Compare Standard to FIFO Costing - Volz Consulting

Compare Standard to FIFO Costing - Volz Consulting

Compare Standard to FIFO Costing OAUG Cost Management SIG June 18, 2013 Contents Presenter Introduction What is EBS Discrete FIFO Costing? EBS Standard and FIFO: A Comparison FIFO Cost - Implementation Considerations Change from Standard to FIFO Cost Org Question and Answer 2 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 Analyst Advisory approach to implementation Core strength: Converting ERP/EBS-speak into accountantfriendly language 3 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 4 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 5

EBS Standard and FIFO: A Comparison 6 Standard vs. FIFO Functionality / Business Need Cost Rollup for inventory valuation - New Make item EBS Discrete Standard Costing EBS Discrete FIFO Costing Need prior to WO Not needed Completion of any item in BOM structure

Cost Rollup to recognize Need BOM, Routing, or Material price changes, or for periodic revaluation Not needed Cost Rollup what-ifs (in Supported separate Cost Types) Supported Correct Make item cost errors Layer Cost Update (may need to involve other items)

Cost Rollup 7 Standard vs. FIFO Functionality / Business Need EBS Discrete Standard Costing EBS Discrete FIFO Costing Correct Buy item cost errors Correct item cost and update to Frozen Layer Cost Update (may

need to involve other items) Cost Update New Make Item Update to Frozen Not needed Cost Update - New Buy item Not needed if direct entry to Frozen Not needed Supply Chain Cost Rollup across Organizations

Supported Supported for what-ifs 8 Standard vs. FIFO Functionality / Business Need EBS Discrete Standard Costing EBS Discrete FIFO Costing Inter-Org Transfers Transfer at standard cost

Transfer FIFO Layer cost (Note: Timing is critical) Variance capture in GL Supported (but some custom reporting may be desirable) Not supported (need custom reporting) Material variances (e.g. PPV, Usage), reflected in Gross Margin No (i.e., below Gross Margin) Yes

PO price maintenance impact Inaccuracies fall through as PPV, no effect on Assembly costs Inaccuracies affect related Assembly costs 9 Standard vs. FIFO Functionality / Business Need EBS Discrete Standard Costing EBS Discrete

FIFO Costing Valuation of Completions: Completions valued at WO Material pushed after Std. WIP Qty x all Completions done 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 Variance Valuation of Completions: Same as above Same as above (could WO Material pushed instead value Completion during Completions

at value of Material push) Valuation of Completions: Completions valued at Completions valued at WO Material backflush Std. WIP Qty x Std. WIP Qty x Component Std Costs Component FIFO Costs 10 Standard vs. FIFO Functionality / Business Need EBS Discrete Standard Costing EBS Discrete FIFO Costing Manual labor charge after incremental Completion

(Resource Charge Type = Manual) Labor charge when Resource Charge Type = WIP Move Inv valuation = Std Qty x Std Resource Rate, diff vs. std to Job Close Variance Inv valuation = Routing Qty x Resource Rate Inv valuation = $0 for Layer built from that Completion, labor $$ to Job Close Variance Same way as Standard BS inventory valuation

(GAAP, / L-C-M, IFRS, etc.) Need separate FIFO reserve Accepted (Note: Get upfront 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 11 Standard vs. FIFO Functionality /

Business Need EBS Discrete Standard Costing Ability to vary GL Supported Accounts by Subinventory EBS Discrete FIFO Costing Supported in WMS Org; otherwise all Subinv have same Elemental Accounts (Note: R12 SLA addresses) Average across all Layers Display on Item Costs Summary form Standard cost rolled

up or entered Ability to change Cost Methods after Org in use Not supported Not supported MOH absorption, MOH Defaults (e.g. MOH based on % of Material cost) Supported Supported 12 Standard vs. FIFO 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)

Supported Supported (including from FIFO and FIFO Rates Cost Types) COGS Recognition Deferred COGS debit upon ship, run three Concurrent Requests to move $$ to COGS Same as Standard R12 Cost ManagementSLA Setups and Create Accounting Feature Feature

13 Standard vs. FIFO Functionality / Business Need EBS Discrete Standard Costing EBS Discrete FIFO Costing MTL and WIP seeded Cost Supported Management reports Supported (plus several FIFO Costing-related inventory reports) Pending Cost Update

Not supported Supported 14 FIFO Cost - Implementation Considerations 15 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 actual costing model Accounting departments- Expectation with ERP: Do more with

same / fewer resources Lean concepts being driven firm-wide 16 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-ifs, new products, etc.) can be run in a FIFO Org In general: The fewer the raw material SKUs and greater the price fluctuations, the better the fit In general: The more backflush, the better the fit 17 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 for management reporting purposes only? Conduct cost method requirements workshop, all parties involved Beware of accepting the past (challenge longtime accounting processes) 18 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 19

FIFO Cost Org: Key Factors to Consider Vertical integration The 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 20 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, backflush vs. push) can offset need to match Material flow with Cost Layer consumption 21

Change from Standard to FIFO Cost Org 22 Change from Standard to FIFO Cost Org Changing the Cost Method flag not supported ** Convert and validate Items, BOMs, Routings Convert on-hand qtys POs and SOs 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 23 Question & Answer 24 Dave Sweas

[email protected] 312.357.4428 708.287.6099 25

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