTER (because its a whole bag). When you report 5 completed, prior to rcv’g into stock, is full cost of the plaster figured into the cost used to receive into stock?
I think it all goes back to not having a cost on the part to begin with. If you applied a cost (even though you have never made the part before) then they would be received into stock at that cost and then all variances would be reported against the last piece completed.
It is generally a very bad process to ship anything that comes from an open make to stock job. If only the quantity you manufactured was what was started (e.g. job for 10, issued material for 5, completed 5) then the job should be closed and another job opened for the balance. If the quantity manufactured was less than what was started (e.g. job for 10, issued material for 10, labor up to op 20 for 5, 5 completed) then you want to split the job.
I am no Avg expert, but what I remember from reading about costing in general is that Avg and Std are pretty similar.
A little off topic, but something to remember.
I’m pretty sure that the cost is adjusted on receipt ( to inventory ). It doesn’t change when going out. So for example, if you ship or issue when there is 0 on hand, it will use the current avg cost. (which is why I have a UBAQ to set average cost on parts with 0 on hand in case the receipt and issue are done out of order)
Good call @Banderson… and a little thing to also keep in mind is that the “Cost Method” type basically refers to how a part’s inventory valuation is determined. As far as I know, every other use of Cost Method is secondary to its use in inventory valuation.
assuming (as other have) that you are “Average Cost”, you are running into the complex problems that happen with partial completions… ESPECIALLY if the receipt is the first receipt.
as others pointed out… Average cost is only set upon RECEIPT, and it changes the current average cost based on the value of the items being received. If the job has no cost, then the parts are “free” (ummm. not!)
I used to work in an “Actual” (or as E10 calls it, “Lot cost”) environment… we had to put in a rule that we didn’t do any partial receipts. Instead we always “Split” the job, and moved appropriate costs to the split job. This way the job being received was always received in full, and relieved all the costs.
IF you were Standard costed… then this would all be resolved. The value leaving WIP is always at standard. the value shipped is always standard. When you close the job, the difference between the “actual” and standard is posted to variance instead of COGS.
When we (@ckrusen and I) are talking about cost. We are talking about in the database as the costs associated with a part number. For example, what you see in Part Tracker.
We (or at least I) am not talking about GL transactions. Shipping to a customer from anywhere does create a GL transaction(s).
In an average cost environment, when you receive parts from a job, the current value of the parts in WIP does update the average cost of the inventory in stock, thus relieving WIP of that value.
Example…
Job for 100 pieces charge $200 in Mtl + Labor
If none in stock, then when you receive the 100, their unit value will be $2 each
if there were already 25 in stock at $1.50 each, then the average (weighted) unit cost would be $1.90 each.
When you later run the wipcostcapture process, there would be no variance UNLESS you had additional costs posted after the receipt.
So the current value of WIP for that job is used for calculating the average cost, regardless of what fraction of materials have been issued?
For example:
Mfg’d part MFG-001, with current QOH of zero, consists of 2 inventoried parts(qty per):
5 FT of PIPE (@ $1/FT)
4 LBS of CONCRETEMIX (@ 2$/LB).
with a unit cost of MFG-001 being $13 (5 x $1 + 4 x $2)
And the following sequence happens:
A job is created to make 10 of MFG-001
50 FT of PIPE is issued to the job. WIP goes from $0 to $50.
But only 20LB bag of CONCRETEMIX is in stock, so only 20 of the 40 LBS are issued to the job. WIP goes up by $40.
WIP for the JOB currently valued at $90 ($50 for the pipe + $40 for the concrete)
(5) are completed (entered as completed) and received into stock.
The cost to be used for the parts entering stock would be $18 ($90 in WIP / the 5 produced). The unit cost is set to $18, and the stock value goes up by $90. And WIP would be reduced to zero.
A shipment of (4) MFG-001 occurs. The COGS used is $18 each.
The last 20 LBs of concrete are received and issued to the job. WIP now has $40 in it.
The last 5 are completed and received into stock.
The cost to be used for these parts entering stock would be $8 ($40 in WIP / the 5 produced). The unit cost is set to $9.67 (($18 x 1 + $8 x 5) / (1 + 5)). The stock value goes up by $40 (from $18 to $58). And WIP would be reduced to zero.
Everything balances in the end (other than COGS being overstated and Inventory being understated by the same amount)
This causes us problems as we do analysis by the order. The order that used 4 of the first 5 completed, would look less profitable. Any orders using the remaining in 6 in stock would look more profitable.