Compare Standard to FIFO Costing OAUG Cost Management SIG June 18 2013 2 Contents Presenter Introduction What is EBS Discrete FIFO Costing EBS Standard and FIFO A Comparison FIFO Cost Implementation Considerations ID: 766624
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Compare Standard to FIFO Costing OAUG Cost Management SIGJune 18, 2013
2 Contents - Presenter Introduction What is EBS Discrete FIFO Costing? EBS Standard and FIFO: A ComparisonFIFO Cost - Implementation ConsiderationsChange from Standard to FIFO Cost OrgQuestion and Answer
3 Presenter Introduction - Dave Sweas, CPA Senior Solution Architect - MarketSphere Consulting, LLC EBS functional experience: Since 1995 (Industry, Big 5, middle market consultancies) EBS Concentration: Core Financials, Discrete Cost, Project Mfg., OPM Cost/SLA, Cost Management SLA Industry experience: General Accountant, FA, AP, Budgets, Cost Accounting Manager, Plant Controller, Supply Chain Cost Analyst, Profitability AnalystAdvisory approach to implementationCore strength: Converting “ERP/EBS-speak” into accountant-friendly language
4 What is EBS Discrete FIFO Costing? FIFO Cost Method flag - Inventory Org level ( permanent ) Available in R12 and 11i “Classic” definition of first-in-first-out inventory & COGS costing Layered Cost concept – Basic example: Item A purchases: 100 qty at $1.00, then 100 qty at $1.20 Result: Two 100-qty Layers at two different values 150 qty consumed into WIP, and W/O Completion: 100 qty from Layer 1 at $1.00, 50 qty from Layer 2 at $1.20 Total Completion value = $160, $60 of Item A on-hand
5 What is EBS Discrete FIFO Costing? Applies to all items within a FIFO Org Costing method only; not automatically tied to physical flow of goods Seeded Cost Types: “FIFO” and “FIFO Rates” Key inquiries and reports: Layered Cost Transaction Detail, Layered Cost Elemental Report, Item Cost History, MADS / MADD detail (the latter is same report as in Std Cost Org) See next section for Standard to FIFO comparison
6 EBS Standard and FIFO: A Comparison
7 Functionality / Business Need EBS Discrete Standard Costing EBS Discrete FIFO Costing Cost Rollup for inventory valuation - New Make itemNeed prior to WO Completion of any item in BOM structureNot neededCost Rollup to recognize BOM, Routing, or Material price changes, or for periodic revaluation NeedNot neededCost Rollup “what-if’s” (in separate Cost Types)SupportedSupportedCorrect Make item cost errorsCost Rollup Layer Cost Update (may need to involve other items) Standard vs. FIFO
8 Functionality / Business Need EBS Discrete Standard Costing EBS Discrete FIFO Costing Correct Buy item cost errorsCorrect item cost and update to FrozenLayer Cost Update (may need to involve other items)Cost Update – New Make ItemUpdate to FrozenNot neededCost Update - New Buy itemNot needed if direct entry to FrozenNot needed Supply Chain Cost Rollup across Organizations Supported Supported for “what-if’s” Standard vs. FIFO
9 Functionality / Business Need EBS Discrete Standard Costing EBS Discrete FIFO Costing Inter-Org Transfers Transfer at standard costTransfer FIFO Layer cost (Note: Timing is critical) Variance capture in GLSupported (but some custom reporting may be desirable) Not supported (need custom reporting)Material variances (e.g. PPV, Usage), reflected in Gross MarginNo (i.e., below Gross Margin)YesPO price maintenance impact Inaccuracies f all through as PPV , no effect on Assembly costs Inaccuracies affect related Assembly costs Standard vs. FIFO
10 Functionality / Business Need EBS Discrete Standard Costing EBS Discrete FIFO Costing Valuation of Completions: WO Material pushed after all Completions doneCompletions valued at Std. WIP Qty x Component Std Costs, usage difference to Job Close Variance Optional: Incremental Completion Layers valued at Std WIP Qty x Component FIFO Costs. Then, any Push after Completions goes to Job Close VarianceValuation of Completions: WO Material pushed during Completions Same as above Same as above ( could instead value Completion at value of Material push) Valuation of Completions: WO Material backflush Completions valued at Std. WIP Qty x Component Std Costs Completions valued at Std. WIP Qty x Component FIFO Costs Standard vs. FIFO
11 Functionality / Business Need EBS Discrete Standard Costing EBS Discrete FIFO Costing Manual labor charge after incremental Completion (Resource Charge Type = Manual)Inv valuation = Std Qty x Std Resource Rate, diff vs. std to Job Close Variance Inv valuation = $0 for Layer built from that Completion, labor $$ to Job Close VarianceLabor charge when Resource Charge Type = WIP Move Inv valuation = Routing Qty x Resource RateSame way as Standard BS inventory valuation (GAAP, / L-C-M, IFRS, etc.)Need separate FIFO reserve Accepted (Note: Get up-front auditor verification) Periodic inventory valuation at actual cost (via Cost Mass Edit) Supported (via Cost Mass Edit and rollup at BOM and Rtg qtys) Not needed Standard vs. FIFO
12 Functionality / Business Need EBS Discrete Standard Costing EBS Discrete FIFO Costing Ability to vary GL Accounts by Subinventory Supported Supported in WMS Org; otherwise all Subinv have same Elemental Accounts (Note: R12 SLA addresses) Display on Item Costs Summary form Standard cost rolled up or enteredAverage across all LayersAbility to change Cost Methods after Org in useNot supportedNot supportedMOH absorption, MOH Defaults (e.g. MOH based on % of Material cost) Supported Supported Standard vs. FIFO
13 Functionality / Business Need EBS Discrete Standard Costing EBS Discrete FIFO Costing Outside Processing - Inventory valuation Supported (inventory valuation at Std qty x Std Resource Rate)Supported (inventory Layer valuation at WO OSP qty x PO price)Cost Copy – Items, Resources, OH)SupportedSupported (including from FIFO and FIFO Rates Cost Types)COGS RecognitionDeferred COGS debit upon ship, run three Concurrent Requests to move $$ to COGSSame as StandardR12 Cost Management-SLA – Setups and Create AccountingFeatureFeature Standard vs. FIFO
14 Functionality / Business Need EBS Discrete Standard Costing EBS Discrete FIFO Costing MTL and WIP seeded Cost Management reportsSupportedSupported (plus several FIFO Costing-related inventory reports) Pending Cost Update SupportedNot supportedStandard vs. FIFO
15 FIFO Cost - Implementation Considerations
16 Current Landscape – Discrete Manufacturers Fluctuating raw material prices, escalation in recent years Material cost avg. 65-80% of COGS value Competitive - Hold line on pricing --“margin squeeze” Need for improved GM/contribution margin info greater than ever PPV – Often largest variance vs. standard; difficult to meaningfully allocate to COGS Limitations of EBS period-end a ctual costing model Accounting departments- Expectation with ERP: “Do more with same / fewer resources” Lean concepts being driven firm-wide
17 FIFO Cost Org: Key Factors to Consider Discrete Org Cost Methods are permanent Overall PO price maintenance – Critical BOM / Routing maintenance up-to-date? Cost Rollups (what-if’s, new products, etc.) can be run in a FIFO Org In general: The fewer the raw material SKU’s and greater the price fluctuations, the better the fit In general: The more backflush, the better the fit
18 FIFO Cost Org: Key Factors to Consider Process automation - Cost accounting (FIFO = no Rollup for new products, eliminates revaluation) The more Resources = WIP Move, better the fit Variance capture in GL needed? Variances f or management reporting purposes only ? Conduct cost method requirements workshop, all parties involved Beware of “accepting the past” (challenge long-time accounting processes)
19 FIFO Cost Org: Key Factors to Consider Focus on COGS valuation (less so on inventory valuation): COGS – Analysis Inventory - Reporting FIFO costing may not be acceptable for some industries Consult internal / external auditors first : e.g., GAAP- & IFRS-compliance, prior year restatement considerations, relevancy of physical flow of goods
20 FIFO Cost Org: Key Factors to Consider Vertical integration – T he greater the number of Inter-Org Transfers, the more coordination needed Distributors – Overall, easier to implement FIFO than manufacturing Physical flow of goods sync with FIFO Layers
21 FIFO Costing and Physical Flow of Goods EBS FIFO Layers are consumed without regard to Lots, Serial Numbers, etc. or other physical flow Within normal range of inventory turns, in a discrete manufacturing environment the difference tends to be acceptable: All factors (variances) considered, generally more comprehensive COGS valuation than standard costing Other factors (low number of raw materials, back-flush vs. push) can offset need to match Material flow with Cost Layer consumption
22 Change from Standard to FIFO Cost Org
23 Change from Standard to FIFO Cost Org Changing the Cost Method flag not supported ** Convert and validate Items, BOMs, Routings Convert on-hand qtys PO’s and SO’s in-process need to be pointed to new Org Close as many WIP Jobs in old Org as possible ** FYI – This change is supported in EBS Process Organization
Question & Answer 24
25 Dave Sweas d ave.sweas@marketsphere.com 312.357.4428 708.287.6099