Cost Accounting for Manufacturing Work Orders

Component Issues and Returns

The component transactions are costed based on the cost method of the component.

Cost Method	Component Cost
Standard Cost	Uses current standard cost of the component.
Perpetual Average	Uses current perpetual average cost of the component.
Actual Cost	Uses the cost of the specific layer from which the component was issued by the cost processor.

Issuing and Consuming the Same Item in a Process Manufacturing Work Order

In specific process industries, it's a common practice for manufacturers to recover a product or by-product from the production process and rework it back into the batch for further processing, In certain industries with blending operations where product yield and material consumption are optimized, it is common practice to capture off-spec product or rework material and blend it back into production to meet target product characteristics such as consistency and concentration. Another business process takes the product left over from one batch as a starting point for the next batch, for example, when filling the product into containers. In these dynamic scenarios, the same item can be used as an ingredient and a product of a batch, creating a circular reference between the batch input and batch output. Cost Accounting supports such work orders where there are product completions and component issues for the same item using all the supported cost methods.

To explain the cost processing logic for each of the cost methods, let's consider the following example:

Operation	Item	Resource	Transaction Type	Date	Quantity	Cost Factor Allocation
10	Oranges	Input	WIP Material Issue	01-Jul-25	5 lbs
10	Orange Juice	Input	WIP Material Issue	01-Jul-25	1 lb
20	Pulp	Secondary Output	Product Completion	01-Jul-25	5 lbs	25%
30	Orange Juice	Primary Output	Product Completion	01-Jul-25	4 lbs	100%

Let's understand the cost processing logic based on the cost method selected:

Standard Cost Method

The WIP Material Issue and Product Completion will be costed with the standard cost that's effective when the transaction is processed. If the input was added as an ad-hoc input, it would be treated as a component substitution variance because the input item isn't in the work definition used for the cost rollup.
Perpetual Average Cost Method

If the item uses perpetual average cost method, the WIP Material Issue will be processed with the current perpetual average whereas the product completion will be costed using the provisional completion option chosen in the cost profile.
Actual Cost Method

For actual costed items, the WIP Material Issue transaction will be costed based on the receipt layer that the issue transaction is depleting from and the product completions will be costed using the provisional completion option chosen in the cost profile. If the adjustment propagation is enabled, then it's possible that there's a cyclic dependency that's introduced where the product completion of the same order is used to deplete the material issue. In such cases, the adjustment propagation would be stopped after 3 loops.

For products costed using actual and perpetual average cost methods, if the Enforce Transaction Order option is enabled in the cost profile to process the transactions strictly in a sequence and if the provisional option is set to Use Accumulated WIP Balances, there's a chance of a deadlock.

In the above example, let's say that there's another issue transaction on 02-Jul-25 for Orange Juice and all of these transactions are interfaced to costing. Because the enforce transaction ordering is enabled, the WIP Issue will get processed only after the product completion is processed. But, the provisional completion logic requires that all the transactions are processed before a cost is calculated and this might lead to a deadlock. To prevent this, the cost of the WIP Issue on 02-Jul-25 is assumed to be the same cost as on 01-Jul-25 (or last actual cost for Actual costed items) for the purposes of the Accumulated WIP balance calculations. This will remove the deadlock conditions and the product completion will get costed. Any difference between the cost assumed and the actual cost used for the WIP Material Issue on 02-Jul-25 will get recorded as part of the cost adjustment when the work order is closed.
Periodic Average Cost Method

If the items are costed using periodic average cost method, then the input item would be costed as a cost derived transaction (uses the periodic average cost of the item) while the product completion would be a cost owned transaction. The cost processor will iteratively calculate the cost of the product by assigning a cost to the WIP material issue and will continue to loop till the cost converges from one iteration to the next.

Process manufacturing users who've a need to use the same item as input and output can do so in manufacturing execution and the same would be costed appropriately, irrespective of the cost method chosen.

Resource Charging and Reversals

Resource transactions are costed based on the resource cost set up in Manage Resource Costs and published to cost accounting. For all cost methods, you need to define the resource rates in a cost scenario. You need to first create a cost scenario for your cost organization and cost book combination. You then define the resource rates in the cost scenario and publish the cost scenario so that the resource rates are used for accounting.

Product Completions and Returns

All product completions are costed with an estimated cost as provisional completions and their actual cost is calculated when the work order is closed. The estimated cost used for the product completion is based on the cost method and the corresponding provisional completions option set in the item cost profile of the product.

Cost Method	Provisional Completions Options
Standard Cost	Value at standard cost
Perpetual Average	Value at last actual cost Value at perpetual average cost Value at standard cost Value at work order close Value using accumulated work in process balances
Actual Cost	Value at last actual cost Value at standard cost Value at work order close Value using accumulated work in process balances

Note:

Even if you're using the Actual Cost or Perpetual Average cost method, you can create a standard cost for any item.
If you set value at work order close, product completions are costed with the actual cost incurred for the work order when the work order close is processed. The product completion transactions won't be processed until work order is closed and will remain uncosted.

Scrap Transactions

The cost of scrap reported against a work order is calculated based on the actual cost incurred till the operation where the scrap has been reported. The scrap accounting is based on these parameters that are setup in the item cost profile.

The operation scrap valuation option is used to decide when the scrap transactions are processed.
- Value at work order close: Bunches all the scrap transactions together and processes them at work order close.
- Value immediately and at work order close: The scrap transaction is processed as soon as the cost processor encounters it and then corrects the value at work order close, if necessary. This option leads to more transactions than the previous option.
- Value at cost cutoff date and at work order close: This option is used for long running batches. The scrap transaction is processed on the cost cutoff date, which is usually the month end, and is corrected at work order close, if necessary.
The operation scrap accounting option indicates how to account for the scrap transactions.
- Include in inventory: The cost of the scrap is included in the inventory value. In essence, the cost of the scrap is spread over the good products produced in the work order. The scrap transaction is ignored by the cost processor and the distribution processor and is marked accordingly.
- Expense: The cost of the scrap is expensed out from the work order.

The Estimated Scrap transaction absorbs the costs due to the additional material used at each operation. An Estimated Scrap transaction is recorded for each completion of an operation that has operation yield associated with it. This is supported for all cost methods.

Estimated Scrap Quantity = Operation Completion Quantity * (1 - Operation Yield)/Operation Yield

Accounting entries for Estimated Scrap are listed here.

Accounting Line Type	Debit	Credit
Work in Process	X
Estimated Scrap Absorption		X

If an operation completion transaction is reversed, the estimated scrap gets reversed through an Estimated Scrap Return transaction.

Accounting Line Type	Debit	Credit
Estimated Scrap Absorption	X
Work in Process		X

Work Order Close

When the work order is closed, costing ensures that all the transactions reported for the work order are successfully costed. After successfully processing all transactions, these events are created in costing.

If the product is costed using actual cost or perpetual average, product cost adjustment transactions are created. After the work order is closed, cost processor calculates the actual cost for the product based on all the material and resource transactions reported for the work order. If there's a difference between this actual cost and the estimated cost used for the provisional completions, product cost adjustments are created.
The scrap costs are recalculated and necessary adjustments are created if the costs are different from the ones that were considered earlier. The actual scrap transaction reported in work orders that have operation yield associated with it are processed with the Operation Scrap Accounting option of Expense, irrespective of the value set up in the cost profile.

If the product is costed using standard cost, then the cost processor compares the components and resources used for the work order with the work definition used to roll up the product and creates these variances.

Variance	Description
Material Rate Variance	The difference in cost when the rate used for the component during cost rollup is different from the rate used while costing the component issue transaction.
Material Substitution Variance	The difference in cost when an item in the work definition isn't used in the work order or when an item that isn't in the work definition is used in the work order.
Material Usage Variance	The difference in cost when the quantity used in the work order is different from the quantity specified in the work definition.
Resource Rate Variance	The difference in cost when the rate used for the resource during cost rollup is different from the rate used while costing the resource charging transaction.
Resource Substitution Variance	The difference in cost when a resource specified in the work definition isn't used in the work order or when a resource that isn't in the work definition is used in the work order.
Resource Efficiency Variance	The difference in cost when the actual usage of resource is different from the one that's specified in the work definition.
Batch Size Variance	The difference in cost for items and resources that have a usage basis of 'fixed' and the quantity used in the work order.
Job Close Variance	This is used to accommodate any variances that the cost processor can't identify as one of those defined earlier. Also, if the standard cost of the product is manually setup and not through the cost rollup process, then the entire cost of components and resources is marked as job close variance.
Yield Variance	The difference between the planned output (from the work definition) and the actual output.

Note:

If a closed work order is reopened and closed again in manufacturing execution, these transactions will be recreated to identify if any new resource or material transaction is reported since the last time the work order was reopened.

Work in Process Cost Adjustments

These are the work order cost adjustments.

Work in Process Material Standard Cost Adjustment - Captures the change in the standard cost of components for work orders that are in the Released and Completed status.
Work in Process Resource Cost Adjustment - Captures the change in cost of resources for work orders that are in the Released and Completed status.
Work in Process Product Cost Adjustment - The cost of product completions is estimated based on the provisional completions options set in the cost profile. After the work order is closed, the cost of the work order is recalculated and compared against the earlier estimated cost. The difference, if any, is accounted as cost adjustment. This cost adjustment is applicable only if the products are costed using the Actual or Perpetual Average cost methods.
Work in Process Scrap Cost Adjustment - Scrap can be accounted each time it's reported or at the end of the work order based on the scrap valuation option set in the cost profile. If scrap is accounted as soon as it's reported, then the actual cost accumulated in the operation till that point of time is considered. Scrap is recalculated at the work order close and if the value is different, then this cost adjustment is created.

Note:

The Review Cost Accounting Distributions page doesn't lists the scrap cost adjustment transaction as a separate transaction, instead it's logged as a layer against the original scrap transaction.