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Evo-ERP and DBA Classic >> Problem Reports - Sporadic >> Use of Standard Cost vs Average Cost
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Message started by David Waldmann on 02/06/08 at 13:41:17

Title: Use of Standard Cost vs Average Cost
Post by David Waldmann on 02/06/08 at 13:41:17

For no reason I can figure out, DBA sometimes posts an Invoice using Standard Cost instead of Average. At least I think that's what's happening. I noticed it because we had one item with a really bad Standard Cost (had a lot size of 0 instead of 2000) and the Standard Cost was more than 100 times what it should have been. The quarter million plus dollars change in Book Value lead me to it pretty quickly...

I have since noticed other items posting a 0 (which is the Standard Cost on them as none has been established). These are manufactured, to-stock items. Nothing unusual about them. No kit components, no WO made from the SO. Just basic make-to-stock and then ship some day.

This item had no Standard Cost, and then the SC was updated to the bad one. You can see some legitimate transactions, and then some illegitimate (?) ones.

http://i29.photobucket.com/albums/c275/dwaldmann/IS%20Tech/InventoryCost.jpg

Title: Re: Use of Standard Cost vs Average Cost
Post by GasGiant on 02/06/08 at 13:55:21

Are the orders created in the SO modules or with IN-C?

Title: Re: Use of Standard Cost vs Average Cost
Post by Vman on 02/06/08 at 15:10:33

It appears that DBA was written with Standard Cost in mind, and average was added on later, almost as an afterthought. For example you can rollup at standard cost, but not average. IN-C can screw up your average costs it you're not careful.
If you are using Average Costing, why should Standard costing even be maintained/used by the program?

Title: Re: Use of Standard Cost vs Average Cost
Post by David Waldmann on 02/07/08 at 05:26:35

GasGiant wrote:

Are the orders created in the SO modules or with IN-C?

Orders for this item are created in WO-A. Material and Labor are entered via WO-G and finished production is entered at the finish of the job (one entry only) and the WO closed at the same time in WO-I.

Title: Re: Use of Standard Cost vs Average Cost
Post by GasGiant on 02/07/08 at 06:22:21

I meant the Sales Order. The WOs seem to be doing fine.

Title: Re: Use of Standard Cost vs Average Cost
Post by lmk223a on 02/07/08 at 07:05:04

One thing that is not on your print out is the quantity on hand after the transaction.

What I have learned, is the calculation COGS using average cost is based on the value of Work Order Receipts only! IN-C adjustments do not affect the value of COGS average cost, even though you have increased quanitities on hand. You can use IN-K to override the average cost calculation when there are significant changes to inventory provided by IN-C adjustments, and then run UT-K-G to revalue inventory on hand.

The $0 value can occur when the shipment qty and/or negative IN-C quantities exceeds the quanitity added to stock via work order receipts. I would suggest reversing the shipments(for internal records only), manually changing the average cost via IN-K, run UT-K-G and re-process the shipments (internally). SO-G allows you to view the COGS calculation before the invoice is posted. That way if you disagree with the system generated COGS (Average Cost) you have the opportunity to change it (IN-K) before posting the invoice.

Title: Re: Use of Standard Cost vs Average Cost
Post by GasGiant on 02/07/08 at 07:35:39

Vman wrote:

Title: Re: Use of Standard Cost vs Average Cost
Post by David Waldmann on 02/07/08 at 09:55:38

GasGiant wrote:

I meant the Sales Order. The WOs seem to be doing fine.

SO is created in SO-A.

Updated list with UOH below. I can sort of (?) get if UOH goes negative using Standard but don't like it, and it doesn't seem consistent.

But you can clearly see that on 1/23 we made an IN-C adjustment to get inventory right, at 0, made plenty on 1/31 and then then it was shipped without it being at or below 0 it got posted at Standard.

http://i29.photobucket.com/albums/c275/dwaldmann/IS%20Tech/InventorywUOH.jpg

Title: Re: Use of Standard Cost vs Average Cost
Post by lmk223a on 02/07/08 at 12:49:06

Thanks for adding the UOH qtys.

I thought there was a golden rule of DBA/EVO not to process shipments without sufficient qty in inventory to support the shipment - as this would result in unusual COGS costing?

My first response would support the $0 costing for the 12/12, 1/7 & 1/18 shipments. If UOH goes negative or exceeds the WO receipts, DBA runs home to mama and put $0 in COGS. However, I am stumped by 2/4 shipment COGS.

Our daily process (in this order) is to enter labor hours to work orders, enter finished production (WO-I) and then prepare invoices, first verifying qty on hand will support the shipment. We have been successful since we adopted this process in obtaining normal costing thru EVO. We employ average costing.

Linda

Title: Re: Use of Standard Cost vs Average Cost
Post by David Waldmann on 02/07/08 at 12:58:03

There is an option to Not Allow, Warn, or Allow negative qtys.

However, we often have shipments of product made that day that have not had the WO completed yet, and we also use an IS Tech add-on that enters finished production during Invoice Posting for WOs created through SO-N. So we have to allow shipments that would create negative on-hand. Theoretically we still will not actually HAVE negative on hand, because the Fin Prod will be completed before posting, or the add-on will enter it at posting. However, we all know that actual on hand and what the computer says is rarely the same.

Title: Re: Use of Standard Cost vs Average Cost
Post by Vman on 02/07/08 at 13:00:12

GasGiant wrote:

[quote author=Vman link=1202330477/0#2 date=1202339433]It appears that DBA was written with Standard Cost in mind, and average was added on later, almost as an afterthought. For example you can rollup at standard cost, but not average. IN-C can screw up your average costs it you're not careful.
If you are using Average Costing, why should Standard costing even be maintained/used by the program?

The two are separate concepts. Think of the three costs as past, present, and future: Last Cost is the past, what it cost the last time. Actual cost is the present, what is the value/cost of a current item in stock. Standard Cost should be a good estimate of the cost of the next item you build. If you use IN-L-E to update your standards costs for purchased items from Average, then run BM-G to roll up your standard costs for products, then you have effectively rolled up average costs. By the same token, using IN-L-E to set standard to Last cost, followed by BM-G, you'd see a different Standard cost result. We use IN-L-E with average cost because we do not purchase parts to specific orders and our material costs fluctuate quite a bit. We run IN-L-E followed by BM-G every weekend. It makes a difference.[/quote]

As I understand the concept of standard costs, they are usually calulated yearly or semi-yearly, and involve quite a bit of work to do them correctly (such as communicating with vendors to get an idea on price increases, etc.) We have used the IN-L-E and BM-G procedure here, but it seems that what you are doing is using the Standard Cost programs to do what you can't do directly with average cost. This does give you a place holder of sorts for your last good rollup. Of course with anything like this garbage in=garbage out. If your average costs get hosed, you can then hose the standard cost with the update/rollup.

If you use IN-C to do an negative adjustment, the Use STD Cost? selection is set to N and not changeable. I am not sure why that is.

Title: Re: Use of Standard Cost vs Average Cost
Post by lmk223a on 02/07/08 at 13:18:01

David Waldmann wrote:

I forgot to mention, we are on a one day lag basis. The day the product ships, all we do is process the sales order release and generate a packing slip, because many times the work order is not complete yet with labor hours and materials. The next day we process labor, any w/o material issues, then enter fin prod, then process sales invoice.

Title: Re: Use of Standard Cost vs Average Cost
Post by David Waldmann on 02/07/08 at 13:25:10

lmk223a wrote:

That's almost exactly what we do, except we print the Invoice on the date of shipment, The next AM we make sure any non-entered materials and labor are issued, enter fin prod (if not an SO-N order) and then do the Invoice Posting.

You would often have "negative on hand" in the interim using this method, except that DBA does not actually create the inventory transaction for the shipment until the invoice posts.

Title: Re: Use of Standard Cost vs Average Cost
Post by cathyh on 02/07/08 at 14:53:17

Vman wrote:

If you use IN-C to do an negative adjustment, the Use STD Cost? selection is set to N and not changeable. I am not sure why that is.

I believe if you are using average cost you can only adjust out at current avg cost. You can adjust in at whatever you want. So to correct average cost you adjust total available out, then back in at standard or last or whatever you type in if you say "N" to standard cost.

We use standard cost differently for purchased parts versus manufactured parts. With purchased parts we use std cost to more or less track our increasing/decreasing costs. We change these once a year. Standard costs for product we build are rolled up when we create the part or when we change the part, or when we change standard costs for items that are going into it..

Title: Re: Use of Standard Cost vs Average Cost
Post by GasGiant on 02/08/08 at 07:19:58

Vman wrote:

As I understand the concept of standard costs, they are usually calulated yearly or semi-yearly, and involve quite a bit of work to do them correctly (such as communicating with vendors to get an idea on price increases, etc.) We have used the IN-L-E and BM-G procedure here, but it seems that what you are doing is using the Standard Cost programs to do what you can't do directly with average cost. This does give you a place holder of sorts for your last good rollup. Of course with anything like this garbage in=garbage out. If your average costs get hosed, you can then hose the standard cost with the update/rollup.

Because many of our raw materials are commodities, like platinum, we tend to watch our costs closely. In order to project margins and keep them in line, we need to rerun standard cost often. I suppose that if your costs don't change very often then you'd only need to refigure your standard costs once in a year. A job shop would need to refigure costs before every quote. The Sequence of Events section of the help says to run IN-L-E and BM-G as needed. Neither is mentioned in month-end or year-end accounting. Some businesses adjust their prices every year or two, others set prices by the job. Obviously, we have different material accounting needs because of this variation.

I'll also mention that if you do not keep your standard costs up-to-date, your Variance account will inflate as time passes. By keeping our standards up-to-date our variances are minimal and we really notice when something goes haywire with costs because we see a blip in the variance account. If your costs don't vary wildly then you could use the variance account to track the gradual change and know when it is time to update pricing.

Vman wrote:

If you use IN-C to do an negative adjustment, the Use STD Cost? selection is set to N and not changeable. I am not sure why that is.

As mentioned above, that is backward. From the help file: "If you are entering a negative adjustment, the current average cost is used and you are not allowed to change it. "

Title: Re: Use of Standard Cost vs Average Cost
Post by David Waldmann on 02/08/08 at 08:01:07

GasGiant wrote:

I'll also mention that if you do not keep your standard costs up-to-date, your Variance account will inflate as time passes. By keeping our standards up-to-date our variances are minimal and we really notice when something goes haywire with costs because we see a blip in the variance account.

So, it sounds like you use Standard Costs(?) We use Average. We maintain and rollup Standard Costs so we can do Estimates and have something to compare our Actual and Averages to. However, Standard Cost (because it uses Lot Size) will never work for us, as our actual lot sizes for the same item can run from 20 to 2000 and the setup costs will make the overall cost vary up to a factor of 10.

GasGiant wrote:

[quote author=Vman link=1202330477/0#10 date=1202418012]
If you use IN-C to do an negative adjustment, the Use STD Cost? selection is set to N and not changeable. I am not sure why that is.

As mentioned above, that is backward. From the help file: "If you are entering a negative adjustment, the current average cost is used and you are not allowed to change it. "
[/quote]

You're both saying the same thing. NOT using Standard means USING Average.

As to the reason why it makes perfect sense. It's trying to keep you from making a mistake. The workaround if you really do know what you're doing (which has already been said or at least alluded to, I think) is change the Average in IN-K, make the adjustment in IN-C, then change the Average back in IN-C (not necessarily to what it was, though...).

Title: Re: Use of Standard Cost vs Average Cost
Post by GasGiant on 02/08/08 at 08:54:41

David Waldmann wrote:

No, actual. We run IN-L-E and BM-G often to keep an eye on our projected margins, but we use actual cost in WO-I. Even though we recalculate standard often (compared to others) we still see variances, the difference between standard (projected) cost when the WO is released and the actual at the time we close the WO, which could be three days or three weeks later.

Title: Re: Use of Standard Cost vs Average Cost
Post by Vman on 02/08/08 at 12:23:12

We use average costs as well. I can understand why IN-C works that way now. It seems that many people use the standard costs functions (not fully, because if your costing method is average, then the only things in standard costs are materials and labor normally), is a) because you can't directly roll up average costs, and have to use the standard costs programs for things like recalculating COGS when you're doing things like new pricing and b) because it gives you a place to store what should be good costs data that can be used to compare with average and last to see if something is out of whack.
The person who is doing our purchasing now used to work for a large company that did full-blown standard costing. As she described it to me, it was a very detailed process, including getting price increase projections from vendors, researching trends, recacluating labor rates, etc. As we are a small company, we can't devote the resources to do this.
I do not profess to be anywhere near an expert at this, so maybe that's why I think the whole use standard cost to rollup your average costs is a little strange.
On a somewhat off-topic note, how do some of you folks handle adjusting items into inventory that were free, such as samples. If you put them in at last or average cost, are you technically over-stating your inventory value? If you put them in a 0.01, you hose your average cost.

Title: Re: Use of Standard Cost vs Average Cost
Post by David Waldmann on 02/08/08 at 13:33:12

GasGiant wrote:

...we still see variances, the difference between standard (projected) cost when the WO is released and the actual at the time we close the WO

OIC. I thought you were referring to a GL Variance account of some sort, which is how I think Standard Cost may work(?).

Title: Re: Use of Standard Cost vs Average Cost
Post by lmk223a on 02/11/08 at 07:29:26

Vman wrote:

On a somewhat off-topic note, how do some of you folks handle adjusting items into inventory that were free, such as samples. If you put them in at last or average cost, are you technically over-stating your inventory value? If you put them in a 0.01, you hose your average cost.

We have tried the IN-C at $.01 way, but have changed to creating a Purchase order for samples. That way there is a record (audit trail) in the system as to when the sample was received. The sample can be a direct job receipt or issued to multiple work order(s) and the production manager can inquire into EVO as to whether the sample has arrived so he can finish the job on the floor.

Upon Receiving the PO, the item either goes directly to the work order (job receipt) at $0 or can go into inventory at $0
If there is a pre-existing qty in inventory and the purchase order receipt is not directly to a job, EVO will average the $0 cost of the po receipt with those already in inventory when the next work order issue is performed.

Title: Re: Use of Standard Cost vs Average Cost
Post by dameng on 02/11/08 at 22:29:37

David,

what are the settings in your DBA / EVO program? i.e. what is set in either SD-H inventory defaults or IN-L-I ?

most users set to A, for average costing. however, if you have it set to either F (fifo) or L (lifo) then, anytime the UOH for that item go 0, then there is nothing in the LIFO/FIFO buckets to average, hence your average goes to 0. your Last cost will keep the $ cost value.
if you're on Avg costing, then your Avg cost will remain, even if UOH go 0, so book value is tracked, and then Avg will get recalculated to Last upon the next receipt.

either of those 3 costing methods, do not post at standard cost. ( it may be coincident if both numbers are same, of if you say use std cost either at IN-C or WO-I but that converts the value )

hth

Title: Re: Use of Standard Cost vs Average Cost
Post by David Waldmann on 02/12/08 at 05:11:53

dameng wrote:

what are the settings in your DBA / EVO program? i.e. what is set in either SD-H inventory defaults or IN-L-I ?

Dave,

Our costing is set to Average. That's why I don't understand why this is happening. Especially the use of Standard when we have positive UOH. Something is very wrong.

Title: Re: Use of Standard Cost vs Average Cost
Post by cathyh on 02/15/08 at 09:11:48

Just a thought...
If these are manufactured items, are you sure when you finish production that you are using actual and not standard (for a work order I believe this is the same as estimated) costs? There is a setting also in WO defaults to use standard costs in finish production. I think if this is set to "Y" then it skips over the Use Std Cost question, if "N", you can change "S" to "A" (actual).

Title: Re: Use of Standard Cost vs Average Cost
Post by David Waldmann on 02/15/08 at 09:24:12

Cathy,

I certainly can't rule out the possibility that someone occasionally uses Standard at Finished Production

However, if you look at the the example you will see
WO receipt at 0.9217,
Shipment at 154.1170.

I don't know if there is any way to find out what the Average was at that time, but you can see from the previous transactions that it was under a dollar.

Title: Re: Use of Standard Cost vs Average Cost
Post by GasGiant on 02/15/08 at 09:51:44

We sometimes have unit of measure issues where we buy in feet and issue in millimeters. This messes up the average cost, but it shows up as a purchase problem. This one stumps me. It definitely looks like someone used IN-K to change the average cost.

Title: Re: Use of Standard Cost vs Average Cost
Post by David Waldmann on 02/15/08 at 10:57:15

GasGiant wrote:

It definitely looks like someone used IN-K to change the average cost.

I can assure you that did not happen. Know one here but me even knows what IN-K is.

And there are other items with exactly the same problem.

Title: Re: Use of Standard Cost vs Average Cost
Post by cathyh on 02/15/08 at 11:43:16

Have you used IN-O to print a report with auditing info, which includes date and time, so you can get an actual sequence of events?

Title: Re: Use of Standard Cost vs Average Cost
Post by David Waldmann on 02/15/08 at 15:29:46

IN-O looks just like the Trans list in IN-A

http://i29.photobucket.com/albums/c275/dwaldmann/IS%20Tech/Std_Cost.jpg

Title: Re: Use of Standard Cost vs Average Cost
Post by Vman on 02/18/08 at 15:58:03

David,

I had an issue with an item where the components on a work order were issued at 10 times their normal amount, which of course greatly increased the cost of the item. If found this out by looking at the usage of one of the component items, and seeing a unusually high usage for December 2007. As the item is only used on the one assembly, this was odd. I then looked at the work order done in December, and discovered the over issues. We use backflushing here, so I am not sure if it was program burp or not.
I don't know if this is related to your problem or not, but I'd thought I'd post anyways.

Title: Re: Use of Standard Cost vs Average Cost
Post by David Waldmann on 02/19/08 at 08:03:53

VMan,

I appreciate your response, but the problem is not material received into stock at the wrong cost. It appears that sometimes it posts as Standard Cost when it should be using Average.

This MAY be related to the "Enter finished production at Invoice posting" add-on that I have, since there have been and still are problems with that program. Although these SOs were for from-stock material, not made to order with SO-N.

???