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Average Costing Flows

The following sections discuss transactions the following flows that occur when transacting jobs in an average costing organization.

Labor Charges to WIP

You can charge person-type resources to jobs either at a predefined labor rate or at the actual labor rate. If you choose to charge labor at the predefined rate, move transactions that complete an operation automatically charge WIP Move resources associated with that operation at the resource's rate as defined in the Average Rates cost type. Resource rates are associated with cost types when you define resources. If choose to charge labor at an actual employee rate, you can enter an employee rate as you charge Manual resources. You can charge labor at either an actual or a predefined rate if you choose to import resource transaction through the Open Resource Cost Interface.

A predetermined number of labor hours can be charged by adding a WIP Move resource to a routing operation, or you can charge the actual hours to a Manual resource by either:

See: Charging Resources with Move Transactions, Charging Resources Manually, and Open Resource Transaction Interface

Resource labor transactions are valued at the rate in effect at the time of the transaction no matter whether the predefined average rate or actual labor rate method is used. As a result, when the same labor subelement or employee is charged to the same job at different times, different rates may be in effect.

Overhead Charges to WIP

Define overheads under average costing the same as under standard costing. For each overhead subelement, define a rate or amount in the cost type you have specified as the Average Rates cost type. Overheads with a basis type of Resource Units or Resource Value use the actual transaction resource amount or hours to calculate the overhead amount. See: Defining Overhead.

Components Issued to WIP

Component items can be defined as push or pull requirements on your jobs. Components issued to jobs are valued at the inventory average cost in effect at the time of the transaction. Components issued to a job in several different transactions may have different unit costs for each transaction. If a component's unit cost is composed of more than one cost element, this elemental detail continues to be visible after it is charged to a job.

Material Overhead Application

Define material overheads under average costing the same way as under standard costing. Define as many material overhead subelements as desired and base their charging in a variety of ways: by item, activity or lot, or based on transaction value. See: Defining Overhead.

When defining item costs, you can associate material overhead(s) to items and define the rate / amount manually using the Average Rates cost type. Once defined, the material overhead(s) are applied whenever the particular item is involved in an applicable transaction. These overheads can be changed at any time. Making a change affects future transactions, but has no impact on the current unit cost in inventory. See: Defining Item Costs.

For purchase order receipts and transfers between organizations, the material overhead amount earned is added to the purchase order cost / transfer cost of the item (but held as a separate cost element) when it is delivered to inventory. For assembly completions, the material overhead amount earned is added to the cost of the completion in inventory, but is never charged to the job.

Material Overhead Defaulting

For ease in assigning material overheads to items, you may choose to default them when an item is first defined rather than manually associating them item by item. This is done in average costing the same as in standard costing. Defaults may be created to apply at the organization level or at an item category level. Within either of those, the default may be chosen to apply to make or buy items only, or to all items.

If more than one rate or amount is defined for the same material overhead subelement, the order of priority is: category level make or buy items, category level all items, organization level make or buy items, organization level all items; with the higher priority rate / amount taking precedence and overriding any other. If you wish to apply more than one material overhead, you must use different subelements. When you change material overhead defaults, that change you make applies only to items defined later; there is no impact to existing items. See: Defining Material Overhead Defaults.

Assembly Scrap

The WIP Require Scrap Account parameter determines how assembly scrap is handled. If you enter a scrap account as you move assemblies into scrap, the transaction is costed by an algorithm that calculates the cost of each assembly through the operation at which the scrap occurred; the scrap account is debited and the job elemental accounts are credited. If you do not enter a scrap account, the cost of scrap remains in the job. If the job is then completed using the final completion option in the Completion Transactions window, the cost is included in the finished asembly cost. Otherwise, the cost is written off as a vaiance when the non-standard asset and standard discrete jobs are closed and at period close for non-standard expense jobs.

If you enter a scrap account as you move assemblies out of a Scrap intraoperation step, the above accounting transactions are reversed.

Assembly Completions Out of WIP

When finished assemblies are completed from a job to inventory, they are costed using one of the following two methods:

User Defined When you choose this method, a predefined cost in a user-designated cost type is used to value the unit(s) being completed. Select this method to use the current average cost of the assembly or a target cost then use a final completion to flush all (positive) unrelieved costs at the end of the job.

Attention: Before completing an assembly item using this method, you must ensure that the item's cost in the specified cost type rolls up correctly. In other words, all component and this-level resource and overhead details have been defined.

System Calculated When you choose this method, you must select a system option. The options are as follows:
Use Actual Resources When you choose this option, the unit cost to be relieved from the job is calculated based on actual job charges and is charged to inventory as each unit is completed. This algorithm costs the completions using a prorated amount of actual resources charged to the job and material usages as defined on the assembly bill, multiplied by the average unit costs in the job. Note that for completions out of a nonstandard job having no routing, this algorithm selects the unit cost from the Average cost type. This method works best for jobs that have resources charged in a timely manner.
Use Pre-defined resources When you choose this option, resource costs are relieved from the job based on the job routing resource usages. This option works best for jobs with accurate routings.
You set your completion cost method in the WIP Parameters window. The method, User Defined or System Calculated, is determined by the Default Completion Cost Source parameter. If you choose System Calculated, the option chosen for the System Option parameter, either Use Actual Resources or Use Pre-defined Resources, determines how the system calculates costs.

If you choose the first completion cost method, User Defined, you must specify which user-defined cost type is to be used in the Cost Type parameter..

Attention: These parameters are defaulted to the WIP Accounting Class window as you define standard and non-standard discrete accounting classes. They can be overwritten except if you set the Default Completion Cost Source parameter to System Calculated. In that case, the System Option that you choose cannot be changed.

No matter which method is used, job assemblies completed in the same transaction have the same unit cost. As part of a completion transaction, the unit cost of the assembly in the completion subinventory is recalculated when it is different from the unit cost used in the completion transaction.

Final Completion

When you complete all remaining assemblies for a job in the WIP Completion Transactions window, you can optionally choose to cost them by taking the current job balance and spreading it evenly over the assembly units being completed. This is done by choosing the Final Completion option. If you choose not to use the Final Completion option, one of the valuation methods described above is used.

The value of the Final Completion option (enabled/disabled) is defaulted based on how the WIP Autocompute Final Completions parameter is set. Using the default eliminates the need to manually choose the option. Final completions ensure that no positive residual balance is left in the job after the last assembly has been completed. Residual balances are handled as discussed below under WIP Job Closures.

Note: When the last assembly in a job is a scrap, a residual balance may remain in the job regardless of how you have chosen to deal with assembly scrap (see Assembly Scrap paragraph above), because the above routine for clearing the job balance is not invoked.

If you return completed assemblies back to a job, the assemblies being returned are valued at the average cost of all completions in this job (net of any prior completion reversals). If the job uses Pre-Defined Resources, the return is costed based on the routing usages.

Average Cost Variances

Define this account in organization parameters. All variances occurring in any subinventory within an organization are charged to the same account. This account is charged only if you choose to allow negative quantities in inventory or a transaction results in a negative amount in inventory for one or more cost elements of an item. See: Average Cost Variances.

WIP Job Closures and Cancellations

Define variance accounts for each standard and non-standard discrete WIP accounting class. Any balance remaining in a job after it has been closed is written off elementally to these accounts.

Just prior to job closure, either all costs in the job have been relieved, leaving a zero balance, or a balance will be left in the job. If the job was completed, all units required were either completed or rejected / scrapped, and the Final Completion option was used, the job balance is zero. The final units completed have absorbed all remaining job costs into their value.

However if the job balance is not zero, it is written off to the elemental variance accounts defined for the job's WIP accounting class. A residual job balance may remain under the following conditions:

The elemental account for the job's WIP accounting class should be different from the Average Cost Variance account.

Miscellaneous Issues

A transaction unit cost can be entered when performing a Miscellaneous Issue. Because entering a cost that is significantly different from the current average can cause large swings in the unit cost of remaining on-hand inventory, you should not allow the cost to be entered.

Average Cost Update

You can manually change the average cost of an item by performing an Average Cost Update transaction. See: Updating Average Costs.

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