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Compare Standard to FIFO Costing OAUG Cost Management SIG June 18, 2013.

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Presentation on theme: "Compare Standard to FIFO Costing OAUG Cost Management SIG June 18, 2013."— Presentation transcript:

1 Compare Standard to FIFO Costing OAUG Cost Management SIG June 18, 2013

2 2 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

3 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 Analyst  Advisory approach to implementation  Core strength: Converting “ERP/EBS-speak” into accountant-friendly language

4 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 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 6 EBS Standard and FIFO: A Comparison

7 7 Functionality / Business Need EBS Discrete Standard Costing EBS Discrete FIFO Costing Cost Rollup for inventory valuation - New Make item Need prior to WO Completion of any item in BOM structure Not needed Cost Rollup to recognize BOM, Routing, or Material price changes, or for periodic revaluation NeedNot needed Cost Rollup “what-if’s” (in separate Cost Types) Supported Correct Make item cost errors Cost RollupLayer Cost Update (may need to involve other items) Standard vs. FIFO

8 8 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 FrozenNot needed Cost Update - New Buy item Not needed if direct entry to Frozen Not needed Supply Chain Cost Rollup across Organizations SupportedSupported for “what-if’s” Standard vs. FIFO

9 9 Functionality / Business Need EBS Discrete Standard Costing EBS Discrete FIFO Costing Inter-Org TransfersTransfer at standard cost Transfer 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 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 Standard vs. FIFO

10 10 Functionality / Business Need EBS Discrete Standard Costing EBS Discrete FIFO Costing Valuation of Completions: WO Material pushed after all Completions done Completions 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 Variance Valuation of Completions: WO Material pushed during Completions Same as aboveSame 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 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 Variance Labor charge when Resource Charge Type = WIP Move Inv valuation = Routing Qty x Resource Rate Same 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 12 Functionality / Business Need EBS Discrete Standard Costing EBS Discrete FIFO Costing Ability to vary GL Accounts by Subinventory SupportedSupported 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 entered Average across all Layers Ability to change Cost Methods after Org in use Not supported MOH absorption, MOH Defaults (e.g. MOH based on % of Material cost) Supported Standard vs. FIFO

13 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 COGS Same as Standard R12 Cost Management- SLA – Setups and Create Accounting Feature Standard vs. FIFO

14 14 Functionality / Business Need EBS Discrete Standard Costing EBS Discrete FIFO Costing MTL and WIP seeded Cost Management reports SupportedSupported (plus several FIFO Costing-related inventory reports) Pending Cost UpdateSupportedNot supported Standard vs. FIFO

15 15 FIFO Cost - Implementation Considerations

16 16 Current Landscape – Discrete Manufacturers  Fluctuating raw material prices, escalation in recent years  Material cost avg % 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

17 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 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 for management reporting purposes only?  Conduct cost method requirements workshop, all parties involved  Beware of “accepting the past” (challenge long- time accounting processes)

19 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 20 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

21 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 22 Change from Standard to FIFO Cost Org

23 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

24 Question & Answer 24

25 25 Dave Sweas


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