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How to Guide: Understanding and Using Costs in Manufacturing

Costs-in-Manufacturing

Lisa Tran from Stoner, Inc. presented a how-to guide for keeping track of costs in manufacturing. When manufacturing and selling products, keeping track of and accounting for all of your costs is extremely important. In her presentation, she covered important topics like:

  • The steps of how costing of manufactured items is derived
  • How to account for tricky costs
  • Pieces that affect basic costing
  • Other less-used cost methods
  • Advantages and disadvantages of different costing methods

About Stoner Inc.

Stoner Inc. serves more than 6,000 manufacturers, service businesses, government agencies, and universities. The company supplies retail packaged goods, aerosol and bulk cleaners, and lubricants to their customers across the United States and internationally – both factory-direct and through distributors.

Stoner Inc. has been using JD Edwards since 2001 and is currently on EnterpriseOne 9.2.

Setting Up Costs in Manufacturing

Manufacturing costs includes all of the following:

  • Setting up costs
  • Setting up work center and labor costs
  • Setting up routing and overhead expenses
  • Verifying costs
  • Rolling up and reviewing costs
  • Cost reports
  • Adding additional costs (landed costs, using X type costs, and using OP1)

Evaluate Inventory Cost Level

The first thing that must be considered when setting up costs is to evaluate the inventory cost level. The inventory cost level is defined within the Item Master Revisions page. This can be done at the item level, the item/branch level, or the item/branch/location level – meaning you can have costing at different levels. However, if you choose to do costing at level three of the item/branch/location, it should be noted that the lot type must be set.

Define Costing Types

The next task that must be completed is to do a row exit from the Item Master or go to the program P4105 and define your costing types.

Standard cost is the method used at Stoner Inc., and this method essentially assumes that there is a low variety with fairly stable costs. With standard cost, the inventory is valued upon the completion of the work order.

Actual cost, or the “02 Weighted Average,” is a cost method that is useful for costs that often change. This method updates cost in the WO Master Tag table when work orders are generated.

The 09 Manufacturing Last Cost is useful for items that are engineered or manufactured to order and have costs that change often and significantly. This method should be utilized when you want to revalue the inventory each time that you run the work order completion programs.

The other thing to take note of with cost revisions is that standard cost is locked out; therefore, it is not able to be modified. Another bucket, “Cost Method 22,” was created for users to stage an updated standard cost. It should be noted that manufactured items need to be rolled up to populate standard cost.

Manufacturing Constants

The next piece is the Manufacturing Constants or “Program P3009,” in which there are many settings that can be controlled. This includes Cost by Work Center, where track cost variance is summarized or detailed. This is also where Work Center Efficiency is addressed – giving users the ability to modify cost by labor efficiency. It also gives you the option to include Variable Labor Overhead in cost as well as Fixed Labor Overhead, Fixed Machine Overhead, and Variable Machine Overhead.

When looking at the Manufacturing Constants Page, you will notice that efficiencies are assigned the letter B while costs are assigned the letter C. In order to utilize this function, you must simply go down the list and select all of the boxes that you want to include in your cost. Additionally, there is a setting that instructs the user to specify whether the values for the overheads are expressed as percentages or rates.

Defining Cost Buckets

Within Product Data Management, User Defined Codes (UDCs) are used to define cost buckets (30 CB). From here, there are five different buckets:

  1. Purchase
  2. Labor
  3. Machine
  4. Overhead
  5. Extras

Bucket 1: Purchase

Bucket one is purchase, which includes the following cost components:

  • Material (A1)
  • Scrap (A2)
  • Outside operations (D1)

Bucket 2: Labor

Bucket two is labor, which includes the following cost components:

  • Direct labor (B1)
  • Setup (B2)
  • Labor efficiency (B4)

Bucket 3: Machine

Bucket three is the machine, which includes the following cost components:

  • Machine run (B3)

Bucket 4: Overhead

Bucket four is overhead, which includes the following cost components:

  • Machine variable (C1)
  • Machine fixed (C2)

Bucket 5: Extras

Bucket five is extras, which includes the following cost components:

  • Taxes (X1)
  • Electricity (X2)

Manufacturing Work Center

The next setup that must be done is in the Manufacturing Work Center. Within the Work Center, the user is able to define all of the following:

  • Direct Labor: Cost per person per hour
  • Setup Labor: Cost rate for setup
  • Labor Variable Overhead: Rate = Cost per hour; Percent = Percent of direct labor
  • Labor Fixed Overhead: Rate = Cost per hour; Percent = Percent of direct labor
  • Machine Run: Cost rate for running machine
  • Machine Run Variable Overhead: Rate = Cost per hour; Percent = Percent of machine run
  • Machine Fixed Overhead: Rate = Cost per hour; Percent = Percent of machine run

All of the above components work in conjunction with the routing.

Accounting Cost Quantity

Another important factor is the Accounting Cost Quantity, which is found on your item master and branch and is based on your primary unit (i.e. your average batch size).

If you enter the number 1 in this forum, what you are essentially saying is that for every 1 that you make, you are applying all of the setup costs. Generally, that number is going to be high. If you actually run 3,000 or 300, then your setup cost (a set amount) will be divided across that, giving you a much lower number. In other words, when setup costs are high, it can typically be attributed to the fact that the user failed to assign the accounting cost quantity.

At Stoner Inc., master routing is utilized – meaning sets of routing are used for all products that are similar. Run Labor, Run Machine, and Setup Labor are all setup as parts of an hour – for example, .42 = 25 minutes, .08 = 5 minutes. Crew size refers to the number of team members. The other item setup is the Time Basis, which can basically be understood as the batch size.

In manufacturing, Stoner Inc. has two-part work orders. The first part is a batch of liquid to be mixed up and the tanks only have a certain capacity; therefore, Stoner Inc. must do the batch as hours per unit. For bulk filling, the chemical mix is taken and transferred into a bucket using a U or unit. In summary, both time and unit must be present for routing.

Running a Cost Simulation

After all of the above has been successfully set up, it is now time to run a cost simulation. This is run for all newly entered items, when standard cost changes, or for a periodic refresh.

Next, in order to verify costs, you should look at the Costed Bill of Material (BOM). This is useful because, here, all of the sub-components can be viewed. Across the top, you can also see numbers for labor, machine, and overhead (everything coming from routing and Work Center).

You should also look at Cost Components. This is the material you verified with the Costed BOM. Double-click to enter edit mode. Row exit to Cost Calculator to view a detailed report of how this number was derived.

Setup Cost includes setup labor hours, accounting cost quantity, and set up labor rate.

Machine Run Cost includes machine run hours, time basis units, operation yield percent, and machine run rate.

Running a Frozen Cost Rollup

After cost simulation has been completed, you should run a frozen cost rollup. This should first be done in proof mode to preview the effects of change, inventory values, and COGs. Then, run in a final mode, which will do an update of costs, journal entries, and item ledger costs.

There is a processing option to perform a complete cost rollup or only update the cost for a selected item or items. The 01 cost is last in cost. Compare 01 cost to 07 cost with a report prior to periodic full rollup.

It is noteworthy to mention several Cost Reports, which can be run prior to the cost rollup. The first is a Costing Exception Report, which involves hardcoded error messages UDC (30/EM). It allows you to define the severity level for each error message using the Description 02 field in the UDC table, and it allows you to create versions for different types of items restricting to certain severity ranges. Another is an Integrity Analysis Report (recommended to run prior to cost rollup), which checks the BOM for any errors.

Lastly, you have the ability to add freight costs to purchased items. Landed cost can be manually entered/corrected on the PO receipt, entered/corrected on the voucher, and applied automatically via a rule in item/branch setup. To do this, go to UDC and create codes that are associated with a particular value. This is simply a label, but you will set up the actual costing configured in P41291. Cost level gives a description to freight. When something with a landed cost is received, it takes the additional amount for the landed cost and adds it to the last in. This is one of the reasons that Stoner Inc. does not use the landed cost anymore.

Landed-Cost

OP1 Costing for Outside Processes

The final noteworthy component to touch on is OP1 costing for outside processes. Outside Operation processing is used to account for a service performed on an item on a work order. Outside operation purchase order (OO) is “services” provided by an “outside” company to complete an operation step in the work order routing. It includes several steps for setup, such as:

  • (Parent Item Number) + (*OP) + (The Operation Sequence number from routing)
  • Set the Stocking Type (STKT) to ‘X.’ The second description of the ‘X’ Stocking Type must be a ‘P.’
  • The primary UOM of the parent item must match the *OP item
  • Order activity rules, AAIs, Inventory cost level of 1 or 2
  • Setup processing options prior to work order entry, for P3161, P3112, and P48013
  • Generate the PO either from work order screen interactively or use UBE to Generate and Print Work Orders/Order Processing (R31410)

Challenges and Solutions

Stoner Inc. found that many users did not understand why 01 and 07 were higher than actual purchase cost of item because landed cost is done in the background and was not obvious to them. Users can also utilize the Supplier Catalog to do pricing for invoices.

What Stoner Inc. did to get around this issue was to set up some freight rules with Advanced Pricing for PO; however, adding it on to the Purchase Order did not account for it in the cost of materials. So, Stoner Inc. added into the cost of materials for freight. This is what Stoner Inc. refers to as using X cost added to cost component. The only issue is that these must be added in manually. They are set up in AAI 4337 and are set up for each GL item type. The issue here is that cost types are not part of the AAI; therefore, all X will always go to the same account.

To learn more about understanding and using costs in manufacturing and how Stoner Inc. did it, check out the additional resources attached below.

Additional Resources

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