PeopleSoft Cost Management

A Layman’s Perspective

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Outline

• Introduction – Who is this guy?

• What is Standard Cost?

• What is Actual Cost?

• What are the different Actual Cost Methods?

• Is it better?

• How would I change from Standard to Actual Costing?

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Introduction Ron Caldwell

• Former practicing CPA with 4 years experience in “Big 5” Public Accounting

• 2 years Private Sector Accounting for US Defense Contractor

• Beta tested PeopleSoft Cost Management version 5.0 • 9+ years working “hands-on” with PeopleSoft SCM and

Financial Applications the last 4 years in private practice.• Help setup Cost Management for DMUG member Honda of

America.• Reengineered setup of Cost Management 8.8 for DMUG

member: Monster Cable Products and Combe, Inc

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What is Standard Cost?

• Standard Cost is a predefined calculation of the costs to produce a good under specified “standard” working conditions.

• It is built up from an assessment of the value of cost elements and correlates technical specifications and the quantification of materials, labor and other costs expected during the period in which the standard cost is intended to be used.

• Its main purposes are to provide bases for control through variance accounting, for the valuation of work in progress and for fixing selling prices.

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What the heck did that mean?

• Standard cost is a singular frozen estimate of production costs based on a singular set of assumptions used to evaluate production efficiency through variance analysis.

• Standard cost predetermined and intended for a finite period of time.

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What are Assumptions are used?

• The Source Code (Make or Buy) of the Final Product

• The Primary Bill of Material (BOM) and the Source Codes (Make, Buy, Floor Stock*, Expensed*) and Standard Costs of the BOM Components

• The Primary Production Routing which includes decisions about which Work Centers, what Crews, how many per Crew, how much Operating Time per Crew member, and whether or not any of the production steps are Subcontracted.

*Not included in the Standard Cost of the Assembly

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Standard Cost - Illustrated

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Fin Goods Production “Make” Cost

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Typical Lower Level for Fin Goods

These items are comprised of Raw Material items on it’s Bill of Material. So the Cost Elements typical of Raw Material items will comprise the Lower Level cost of the Finished Goods item. These are as follows:

100 – Material – Vendor or Transfer Price 300 – Freight – Inbound Freight Cost 400 – Duty – Inbound Duty Cost 700 – Overhead – Purchasing Overhead

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Rolling up Lower Level Costs

Item 200Cost Element 100 $8.00Cost Element 300 $1.50Cost Element 400 $1.25Cost Element 700 $1.75

Item 140 Cost Element 100 $1.75Cost Element 400 $0.75Cost Element 700 $0.25

Item 160Cost Element 100 $3.75Cost Element 300 $1.00Cost Element 400 $0.50Cost Element 700 $0.25

Item 180Cost Element 100 $2.50Cost Element 300 $0.50Cost Element 700 $1.25

Cost Elements are retained in the Lower Level Cost as they roll up from Raw Materials to assembled Finished Goods.

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Bill of Material for a Make Item

Sum of the Component cost $6.0419

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Typical This Level for Fin Goods

The cost associated with assembling the Raw Material items into Finished Goods items are the This Level cost for the Finished Goods Item:

200 – Labor – Production Labor 500 – Overhead – Production Overhead600 – Outside Processing – Subcontracted

Production Cost

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Routing Summary for a Make Item

The Routing displays the Work Centers used to assemble the Make Item.

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Operation Times for a Make Item

Note Costing Labor Run is 4 Minutes

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Crew Size for a Make Item

Note Crew Size is 1 Employee

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Labor Rate for the Work Center

The Labor Rate is $19.80/Hr.

$19.80 X 1 X (4/60) = $1.3200

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Overhead Rate for the Work Center

The Overhead Rate is 77% of the Labor Amount.

$1.3200 X 77% = $1.0164

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Establishing a Standard Cost

• When using Standard Costing establishing a cost standard for each item is a prerequisite for transacting the item for Inventory or Production purposes.

• The standard are set after running these two processes:– Cost Rollup– Cost Update

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Cost Rollup Process

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Cost Update Process

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Actual Costing for Production Items

• Okay, now it’s about to get interesting.

• One of the things that production operations will like is that Actual costing doesn’t require a pre-established standard cost before the item can be transacted.

• With Actual Costing the Cost Rollup and Cost Update process is not required.

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What is Actual Costing?

• Actual Costing values inventory based on the “best available” actual cost information at the time including purchase order price or matched vendor invoice price, and actual production labor and machine time.

• The release of PeopleSoft 8.8 Cost Management made available the use of Actual and Average Costing Methods for production inventories.

• Prior to 8.8 Standard Costing was the only cost method available for production inventories

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Actual Costing emphasizes Material Cost

• Standard cost accounting methods were developed about 100 years ago, when labor comprised the most important cost in manufactured goods. The emphasis on measuring production labor efficiency in one of the prime sources of criticism by Eliyahu “theory of constraints” Goldratt.

• Actual Costing endeavors to reflect the actual vendor cost for the material component of production inventories.

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Actual Costing for “Buy” Items

• Purchased goods are initially valued based on the Purchase Order Price at the time of Receipt.

• The value of purchased goods is adjusted for any difference between the Purchase Order price and the Vendor Invoice price after the related voucher is MATCHED, POSTED, and EXTRACTED via the Landed Cost Extract Process.

• The adjusted cost of the purchased goods flow into Work-in-Process cost based upon the Costing Method selected.

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Landed Cost Extract Process

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Actual Costing Methods for Outputs

• The Actual Costing methods include:– FIFO (First-in, First-out)

– LIFO (Last-in, First-out)

• The Weighted Average Costing Methods include:– Periodic – calculated at month-end – all depletions use

the same average.

– Perpetual – calculated throughout period based on information available at the time of the depletions

– Retroactive – similar to perpetual except that depletions are revalued retroactively at month end for all for AP match and post activity during the month

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Costing Methods on Cost Profile Page

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Calculating Labor and Machine Cost

• Labor and Machine Cost can be added to material cost based on following selections on the Cost Profile-Manufacturing Page:– Not Applicable – Standard Time-Conversion Rate – Actual Time-Conversion Rate– Actual Time-Actual Rate (Labor Only)

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Cost Profile Mfg Labor Cost

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Labor and Machine Cost Inputs

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Crew Rates

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Actual costing eliminates variances

• You can chose to eliminate Purchase Price Variance Expense for inventory purchases. Any difference between purchase order and invoice price updates the basis of the good, even if it has been consumed into work-in-process and the assembly had been shipped to a customer.

• You will not have Material, Conversion or Rework Variances, or Subcontract PPV Expense for production work orders because these costs are added to the basis of the assemblies produced.

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Is it better?

• Actual costing is flexible. Each production transaction is valued exactly in the manner in which it is produced for those who might use alternate sourcing, Bill of Material or Routing.

• It is especially beneficial to those who extensively use Product Configurator in Production

• Actual Costing ultimately provides the most accurate inventory information for evaluating production costs and gross margin.

• Yes, it’s better! Period!

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Actual Costing Caveats

• You should develop a reasonable means for Current Purchase Cost for Bill of Material (BOM) components and Default Actual Cost for All Actual Cost items.

• Current Purchase Cost (or Last Price Paid) is used to cost components when no cost is available such as when inventory of the component is negative.

• Default Actual Cost is used cost any “Increase” adjustment transaction like Cycle Count and User adjustments. It is also used to value RMA transactions as well

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One more Caveat

• When running the Cost Accounting Creation process it is very important to run using the Mid-Period Mode during the month and Regular Mode on the last day of the month especially when using an Average Costing Method.

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Cost Accounting Creation Process

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Migrating from Standard to Actual Cost

• Oracle does not have a certified upgrade methodology for migrating from standard cost to an actual or average costing method.

• There will not be a one size fits all solution for migration.

• At Combe we will develop a methodology for migrating from Standard to Actual Costing where the initial Actual Cost of Inventory will be equal to the Standard Cost.

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End Presentation

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Appendix - More Standard Cost Info

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Standard Cost is predicated on the creation and analysis of variances.

Variances are created on most purchase and production

transactions.

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Standard Purchase Price Variance

There are two instances where PPV may apply:

The Purchase Order Price differs from the Standard Cost for an Item (PPV 1).

The Voucher Price MATCHED and POSTED differs from the Purchase Order Price (PPV2). This variance is extracted from Accounts Payable using the Landed Cost Extract process

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Standard Cost Production Variances

Material Variance – to account for deviations from the Primary Bill of Material (BOM)

Conversion Variance – to account for deviations from the Primary Production Routing

Rework Expense – to account for the additional material and processing cost associated with rework production.

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Walkthrough of the Cost Rollup of “Buy Items.

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Cost Elements for Raw Material Items

Cost Elements typically used: 100 – Material – Vendor or Transfer Price300 – Freight – Inbound Freight Cost400 – Duty – Inbound Duty Cost700 – Overhead – Purchasing Overhead

Cost Elements NEVER used: 200 – Labor – Production Labor 500 – Overhead – Production Overhead600 – Outside Processing – Subcontracted Production

Cost

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Material Standard Cost for “Buy” Items

• The material cost for these items are primarily comprised of purchased cost. The standards for these items can be derived from one of these sources:– Current Cost– Average Cost– Last Price Paid– Forecasted Purchase Price

• Despite by names like “Current” and “Last Price” the material standards remain frozen (unchanged) between Standard Cost Updates.

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Material standard basis can vary

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Raw Material Item

Raw Material items only have cost at This Level because they do not have a Bill of Material.

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Raw Item Current Purchase Cost

The Material Cost should equal the Current Purchase Cost for each unit.

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Raw Item Vendor-Item Set-up

The Vendor Price on PO’s will be compared to ONLY CE 100 to determine PPV.

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Raw Item Freight-In Cost

3.9% X $3.48 = $0.1357

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Raw Item Duty-In Cost

5.8% X $3.48 = $0.2018

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Raw Item Purchasing Overhead Cost

5.1% X $3.48 = $0.1775

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Cost Elements for FG “Buy” Items

Cost Elements typically used: 100 – Material – Vendor or Transfer Price300 – Freight – Inbound Freight Cost400 – Duty – Inbound Duty Cost700 – Overhead – Purchasing Overhead

Cost Elements NEVER used: 200 – Labor – Production Labor 500 – Overhead – Production Overhead600 – Outside Processing – Subcontracted Production

Cost

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Finished Goods “Buy” Item

Finished Goods Buy items are similar to Raw items in that they only have This Level cost.

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Now it gets exciting because we’re going to illustrate the Accounting Debit and Credits for a few typical

transactions.

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Buying a Raw Material Item

DR 1200-Inventory-Raw Stk 3.9950

CR 2100-Accrued Liabilities- Inventory

3.4800

CR 5159-Applied-Ocean Freight In

0.1357

CR 5169-Applied-Customs-Duty

0.2018

CR 5999-COGSI-Overhead Absorption

0.1775

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Issuing Material to a PID

DR 1300 – Inventory WIP 6.0419

CR 1200 – Inventory Raw Stk

6.0419

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Applying Labor to a PID

DR 1300 – Inventory WIP 1.3200

CR 5149– COGSD-Direct Labor Absorption

1.3200

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Applying Overhead to a PID

DR 1300 – Inventory WIP 1.0164

CR 5999 – COGSI-Overhead Absorption

1.0164

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Closing a Production Order (PID)

DR 1400 – Inventory Finished

8.3783

CR 1300 – Inventory WIP 8.3783

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Issuing Material to a Customer

DR 5000 – COGSD-Taxable

8.3783

CR 1400 – Inventory Finished Goods

8.3783

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Contact Information

If you have any questions please feel free to contact me at:

Rondal A Caldwell, CPA

Caldwell + Associates

1900 West 42nd Street

Austin, TX 78704

832-741-7427