Actual cost and cost variances calculation in JD Edwards

Introduction

The target audience of this article are accountants or economists involved in processes of calculation the actual cost and cost variances of produced finished and semi-finished goods.

Finished and semi-finished goods should be recorded in accounting at their actual cost. However, it is often not possible to determine the actual cost of production at the time of release because all costs incurred (direct and indirect) have not yet been determined. Thus, companies resort to the standard method of accounting for finished and semi-finished goods produced.

If a company is international, however, there is often a requirement to account for standard cost, taking into consideration variances. However, in “classic” standard cost accounting, variances in costs are not allocated to products and actual cost at the product level is not calculated.

It turns out that “on top of” accounting for the production and movement of goods at standard (or normative) cost for Russian accounting purposes it is necessary to:

  • calculate the actual cost of materials to be used in production after all costs for the reporting period have been collected;
  • calculate and reallocate accumulated variances from standard cost to finished goods and semi-finished goods;
  • as a result, obtain the actual cost of production calculated by the boilerplate method at the required level of details.

In most cases, accountants carry out calculations in Excel spreadsheets. Preparing such reports is resource-intensive and requires careful attention to eliminate errors in formulas and calculations. A lot of manual iterations cause feelings of stress, dissatisfaction with the system and the process to follow month after month, year after year…

What if manual work, manual manipulation of data is moved to your ERP system? What if all the mandatory manual activities will be automated and the results will be displayed in easy-to-understand reports? Have you thought about it before?

The following are the actual cost and variance calculation capabilities of JD Edwards that can be implemented as part of a solution tailored to the realities of your business.

To find out what the JD Edwards system is and for answers to frequently asked questions, visit our website here.

Solution description

The automation solution includes:

  • collection of variances between the standard cost and the actual cost incurred;
  • calculation of actual cost values for an item or item group (according to the method chosen by the company):
    • Production cost is the cost of manufactured finish/semi goods in the current month;
    • Cost of sales – total cost of sales (including the effect of finished goods balances from the previous month).
  • calculation of the amount of variance between standard and actual costs in the following blocks and generation of accounting records for totals:
    • Production output;
    • Production losses;
    • Cost of sales (including returns);
    • Month-end balances.

In addition, the solution contains:

  • visualisation of the solution through visual and understandable reports;
  • the possibility of creating technical postings with closing balances in terms of actual cost and the linkage to the item number, allowing the values to be fixed in the system;
  • the possibility for the user to select an appropriate launch mode (proof or final) and, for example, not to create postings before the reports and calculations have been reviewed and checked.

Prerequisites and preparation

The following aspects should be taken into consideration as preparation:

  • Account setup. Appropriate attributes must be set up via the Category Codes on the account level in order to define these accounts in which variances in the Material and Works areas will be accumulated. The system will use the configured Category Codes to collect data, as variances.
  • Technical accounts setup. Technical accounts are required to save information based on the results of calculating the actual cost on Materials and Works areas for the Balances at the end of the month (data from these accounts will be used as Balances at the beginning of the month to calculate the actual cost in the next financial period).
  • Definition of transaction types. The program logic should contain a calculation algorithm by transaction type to accumulate information on specific transactions. For example, the Production output block should contain transactions with type IC (Inventory Completion), the Production losses block should contain transactions with type IA (Inventory Adjustment), PI (Physical Inventory), IS (Inventory Scrap), etc.
  • Definition of the matrix by types of cost. The cost matrix should define the relationship between the types of cost used for amounts accumulation by transactions and the types of cost components (to separate out Materials and Works).
  • Definition of exceptions. Nomenclature items relating to finished and semi-finished goods, as well as nomenclature items to be excluded from the calculation, must be defined via special attributes on the nomenclature level (usually using the Master Data settings).

Stages in calculating the cost of production

Calculation of the actual cost and variance consists of the following stages:

 

Stage 1. Data collection by standard cost

Standard Cost of production is defined based on data from system databases and populated in blocks provided below, which will be used in the following stages:

  • Balances at the beginning of the month;
  • Production output;
  • Production losses;
  • Cost of sales;
  • End of month balances.

Stage 2. Calculation of variances for manufactured semi-finished products in the current month

Accumulated variances are collected by Material and Works areas for finish and semi-finished goods. Variances for production consist from two parts:

  • Cost variances in the price of purchased materials;
  • Cost variances in production (difference between planned and actually issued materials and/or man-hours, and other costs).

Stage 3: Calculation of actual cost

Step 3.1. Calculation of actual production cost

Once the variance amounts have been identified and calculated, the total value (hereafter = total = t) of the actual cost of finished and semi-finished goods produced appears:

SCt + Variances = APCt,

where  SCttotal standard cost of Production output (data from Step 1);
              Variancestotal accumulated variances by Material and Works areas for finish and semi-finished goods (data from Step 2);
              APCttotal actual production cost value of finish and semi-finished goods produced.

Next, calculate the actual production cost (APC) for the Production output for each item (this can be also a product group) of finished and semi-finished goods (hereafter = item = i):

APCt / (SCt * SPCi) = APCi,

where  APCt total actual production cost of finished goods produced (the result of the previous calculation);
              SCttotal standard cost of finished goods produced (the data from Step 1);
              SPCistandard production cost of item or group of items;
              APCiactual production cost of item or group of items.

Step 3.2. Calculation of the actual cost of sales

Calculation of the actual cost of sales (ACS) in the Cost of sales block by following formula:

(QBi * ACSBi) + (QPi * APCi) + (QPLi* APCi) / (QBi + QPi + QPLi) = ACSi,

where  QBiquantity of an item or group at the month beginning;
              ACSBiactual cost of sales at the beginning of the month for item or group of items;
              QPiquantity produced item or group of items;
              APCiactual production cost of item or group of items;
              QPLiquantity produced losses of article or group;
              ACSiactual cost of sales of the item or group of items for the current month.

Stage 4: Calculation of the differences between standard and actual costs for all blocks

Step 4.1. Calculation of the differences in the Production output block and as a result amount of variances for accounting records by following formula:

(APCi – SPCi) * QPi = Variances for the Production output block,

where  APCiactual production cost of item or group of items;
              SPCistandard production cost of item or group of items;
              QPiquantity produced item or group of items;
 

Step 4.2. Calculation of the differences in the Production losses block and as a result amount of variances for accounting records by following formula:

(APCi – SPCi) * QPLi = Variances for the Production Losses block,

where  APCiactual production cost of item or group of items;
              SPCistandard production cost of item or group of items;
              QPLiquantity produced losses of article or group;

Step 4.3. Calculation of the differences in the Cost of sales block and as a result amount of variances for accounting records by following formula:

(ACSi – SCSi ) * QSi = Variances for the Cost of sales block,

where  ACSi actual cost of sales of item or group of items;
              SCSi standard cost of sales of item or group of items;
              QSiquantity sold of article or group.

Step 4.4. Calculation of the differences in the End of Month Balances block and as a result amount of variances for accounting records by following formula:

(ACSi  – SCSi ) * QEi = Variances for month-end balances block,

where  ACSi actual cost of sales of item or group of items;
              SCSi standard cost of sales of item or group of items;
              QEiquantity at the end of the month for item or group of items.

Stage 5: Creation and posting calculated variances and month-end balances in actual cost.

A report that calculates variances by blocks has the ability to select a launch mode (proof or final) in order to be able to verify the data before transactions will be posted. When choosing the final launch mode, the following records will be created in the system:

  • accounting records with variances between the standard and actual costs;
  • technical postings with balances at the end in actual cost of sales for item or group of items.

Thus, we have briefly reviewed the main aspects of the process of calculating the actual cost and variances, which undoubtedly plays an important role in the life of any manufacturing company and can be greatly simplified and automated using the capabilities of the JD Edwards system or other ERP solution.

For more than ten years, Kertios Consulting has been helping its clients in the Russian market with the development and automation of business processes, incl. calculating the actual cost and variance, in the JD Edwards system.

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Frederic Glenat