Using Standard Costing for Makeable ItemsThis chapter provides an overview of frozen standard costing for make items and discusses how to: Show
Understanding Production CostsThe Cost Rollup process can calculate the costs for make or buy items within a manufacturing or distribution environment. These new costs are temporarily stored in the CE_ITEMCOST and CE_ITEMCOST_DET tables where you can review them using several PeopleSoft inquiry pages. If you discover that the new standard costs are incorrect, then you can change the cost foundation, bill of materials (BOM), or routings and then run the Cost Rollup process again. Once you are satisfied with the results, run the Update Production job (CEREVAL) to move the new standard costs into the CM_PRODCOST table that the system uses to cost manufacturing and inventory transactions. The new frozen standard costs are used for future manufacturing, production variances, and valuing inventory. Both the Cost Rollup and Update Production processes accommodate yield by operation transactions by calculating yield loss costs at the operation sequence level, maintaining extended precision cost fields, and storing detailed cost rollup calculations. For production IDs, completions are recorded at the last operation. Completed items from Work in Process (WIP) are putaway as finished goods. These putaways are posted to TRANSACTION_INV. Completions may also be directed into another production ID. If the end item is standard cost, the system debits the standard costs to finished goods and credits WIP. This may leave a remainder in WIP if the standard is different than the cost in the production ID. This remainder is cleared from WIP as a variance. When production IDs are closed for accounting, the variances between standard and production costs are computed by the Production Close process and stored in the SF_VARIANCES record. These variance transactions account for the difference between the standard cost of the end items putaway into finished goods and the total costs of the components, plus conversion cost consumption. WIP is cleared either to finished goods or as a variance for all completed and closed production IDs. This diagram illustrates setting up frozen standard costs for makeable items. The Cost Rollup process calculates the frozen standard costs and stores the costs in the temporary item cost tables for review. The Update Production process (Cost Update/Revalue process page) moves the new standard costs into the production tables used to cost manufacturing and inventory transactions: Managing frozen standard costs for makeable items Once you have set the foundation for costing, you can calculate and update item costs. In a manufacturing environment, PeopleSoft Cost Management supports standard costing and enables you to easily perform cost simulations, standard cost updates, inventory, inspection, and WIP revaluations using a system that is well interfaced with other PeopleSoft Supply Chain Management applications. Within a standard cost environment, you calculate the cost of makeable items based on the cost of purchased items, the makeable items product structure, and the list of tasks necessary to put the components together to form the subassembly or assembly. Once you calculate and approve the item costs, you must put them into effect as the new frozen standard cost in production. Costs based on engineering bill of materials (EBOM) are calculated but are not used to update the standard cost for the item in production. When you have completed this process, PeopleSoft Cost Management revalues all inventories in the inspection, raw material, WIP, and finished goods storage areas at the new standard cost. Additionally, PeopleSoft Cost Management revalues any assemblies or subassemblies in process in production at the new standard. PeopleSoft Cost Management also records an accounting transaction to adjust the general ledger (GL) inventory balances. You can maintain many standard costs for various production options and cost approaches, however, there is only one frozen standard cost per item that transcends all standard cost profiles and cost books for a business unit. When production begins, PeopleSoft Cost Management tracks the cost of production, including any variances from the expected results. You have visibility into potential production variances before production is completed, which gives you time to analyze potential problems before they are booked to the GL. See Also Defining the Cost Foundation for Makeable Items
Using the Cost Rollup Process to Calculate Product CostsThe Cost Rollup process calculates the standard cost for an item based on:
This diagram illustrates the calculation of the cost of manufactured items. The Cost Rollup process calculates the standard cost based on the BOM and routing of the item. The cost type and cost version combination determine the rates and additional costs used to calculate the cost: Calculating the cost of a manufactured item The Cost Rollup process uses several elements to compute the frozen standard costs, including:
The Cost Rollup process must calculate the cost at each level of the product structure, as well as the final cost. For example, if an item has a BOM or component list like the one in this diagram, the cost rollup must calculate the cost of item 2002 before it can calculate the cost of item 1001. This diagram illustrates the cost rollup of a multi-level product structure: Example of a cost rollup In this example, the costs associated with items 2004 and 2005 would be lower-level or component-level costs for item 2002. The cost of 2002, when you add it to items 2001 and 2003, becomes the lower-level or component costs for item 1001. The labor, machine, and overhead costs associated with manufacturing item 2002 are this-level or assembly-level costs for 2002. However, they would become lower-level or component-level costs when associated with item 1001. Item 1001 would have its own set of this-level or assembly-level costs, associated with putting items 2001, 2002, and 2003 together. See Also Understanding PeopleSoft Manufacturing Prerequisites Rounding Rules in Manufacturing
You can use the Cost Rollup process to determine the standard cost for makeable items, configured items, engineering items, purchased items, and simulations. Only cost rollups of manufactured, purchased, and configured items can be used to update production costs (the CM_PRODCOST table). The system calculates engineering and simulation costs for reporting and comparison purposes. The Cost Rollup process performs in basically the same way for the different types of items. The only difference is where the cost calculation obtains the information to determine the material and labor costs for the item.
Rolling Up Configured Items There are two options for calculating standard cost for a configured item using the Cost Rollup process:
The roll up of a configured item using configuration costing does not include co-products, by-products, or yield by-operation details. However, the system maintains detailed costs for configured items according to component ID and operation sequence. It stores these detailed costs in the CE_ITEMCOST_DET and CM_PRODCOST_DET tables. It also summarizes these costs according to cost element and stores them in the CE_ITEMCOST and CM_PRODCOST tables. See Also Establishing Configured Production Costs Defining Configuration Attributes for an Item If the output of a production run is more than one item, then the cost is allocated. Multiple outputs include:
Costing Co-Products If a single manufacturing process generates multiple items, you can allocate the batch cost across the primary and co-products to determine the per unit cost of each end item. When it explodes a co-product for a multiple output BOM during Cost Rollup process, the system uses the Associated Primary BOM to determine the correct lower-level structure. An associated primary must therefore exist in this case for the rollup to occur. The BOM and routing code combination that the system used to explode the co-product must also exist. Note. The system calculates a co-product's cost by multiplying the total cost of the batch (including the recycle and waste by-product costs) by the cost percentage for the co-product (as specified on the BOM Maintenance - Outputs page), then dividing by the expected output quantity of the co-product. Costing By-Products By-products can be of two types: recycle and waste. The system calculates cost relief for recycled by-products by multiplying the quantity and the cost of the recycle by-product. This cost relief is subtracted from the lower-level costs. The system treats recycled by-products as a negative cost, because they can be used as an input to another process. The cost used is determined by the purchase cost as specified for the cost type that you selected on the Cost Rollup page. Note. A recycled by-product must have the same cost element (with a cost category of material) as another component or waste by-product; otherwise, the item is not costed. This reduces the chance of a material element producing a negative value. If the cost element becomes negative, due to a recycle by-product cost relief, the system does not cost the item and an error message is printed on the Cost Rollup Audit page. The system treats waste by-products as positive or zero cost. They either add to the cost of the product, such as the cost of disposing it, or have no associated cost. The system determines the cost used for waste by-products by multiplying the quantity and the cost of the waste by-product. It adds this cost to the material costs. This diagram illustrates an example of a cost rollup with multiple outputs: Example of a cost rollup with multiple outputs In this example for orange juice processing, you have these outputs: primary (orange juice), co-product (orange concentrate), recycle by-products (orange rinds and orange pulp), and waste by-product (orange pits). The components are oranges, sugar, and water. Calculate the material costs by multiplying the quantity of each component by the standard cost: Oranges: (5lb * 0.50) = 2.50 Sugar: (1lb * 0.80) = 0.80 Water: (10Gal * 0.10) = 1.00 Total Material Costs = 4.30 Calculate the by-product costs as: Orange Rinds: (2lb * 0.01) = -0.02 (Cost is negative, because the recycled by-products are viewed as a cost benefit.) Orange Pulp: (1lb * 0.02) = - 0.02 Orange Pits: (2lb * 0.005) = 0.01 (Cost is positive, because it is a disposal cost.) Total By-Product costs = - 0.03 Total Costs = Material Costs + By-Products Costs = 4.30 + (-0.03) = 4.27 To determine the primary and co-product costs, multiply the total costs by the cost percentage. Orange Concentrate = 40% * 4.27 = 1.71 Orange Juice = 4.27 − 1.71 − 2.56 Calculate the standard cost of the primary and co-product by dividing the apportioned costs by the output quantity of each item. See Also Understanding BOM Maintenance
For yield by operation transactions, the Cost Rollup process calculates the yield loss for each operation sequence where the operation yield is less than 100 percent. The Cost Rollup process performs these steps to calculate yield by operation transactions:
Performing a Cost RollupYou can calculate the cost of makeable items by running the Cost Rollup process. To calculate product costs:
See Also Maintaining Bills of Material Structuring Routings Defining the Cost Foundation for Makeable Items
See Also Understanding the Manufacturing Standard Cost Foundation Defining Cost Versions These default values influence the Cost Rollup process. Source Codes The item's source code determines how the item is used for the Cost Rollup and Update Production processes. Define each item's source code on the Define Business Unit Item - Manufacturing page. The options are:
Routing On the Define Business Unit Item - Manufacturing page, specify which production routing the item uses when the system determines the assembly item's this level labor, material, and overhead costs. Average Order Quantity The item's average order quantity indicates the typical batch or lot size that you use to produce this item. Define each item's average order quantity on the Define Business Unit Item - Manufacturing page. This is the quantity that you expect to produce in one production ID or production schedule based on the BOM. If a BOM quantity on a bill is greater than 1, the component's per order quantity is spread over the BOM quantity. For example, Assembly A has a BOM quantity of 100; Component B used on A has a per order quantity (QPA, or quantity per assembly) of 1500. Therefore, the use of B for a single A is 15 (1500/100). When entering the QPA, the BOM maintenance supports a precision of 4 places to the right of the decimal. You have the option to define the calculated QPA precision that the system maintains when it determines the item's cost. On the Installation Options - Manufacturing page, you select a precision anywhere from 4 to 10 places to the right of the decimal. If the BOM and associated process results in multiple outputs (primary, co-products, and by-products), the BOM quantity must be set to the item's average order quantity. If you use economic order quantities or average order quantities with setup, fixed run, and postproduction times, the system must prorate the cost of these processes over the order quantity to determine a per unit cost. The system determines per unit setup, fixed run, and postproduction cost by dividing the cost of each process by the average order quantity. Typically, the system calculates this at the operation level, then sums it to provide the total cost. Standard Cost Groups (Optional) You can use cost groups to select a set of items to process for the Cost Rollup process and the Update Production process (Cost Update/Revalue process page). Enter the group in the Standard Cost Group field on the Define Business Unit Item - General page. Cost Elements The Cost Rollup process and Update Production process (Cost Update/Revalue process page) use cost elements to categorize the components of an item's cost. Cost elements are also used when costing a transaction. Enter the cost element for the item's material costs on the Define Business Unit Item - General page. For both purchased and makeable items, enter a cost element in the material cost category. Used in Manufacturing Check Box You must identify any items that are used in PeopleSoft Manufacturing. Select the Used in Manufacturing check box on the Item Business Unit Definition - General: Costing page for any item that:
See Also Prerequisites Defining Basic Business Unit Item Attributes The manufacturing bill, engineering bill, or component list determines the structure of the item and therefore the associated lower-level costs. PeopleSoft Cost Management uses BOM yield or component yield loss to account for the loss of components during the manufacturing process. For costing purposes, the cost of the assembly item can, therefore, take into account the expected loss of components in production. In this instance, the system inflates the cost of the component by the component's yield. Cost rollups do not include the cost of floor stock, expensed, subcontract supplied, or non-owned items. Consigned items are included in the item's cost as they are considered owned upon consumption. If you roll up an assembly item that has no owned components, only non-owned and parts supplied by a subcontractor (Subsupply flag is set to Yes), the cost rollup does not calculate any lower-level material costs but still rolls up labor costs for that item. See Also Maintaining Bills of Material Maintaining Component Lists
The production routing, engineering routing, or operation list documents the operations that are necessary to assemble the item. In the Cost Rollup process, the system considers only the routings or operation lists of those items whose source code you have defined as Make. When calculating conversion costs for an operation, you must consider the crew size of the operation. For example, if the crew assigned to a work center consists of three people, multiply the labor run cost by three. As it does with crew size, the system multiplies the machine cost of an operation by the number of machines assigned to the work center in which the operation takes place. When the conversion rate associated with the code assigned to the operation is expressed in terms of a cost per unit, as opposed to a labor or machine rate per hour, you must specify the corresponding costing time type on the routing or operation list in order for the system to include the cost. For example, suppose that you specified a labor run cost of 1.00 per unit in the conversion code associated with the operation. There must be a costing labor run time in the routing or operation list in order for the system to include that 1.00 in the item's cost. When you specify an operation's costing times and run rates in terms of days, the system factors the rate by the work center's average daily capacity to determine the total number of hours it requires to complete the operation. See Also Structuring Routings Maintaining Operation Lists
Access the Cost Rollup page (Cost Accounting, Item Costs, Update Costs, Cost Rollup, Cost Rollup). Use the Cost Rollup page to perform a cost rollup for a single item, a range of items, a group of items, or all items for any BOM and routing combination within a business unit, as well as for any cost type and cost version. When rolling up one or all items, consider these points:
These errors can occur during the Cost Rollup process. Use the Cost Rollup Audit page to check for these errors:
See Also Understanding the Manufacturing Standard Cost Foundation Defining Cost Versions Reviewing Calculated CostsBefore updating the production records with the new costs calculated by the Cost Rollup process, you can review the new cost using several inquiry pages. This section discusses how to review BOM costs for manufacturing and engineering.
Access the Costed BOM page (Manufacturing Definitions, BOMs and Revisions, Review BOM Information, Costed BOMs, Costed BOM) or the Costed EBOM page (Engineering, BOMs and Revisions, Review EBOM Information, Costed EBOM, Costed EBOM). Another method of viewing a manufactured or engineering item's cost is to use the Costed BOM page or the Costed EBOM page. You can display the costs of an assembly, its components, and outputs according to cost type and cost version. This is especially useful for determining the costing impact of manufacturing BOM changes on an assembly. Use cost types for costing simulations, to perform what-if analyses, or to calculate new standard costs prior to updating. Cost versions are iterations of a particular cost calculation for a cost type. You can have multiple versions for each type. You cannot use these inquiry pages for configured items.
Note. Due to rounding differences, it is possible you could see a small variance (+ or − 0.0003) between the cost version costs and the inquiry costs in this inquiry. This occurs when the system displays the costed BOM results for an item that is either a batch item or has batch assembly items at lower levels. See Also Prerequisites Defining BOM Outputs Updating Production CostsTo update standards costs in the production tables, use the Update Production Costs component. Once you have reviewed and approved the calculated product costs for manufactured and configured items, you can move them into the production cost records using the Cost Update/Revalue process page. This process:
The Cost Update/Revalue process page does not move product costs for an engineering or simulated cost version into the production cost record. However, you can run the process in report-only mode. This enables you to determine the effects of proposed engineering changes on inventory value.
Revaluing inventory is the process of updating an item's cost and accounting for the change in inventory value due to the change in standard cost for the item. The process involves calculating the difference in inventory value, recording the difference, and updating the standard costs for the items. Once you record the updated information, you can post it to the GL through the normal transaction accounting cycle. Because the system bases the revaluation on a snapshot of the inventory, you want to ensure that the inventory value is as correct and accurate as possible to reflect the correct financial picture. Prior to running the Cost Update/Revalue process page to revalue inventory, you must:
In-process inventory includes two parts:
WIP value is not a value or amount that PeopleSoft Cost Management stores for end items using a frozen standard cost approach. It is calculated at any point in time using PeopleSoft records. To calculate WIP:
Component Costs PeopleSoft Cost Management bases the WIP component costs value on the quantity of the component issued to the production ID or production schedule. The quantity issued is stored on the component list. PeopleSoft Manufacturing updates the issue quantity when you record operation or assembly completions and the component is consumed from the WIP location or when the component is kitted directly to the production ID. PeopleSoft Cost Management derives the value for component costs by multiplying each component's issue quantity by the component's standard cost-by-cost element, then summarizing all the costs for all components. This enables the system to determine the lower-level costs for WIP. To calculate the old cost, PeopleSoft Cost Management uses the latest cost for the item in the Items Production Cost record. To determine the new cost, PeopleSoft Cost Management uses the item's cost for the cost type and version that you're using to update the cost. Earned Conversion Costs Earned conversion costs include the labor, machine, subcontracting, and overhead costs for this level only.Earned this level costs account for the value added to WIP. The system bases these costs on assemblies or operations that are complete. The WIP value report summarizes entries in the earned conversion cost record for each production ID or production schedule according to the cost category associated with the cost element. The WIP revalue first determines the old earned this level costs by summarizing the costs as stated in the Earned Conversion Cost record. Then, the new earned this level costs are calculated, taking into account any changes in routing times and their corresponding rates for the cost type and version that you select. PeopleSoft Cost Management posts any differences to the earned conversion cost record, so that when it summarizes, the old earned conversion costs plus the differences equal the conversion costs at the new standards. Waste By-Product Cost If the production ID or production schedule has multiple outputs, then include any waste by-product that has been reported complete and issued from the operation. Determine the waste by-product cost by multiplying the actual output quantity (quantity completed at the operation) by its standard cost. Any waste by-product costs are added to the overall cost of the WIP value. To determine the change in waste by-product cost, compare the current completion cost to the cost of the quantity completed and multiply by the new cost for the cost type and version selected for the update. Assembly Scrap Assembly scrap accounts for the value of partially completed assemblies that you have rejected. The cost must be subtracted, because the system does not include this assembly scrap value as part of WIP or finished goods. At the time the scrap occurs, the system determines the scrap cost by summarizing the components used up to that point, plus any value added up to the point that the scrap occurred. The system stores assembly scrap costs in an assembly scrap record and summarizes scrap costs in the WIP value report by cost category for the production ID or production schedule. As with components and earned conversion costs, the scrap cost for revaluation is recalculated based on the component costs using the cost type and version. These level scrap conversion costs are based on the new times and rates for the cost type and version. Assembly Completions Assembly completions take into account, for all outputs, the assemblies that are completed to stock, another production area, or issued directly to another production ID, and are therefore no longer part of the production ID or production schedule value. This includes the cost of co-products and recycled by-products. The value is derived by multiplying the quantity completed for all outputs as stated in the production header record by its cost from the item production cost record. To determine the new value of completions, the assembly quantity completed is multiplied by the cost for the selected cost type and version.
The inclusion or handling of a production ID or schedule in WIP depends on the production status. The system revalues any production ID or production schedule if the production status is not entered, firmed, released, canceled, or closed for accounting. Processing Non-Matching Cost Elements When processing non-matching cost elements, the WIP revalue involves matching cost elements from the old costs to cost elements for the new costs. In cases where there are no matches, the Cost Update/Revalue process still posts the difference to the variance record. In the case where the old cost record has a cost element that does not exist on the new cost record, the system posts a negative entry on the variance record for the entire old cost. If the new cost record has a cost element that does not exist on the old cost record, the system posts a positive entry for the entire new cost. Processing Configurable Items In the WIP revalue process, it is necessary to first determine if the item being revalued is a configured item that is using configured costing. When processing the component, the system verifies whether there is a configuration code on the component list for the item. If there is, the next check verifies whether the item is configured costed by reviewing the check box on the master item table. If the item is to be configured costed, the system matches the configuration code found on the component list to that on the item production cost record for the item and uses those costs to calculate any differences. When the system processes assemblies, the same checks hold true. If the production order assembly item has a configuration code, the system verifies whether the item is to be configured costed. If the item is to be configured costed, then another match of the configuration code found on the header record is made to that on the item production cost record, and those costs are used to calculate any differences. Processing Without Operation Lists When a production ID or production schedule does not have an operation list, the conversion costs are earned by posting the this level costs from the item production cost record to the earned conversion cost record. Therefore, to calculate the earned conversion costs at the new standard, use this level costs for the cost type and version. Floor Stock and Expensed Items The system does not include floor stock or expensed items for purposes of inventory valuation and revaluation. Operation List Updates As part of the WIP revaluation process, the system updates the operation lists with the costing labor and machine set up, run, fixed run, and postproduction times and run rates. It makes an attempt to match the operations on the operation list to those on the items primary production routing or its referenced item routing. When the operation sequence, work center, and task code (if you use tasks) on the routing match the component list, the times and run rates in the operation list are updated with those from the routing. This ensures that the system does not create process change variances once you update the costs. If the item's reference routing changes and is different from the one that you used to create the operation list, no updates are made even if the operations, work centers, and task codes match. The WIP Revaluation report displays the old cost, new cost, and variance.
Access the Cost Update/Revalue page (Cost Accounting, Item Costs, Update Costs, Cost Update/Revalue, Update Production). Select the business unit, cost type, and cost version with which you want to update the standard costs. The status for the cost type and version type appears and must be set to Approved for versions related to manufactured and configured items. The value in the Distrib. Type (distribution type) field changes to the distribution type associated with the inventory revaluation transaction group, but you can change it or you can leave it blank. Note. PeopleSoft Cost Management copies to production the cost type and version's conversion rates and conversion overhead rates only when you have selected all items. The system copies these rates and uses them to calculate the earned labor and machine costs, as well as the applied overhead values for assembly completions and scrap. If you are updating a single item cost and have based that cost on new conversion rates, you must manually copy those rates into the production rate records. Report/Update Options You have three options for running this process:
When reporting, you can also select to print a summary report only or to save variance results. When you choose to run the update in report-only mode and save variance results, you can review the revaluation results by viewing the Compare Cost Updates or the Cost Updates by Tolerance pages. See Also Updating Conversion Rates Reviewing Standard CostsAfter updating the production records with the new standard costs calculated by the Cost Rollup process and applied by the Cost Update/Revalue process, you can review the standard costs using several inquiry pages.
Calculating Costs for PeopleSoft Supply PlanningYou can define specific BOM and routing combinations that can be extracted to PeopleSoft Supply Planning. This ensures that planning processes use the most accurate costs as the main driver when making sourcing decisions. To specify BOM and routing combinations that can be extracted to PeopleSoft Supply Planning:
To use the Define Business Unit Item - Manufacturing page to specify BOM and routing combinations that can be extracted to PeopleSoft Supply Planning:
Note. If the Production Option Costing process has not been run, PeopleSoft Supply Planning use the item cost based solely on the primary BOM and routing. Sourcing Template If there is a sourcing template for the item, then that template determines the sequence of production, purchase, and transfer options. If there is no sourcing template, then the template is loaded in lowest cost order. Note. If the costing utility has not been run, then the system uses the item standard cost when creating the item's sourcing template.
Access the Production Option Costing page (Cost Accounting, Item Costs, Update Costs, Production Options Cost Update, Production Option Costing). The Production Option Costing process calculates the cost of items to be sent to PeopleSoft Supply Planning. This utility considers makeable items, including primary items and co-products (make items) but not buy items. If an associated primary BOM exists for an item and it is a co-product on an associated primary BOM and also has its own BOM, then both the item's BOM and its associated primary BOM are included in the costing. For a routing with operation yield, this process captures the detailed costs at the operation-sequence level by calculating yield loss, maintaining extended precision cost fields, and storing detailed calculations in the CM_PRODCOST_DET record. For single output BOMs, the system calculates, according to cost element, the BOM and routing combination total this level and lower-level cost, and then stores these values in the full cost fields. It then divides these values by the output quantity (same as BOM quantity for single output BOMs) to get the per unit cost. For multiple output BOMs, the system also adds any waste by-products costs and subtracts recycle by-products costs from the full batch this level and lower-level costs. Therefore, in order to calculate the (per unit) cost for the primary and co-products, the system uses this formula:
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