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© 2017 DBA Software Inc. Product Costing Guide Product Costing Guide © 2017 DBA

© 2017 DBA Software Inc. Product Costing Guide Product Costing Guide © 2017 DBA Software Inc. 3 Contents 3 © 2017 DBA Software Inc. Table of Contents 1 Introduction 4 2 Why You Need WIP-Based Product Costing 5 3 Total Control Workflow 8 4 Product Costing Overview 10 5 Absorption Costing 12 Absorption Costing - Overview 1 13 Absorption Costing - Cost of Sales Setup 2 14 Absorption Costing - Shop Rates 3 21 Absorption Costing - WC Cost Factors 4 26 6 Job Receipts and Job Close 28 7 Absorbed Cost Variances 32 8 Inventory Value 34 9 Cost of Goods Sold (COGS) 36 10 Period End 43 11 Using a Mainstream Accounting Package 44 12 Product Costing Guidelines 47 13 FAQs 49 Product Costing Guide 4 © 2017 DBA Software Inc. 1 Introduction What does product costing do for you? Product costing provides the means by which material, labor, subcontract service, and overhead costs are absorbed into item inventory costs and cost of goods sold. Product costing provides the following features and benefits: · Conforms to general accepted accounting principles and IRS and other tax authority guidelines. · Calculates the estimated cost of manufactured items. · Absorbs material, direct labor, subcontract service, and manufacturing overhead costs into the inventory cost of your manufactured items. · Tracks total WIP value in real time. · Eliminates the need for associating specific purchases or payroll costs to specific jobs. · Eliminates the need for period end adjustments to inventory and WIP. Our design is optimized for small business We’ve designed our product costing system so that it can be successfully used by companies of any size, especially small businesses, for these reasons: · Product costing occurs as processes are performed and requires none of the maintenance and adjustments required to adapt a non-WIP system to a manufacturing business. · Hourly shop rates for direct labor and manufacturing overhead are automatically calculated based on historical job hours and actual costs. · Absorbed costing occurs automatically as job processes are performed. Who is this guide for? This guide is for the benefit of managers, accounting personnel, CPA’s, production planners, and anyone who wants to learn how a WIP-based costing system works or is considering using DBA as a manufacturing solution. Why You Need WIP-Based Product Costing 5 © 2017 DBA Software Inc. 2 Why You Need WIP-Based Product Costing All manufacturing companies require a WIP-based product costing system because work in process is the core set of activities performed by a manufacturing business. When your accounting system is not WIP-based, time consuming, inefficient, and inadequate workarounds are required to address WIP accounting issues. Non-WIP systems are one-dimensional Manufacturing consists of two dimensions – “material”, meaning the components that comprise each item, and “process”, which involves the labor and subcontract processes that comprise each item. Non-WIP systems only address the material dimension and ignore the vitally important process dimension. Three of the four major cost elements are ignored Manufactured items consist of four major cost elements – material, labor, subcontract services, and manufacturing overhead. Non-WIP systems only deal with the material cost element and ignore the other three. Item costs are not GAAP or IRS compliant Without all four cost elements, the inventory cost of individual items can never be GAAP or IRS compliant, which requires that the cost includes labor and overhead. Labor and overhead cannot be applied at the item level Ideally, labor and manufacturing overhead costs should be applied to each item you make so that you have an accurate cost profile for pricing decisions and an accurate cost of goods sold for profitability analysis. With non-WIP systems, however, there is no good way to apply these costs at the item level. Labor and overhead can only be applied to overall inventory at period end Even though non-WIP systems are inherently not GAAP or IRS compliant for manufacturing, companies using such systems must comply with reporting requirements within the limitations of the software. This requires accountants to make period end adjustments to overall inventory whereby direct labor and manufacturing overhead cost totals are added to total inventory value and then beginning and ending inventory values are compared to calculate a theoretical cost of goods sold. WIP inventory cannot be separated from inventory on hand Work in process is actually a separate inventory and should be tracked with its own GL account. In non-WIP systems, however, no means is provided to isolate the value of WIP from inventory on hand. Product Costing Guide 6 © 2017 DBA Software Inc. Assembly builds do not isolate issued materials Most non-WIP systems use assembly builds that deduct components after the fact when finished items are received to inventory. Because components are deducted when items are completed instead of at the time they are issued to the shop floor, there is no way to know at any given time how much component stock is actually on hand or has been issued to jobs. Issued materials must be accounted for manually Because non-WIP systems do not account for issued materials, whenever an accurate on hand inventory profile is required, it can only be achieved by manually adjusting inventory to account for materials issued to jobs. This often requires counting components in process out on the shop floor, which can be extremely difficult when components are already incorporated into manufactured items. Non-WIP systems are inadequate, inefficient, and time consuming Using a non-WIP system in a WIP-based business is inadequate, inefficient, and time consuming, for these reasons: · You cannot make sound pricing decisions when you do not know what your items cost to make. · You cannot assess item profitability without an accurate cost of goods sold. · You can never operate with a reliable and accurate on hand inventory without separate tracking of WIP. · Stock counts are much more complicated and time-consuming when materials in WIP must be manually accounted for. · Without a reliable inventory, shortages, high expediting costs, and over-stocking are unavoidable consequences. · Time consuming and error prone period end adjustments are required to reflect labor and overhead in overall inventory value and cost of goods sold. WIP-based product costing solves all these problems As you shall see in the rest of this guide, WIP-based product costing in DBA solves all these problems. · Estimated item costs are broken out into four major cost elements – material, labor, subcontract services, and manufacturing overhead – so that you have an accurate cost profile for making pricing decisions. · Labor, subcontract service, and manufacturing overhead costs are absorbed into the inventory cost of the items you make so that you get an accurate cost of goods sold at the item level. Why You Need WIP-Based Product Costing 7 © 2017 DBA Software Inc. · Components are deducted from inventory in real time when they are issued to jobs so that on hand inventory is always accurate and cleanly separated from materials in WIP. · Stock counts can be freely performed without any consideration of materials in WIP. · WIP and inventory accounts are self-adjusting and require no period end adjustments. Product Costing Guide 8 © 2017 DBA Software Inc. 3 Total Control Workflow Product Costing is one of the eight phases that comprise DBA’s “Total Control” process workflow. This chapter provides an overview of the process workflow and how all eight phases contribute to your manufacturing efficiency. DBA is an integrated MRP and shop control system DBA Manufacturing is an integrated MRP and shop control system. DBA replaces manual planning and expediting with a coordinated master schedule and process workflow that enables you to fulfill customer orders quickly and reliably using the least amount of inventory and WIP possible. Most small businesses rely on manual planning and expediting Most small businesses rely on manual planning where jobs and POs are created from shortage reports using BOM explosions and job chaining, and shipping dates are guesstimated. To meet required dates, jobs get expedited at the expense of other jobs and precious time is squandered on investigating problems and putting out fires. DBA replaces manual planning and expediting with a master schedule DBA replaces manual planning and expediting with a coordinated self-adjusting master schedule for jobs, POs, and work centers that provides total control over your workflow processes. You always know when you can ship, when and what to make and buy, and what to do next out on the shop floor. The “Total Control” workflow executes the master schedule DBA’s “Total Control” workflow is a set of standard processes that generates and executes the master schedule so that customer orders are fulfilled efficiently and on time. The workflow progresses through eight phases: Phase 1 – Bill of Manufacturing The bill of manufacturing (BOM) is used to define the work centers, subcontractors, processes, components, and outputs that comprise each of the items you make. The BOM provides the specifications needed for job generation. Phase 2 – Inventory Control Inventory control maintains the accuracy of on hand quantities uploads/Industriel/ product-costing-guide.pdf