Can someone help me get a better understanding of how Actual vs. Standard reporting works.

Here is my confusion!

I know that when inventory is received, it is received at standard. When the invoice is received, any discrepancy between it and standard will post to a variance account.

My impression was that when a balance sheet is created that the both the Inventory + Variance account would appear on it. I thought the net of the two should give you your true or actual inventory?

Now I am being told that the Material purchase price variance account should be included on the I/S under an addition to COGS because COGS is at Standard?

I just don't get it.

If your purchase price variance on Inventory is added on to your COGS, doesn’t this overstate or understate your COGS.

For instance, what if you only produce 1 part a year, but have purchased enough to produce 2 parts.

i.e. Each raw material part has a Standard of $100. Therefore raw = $200

When the invoice comes, they actually cost $150 each. Therefore $100 is posted to the variance account [2* ($150 actual - $100 standard)]

Now say you produce an only one part with value added of $100

Therefore

Raw Cost of 1 Item = 100
Value Added = 100
PPV of 200
= COGS

Isn’t your COGS overstated by 100

Maybe I just need to see actual Financial Statements since we don’t have them yet.

I think you are on Baan IV and talking about standard items, correct me if not...

You have to understand that Baan IV valuates your inventory of standard items with the STANDARD COST PRICE. Even if you buy cheaper, or more expensive, the value of those items will still be what is in that field of the item master (basically...). Your actual inventory IS what is on the inventory account, EXCLUDING the variance account!

So, if you sell that item again, your COGS is the standard cost price, and you lower your inventory with exactly that amount. If you buy cheaper or more expensive, than you produce Profit/Loss relevant postings as soon as you receive the invoice, and NOT when you sell the goods.


So your calculation goes like this:

Standard Cost of 1 Item = 100
Value Added = 100
-> COGS = 100 + 100 = 200

Standard Cost of one item remaining on stock = 100
-> Inventory = 100

Buyed more expensive = 2 x 50,-:
-> Loss by purchase price variance : 100,-

So from your invoice of 300,- go
100,- to inventory (for the remaining item)
100,- to the COGS
100,- to the profit and loss, since you buyed more expensive than you valuate your stock.

So, indeed, that profit and loss account for the purchase price variance is NOT costs of goods sold. But it's still costs, nevertheless.

Hope that helps a bit
Uli

(PS: Captital letters are emphasized, not screaming... Still haven't understood how I get Italics here... ;-))

If you are using Actual Costing, the value of purchased parts will be the value quoted on your purchase order. If the supplier invoices something different to the price quoted this can be changed in the post receiptes session providing this happens before the invoice is entered.

If you are manufacturing parts, parts are booked into stock at Standard. All variances from the SFO can change the price in inventory to the ACTUAL price only when the shop floor order is finally closed AND if the parts have not moved from the original receipt. If parts are sold or issued to another assembly order etc before the SFO is closed then costs will be transferred at standard.

This is a recognised WEAKNESS in the Baan offering, especially is you are a make to order business and constantly change your batch sizes.

regards,

Keith

Ulrich you mentioned that your actual inventory is simply what is in your inventory account, not including your variance accout.

1) Do you mean

+Inventory Account = Actual (But isn't this at Standard)

2) or Do you mean

+Inventory Account + PPV Account = Actual


If number 1 is true, how do I know really know what I have in inventory (actual prices)

Can I ever know my true costs of Inventory?

Maybe what I need is to see some actual Financial Statemtents to try and understande better. Can you help on this aspect.

Thank you

Jack,

Number 1 is true. You don't have the actual prices in inventory when using Baan standard items. You have the standard cost prices of these items in inventory. Your true inventory is not what you have PAID for it but how you VALUATE it. The difference is not stock, but costs (or profit). Period. This is a fact you have to accept when you're working with Baan.

However, there is light at the end of this tunnel:

It depends on how your standard cost price is calculated. Normally this is done on the base of average purchase prices, and these get updated from your price difference.

Normally, that goes like this:

Item A
Standard cost price: 100,-
Average Purchase price: 100,-
Inventory Account 100,- (debit)
Stock: 1 Piece (at 100,-!)

You buy another piece at 200,-

Situation than looks like this:
Standard cost price: 100,-
Average Purchase price: 150,-
Inventory Account 200,- (debit)
Stock: 2 Piece (at 100,-!!!!)
Purchase Price differences 100,- (debit)
Accounts receivable: 100,-

THEN YOU RECALCULATE YOUR STANDARD COST PRICE!
That will revaluate your inventory on the base of the updated average purchase price:

Situation than looks like this:
Standard cost price: 150,-
Average Purchase price: 150,-
Inventory Account 300,- (debit)
Stock: 2 Piece (at 150!!!)
Purchase Price differences 100,- (debit)
Accounts receivable: 150,-
Inventory revaluation: 100,- (credit)

And erverything is fine again...


Uli

Thank you, that clears some things up.

Do you know of any sites where I can see some actual financial statements incorporating these variances.

I believe only then will things be picture perfect for me.

Jack -

I think I can offer you some help...

Have you considered using LOT PRICE instead of FTP (Fixed Transfer Price) for your choice of inventory valuation?

This choice will allow you to maintain your inventories at actual cost. Any price variances that would have been recognized as PPV's at the time of purchase are instead recognized at Lot Variances at the time the material is issued to Work in Process. (The material is issued to Work in Process at its standard cost.)

There is additional integration setup and lot maintenance involved with using this type of inventory valuation, but there are also benefits. Not only is your inventory valued at actual, but you can also track its usage via the Lot Tracking sessions.

Let me know if you would like further detail.

Regards,

Linda Nulph
Manager, Finance Sytems

Jack,

We have our Purchase Price Variances in an account named the same. This zero level account rolls up into the Direct Material line on our financial statements.

Taking it a step further (if you want)... we also break our our production results into their individual components (material, labor, overhead) and have each of those roll up on our F/S into our Direct Material, Direct Labor, and Manufacturing Expense statement account lines respectively.

The F/S would look like this...

Sales
COGS:
Direct Material (including PPV and Material Production Results)
Direct Labor (including Labor Production Results)
MFG EXP (including Overhead Production Results)
Total COGS:

Operating Profit

Is it possible to actually see that financial statement & its respective balance sheet.

Jack,

Here is an example that I hope helps...

Eddie this helped very much.

Thank you

Eddie, I need your assistance again.

I am currently developing a a fin. stat. in Baan but I need some help understanding the items below


eg.

Line 10 - Manufacturing Expense
Accounts included in roll up.

Acct 1010 COGS - Manu. O/H [ std rate x std. hrs ] = 200
Acct 1020 Effec. Var. [ act hrs x std hrs ] = -10
Net = 190

Acct 1030 Manu O/H [ act hrs x act. rate ] = 250
Acct 1040 Manu O/H Absorption [ act hrs x std rate ] = -220
Net = 30

My misunderstanding is, I thought that when statements are created, the netting of the standard costing accounts will still
result in simply your true acctual expense. in this case 250.

When all is said and done, your cost of good sold should be the actual costs (labor, material, and overhead) charged to the job.

HOWEVER...

The production variances may not hit the general ledger the same time that the system costs off the standard cost of the item you are selling. Baan expenses the production variances when the production order closes.

For example, let's assume that the transactions that I am listing are the only financial transactions the company has.

January:
Labor, Overhead and Material are charged to a job ($4000) total to produce 100 parts of a finished good item. That item has a standard cost of $35 a piece.

At the end of January there are no costs to report on an income statement.

Febuary:
Additional Labor, Overhead, and Material are charged to the job ($1000), 100 pieces of finished goods are posted to inventory and the job closes. Once the production order closes the following general ledger transactions occur:

Credit - WIP $500
Debit Finished goods for $30 x 100 pieces at standard cost ($3000)
Debit Result accounts for the differences of actual ($5000) and standard ($3000) - $2000.

The income statement will reflect an expense in the production variance (result) accounts and the company will show a loss of $2000 - keeping in mind there were no sales.

March:
In March there was no production, but only a sale of 100 pieces at $70 dollars each.

Credit Finished Goods inventory $30 x 100 (3000)
Debit COGS $30 x 100 (3000)
Debit accounts receivable $70 x 100 ($7000)
Credit Sales $70 x 100 ($7000)

The March income statement shows a net profit of $4,000. The year-to-date statement of income will reflect your actual profit for the sale of $2,000.

It is very important for your managment to understand this timing difference. I have worked very hard creating a fully automated WIP accrual to 'equalize' these timing differences and provide an automated vehicle that will calculate these results and generate an entry for our finance department so that our statement truely reflect our profit. The theory behind it is somewhat complicated. If you need to take your work this far, I'd be glad to try to explain it to you. Let me know. Take some time to absorb the above and please contact me if you have any questions! I'll try my best to help you out.

I have two typos in my prior message:

In January the standard cost should be $30

and in February the credit to wip should be $5000...sorry...

Eddie, I kind of understand it, but not as clear as I would like.

Is there any sort of documentation out there that you may have?

I am the type of person who really can't comprehend until I see hard core doc's or actual walk through an actual example, and then reconcile.

I don't have any documentation directly related to this. I found this out just through auditing our financial statements when I worked in accounting. The best thing I could suggest is to print the integrations on a few production orders and follow them through from start to finish.

In my example above (and using only those transactions) you would have the following P&L statements...see attached file.

That file helped! Thank-you.


One more question.

As far as my understanding of acccount roll-ups, did I correctly explain it.


+ COGS - at STD
+ efficiency variance
+ actual expense
+ absorption
= ACTUAL COST

I'm not quite sure what you are referencing with:
+ actual expense
but it seems that the rest is fine. Its been a little difficult not knowing details of your general ledger vs. our.

by actual expense, I mean all items with invoices. what we actually pay people.

From a financial statement point of view:

Sales
Less Cogs: (which include)
Direct Material (Production Order Related)
Direct Labor (Production Order Related)
Overhead (Prodcution Order Related)
Production Results for Labor, Material, and Overhead (Prodcution Order Related)
Misc. Manufacturing expenses (A/P related, indirect labor, etc.)
= Operating Income (Loss)
Less Selling and Administrative Expenses

= Net Income (Loss)

Our company has flip-flopped over whether or not to include the production results for labor with direct labor, production results for material with direct material, overhead results with overhead. That will all depend on your finance department head on the presentation.

I think that we're saying the same thing, but I just want to make certain.

Maybe this will help you understand what I am having a difficult time with.


Eddie, in your example

DL = 1000
Material = 1000
Overhead = 1000
------
3000 or ( $30 x 100 )

Where is your actual DL, Material, Overhead expense posting?

We have a Direct Labor general ledger account where direct labor is integrated to when someone posts an hour of time to a job. We also have Production Result-Direct Labor account that holds the integrations for labor related production results. These two general ledger accounts are the only zero level accounts that are mapped to a Baan Statement account named Direct Labor.

We have a Direct Material ledger account, a Production Result-Material account, Scrap Revenue (contra expense account), Lot price result, PPV account (and a few other minor general ladger accounts) that get mapped to a Baan Statement account named Direct Material.

We have a variety of manufacturing expense accounts plus an Overhead Variance, and a Production Result-Overhead general ledger account that get mapped into a Baan Statement account named Manufacturing Expenses. Our Financials then resemble the following:

Sales
Less COGS
Direct Labor
Direct Material
Manufacturing Expenses
Total COGS
Operating Profit/Loss

In my example, I didn't get too detailed as to how much was labor, ovh, or material. I just spread it out over the three equally.

I am really confused now because I have the following accounts.

1) COGS - Direct Labor at Std
2) Direct Labor Efficiency Variance ( I am assuming this is your results)
3) Direct Labor actual ( what is on their pay check )
4) Direct Labor Absorption ( Not sure where how this plays a role )

From what you are telling me, if accounting for the timing differences, and adding all these accounts together, I should = the account labeled # 3) Direct Labor actual

Where have you netted your Absorption Account

Apparently we weren't completely talking apples to apples...

My company doesn't use a labor absorbtion account. When someone charges time to a job we debit WIP and credit a balance sheet account (Accured Payroll). We don't want to artificially create income by crediting a labor absorbtion account.

When we pay out to employees we credit cash and debit Accrued Payroll.

If we had to, I guess that we would treat the labor absorbtion accounts similarly to our overhead transactions.

How are your overhead accounts treated. Do they have an absorption account