Understanding production costs

Planned costs essentially estimate what it will cost to produce the released item for the work order.

Planned costs are displayed for each production operation, operation resource, and component as they're added to a work order. The total planned production cost of the finished item is calculated and displayed in the Planned versus actual block when the work order is created.

• Planned process costs are calculated from each individual resource cost for each production operation.
• Planned component costs are calculated from the current cost of each individual component, as determined by the defined valuation method for the component. This can mean that the total planned material cost is a combination of component standard costs, average costs, and FIFO tier costs.

This method of estimating production costs means that labor and material transactions can be reported on and tracked after the released item is received into stock. This is particularly important when a released item is produced faster than the associated "paperwork" leaves the shop floor and the figures entered into your system. In some organizations, employees might indicate on the job traveler their labor hours and material quantities used. A supervisor might collect the job traveler at the end of each shift, then the next working day review the reported figures, potentially challenge some, and finally enter the data when they are absolutely sure the paperwork and reported figures are correct. During the time the paperwork is delayed, and actual labor times and material quantities are entered and tracked for the work order, a released item might have been packed, moved to stock, and shipped to a customer.

To minimize the impact of understated costs, planned costs are used when receiving finished items from production for a work order on the Production tracking page.

On the Work order page, if you want to make sure you are viewing the current planned costs, you can select the Update planned costs action at any time until a production tracking is entered for the work order. The planned costs will only change if a component standard cost is changed, an average cost has changed, or if a FIFO tier cost has changed.

The Work in progress inquiry and Work in progress transaction inquiry pages are updated after a tracking is posted. The "Actual" tracked cost figures are compared with the "Planned" cost figures, and the difference between the actual and planned work order cost totals calculated for the components and the individual resource types.

Component planned costs

The planned cost for each individual work order component is calculated from the item Unit cost, which is determined by the item Valuation method.

You can view these details on the Item page, on the Sites tab, in the Item-sites grid. The item valuation method is displayed as the Cost type.

Cost type: Standard cost

For a component with a Cost type set to Standard cost, the component planned cost is the item Unit cost on the work order Start date.

Cost type: Average unit cost

For a component with a Cost type set to Average unit cost, the component planned cost is set to the average cost of the item, as displayed in the Unit cost, on the date the work order is created.

Cost type: FIFO cost

For a component with a Cost type set to FIFO cost, the component planned cost is the item Unit cost in the first or oldest FIFO cost tier with available stock of the item, on the date the work order is created.

Released item planned cost

The planned cost for the released item is calculated from the released item Unit cost which is determined by the released item Valuation method.

You can view these details on the Item page, on the Sites tab, in the Item-sites grid. The released item valuation method is displayed as the Cost type.

Released item cost type: Standard cost

The production receipt cost is always the current standard cost of the released item.

If the actual production cost of the work order is different from the planned production cost, a work order cost variance journal entry is created for the variance when the work order is closed, if the WIP posting switch for the company is on.

Released item cost type: Average unit cost or FIFO cost

The production receipt cost is calculated as:

(Planned cost / Released quantity) * Actual quantity produced

When the work order is closed, the final cost of the released item is calculated from the sum of the material and time trackings for the work order. The released item Unit cost is adjusted if there are any differences between the released item planned cost and actual cost, or any rate or usage variances.

Production variances causes

• The resource setup and run times tracked for the work order exceeds or does not meet the time specified in the routing.
• More or less material is used than indicated in the bill of material (BOM).
• The standard cost of the components or resources is updated but the Standard cost calculation was not updated for the released item.
• The planned process cost is calculated from the standard cost rates for the specified resources or resource groups but a different resource or resource group performs a production operation for the work order.
• The Update planned costs action is not selected after components are added or replaced for the work order.
• The released item was sold or issued from stock before the work order was closed.