Marty,
Group 1 (if I understand your statement of their premise) is wrong.
With Average costing, the average cost of a part only gets updated upon receipt from a job or PO and, VERY importantly - is based upon the KNOWN actual costs of the jobs and/or POs at the time of receipt.
Example: Part A carries an ave cost of $1.00 each and 100 pc are in inventory.
A PO receipt of 100 pc's occurs and that PO line has a unit price of $1.10 each. Upon receipt, a new ave cost is calculated (pre-existing O/H * current ave cost + Rcpt Qty * PO Unit Cost) / (pre-existing O/H + Rcpt Qty) giving you 200 pc O/H at a new average cost of $1.05 each.
Any of this material issued to jobs before the next receipt (which will again possible change ave cost) is valued at $1.05 ea. The same is true if the part is shipped to fulfill a stocked part sales order line release. (Part A's contribution to COGS for the sales order line release will be $1.05 ea.)
Time passes and 100 of the 200 pc's O/H are consumed leaving a balance of 100 pc O/H when another PO receipt of 100 pc's occurs (PO still indicating a unit price of $1.10 each). That receipt triggers a recalculation of average cost from $1.05 to $1.075 each pc O/H (200 pc's).
Note I said KNOWN actual costs of the jobs and/or POs at the time of receipt.
For A/P, most companies have rules in place (rarely system supported) that allow receipt qty and/or INVOICED unit price to vary from the PO by either a percentage or fixed net $ threshold before Invoice Entry is halted and the Buyer is notified of the excessive discrepancy (and it is accepted or the vendor is asked to correct the billing via a re-invoice).
Similarly, any of you out there buying things made from copper, brass, chromium (stainless steels), petroleum based plastics and aluminum are familiar with the highly inflationary cycle of (example) metals surcharges that has been occurring over the last 3-4 years (and now appears to be easing as a result of a world wide recession and drop in demand).
Posted Invoice prices OFTEN don't match the PO price at time of receipt - Yet it is that PO price that SOLELY is used to recalculated the just received Part's new inventory asset average unit cost.
Later posted invoices with variant (to PO) unit costs DO NOT trigger a recalculation of the average. The variance's get posted to an Invoice (actual) to PO (expected) purchasing variance account instead.
Maybe you can live with that for solely purchased items. We don't like the weakness of the process... (A quarter million dollars worth of software should be able to go back and adjust the average costs to reality using accepted accounting practices) - but we can live with it.
Job receipts are another issue entirely. When Operations are set up as Backflush, at least the 'actual' labor component of the job cost matches your expected (effectively Standard) labor cost (not getting into any Scrap/Yield process losses).
Qty labor reporting method is a little better (although it prevents use of OP scrap loss/Job Qty recalc processing) as the operators simply have to accurately report qty's. (I say "simply" but I've never seen these done to any high degree of reliability or accuracy).
Time and Qty labor entry method Operations are a different animal entirely. The job receipt cost (that updates your new average cost) will include any distortions that sloppy (not real elapsed time accurate) or errant (qty reported) Labor activity record entries may contain.
In high volume (re job receipts per day) environments (with complex methods as in a CNC machining shop) the errors in the 'actual' reported labor cost for a job being received can be staggeringly inaccurate.
I've never seen anyone delay the receipt process (as you are presumably only making something on a job because you need it to ultimately meet a customer sales order requirement & date) and 1st review/correct job cost before receipt. (In Vantage, this would be done via Job Adjustment.)
Similarly, actual job material costs can be randomly quite inaccurate. Issue transactions (even with bar code enabled transaction processes) can simply be missed (resulting in missing material cost) or over-issued. Anyone who does a lot of back-flushing of materials has surely experienced the pain of someone inadvertently changing a part from back-flush to Issue only - and have dozen (even hundreds) of jobs be processed & received before someone notices the problem and (too late for average costing) corrects it.
That's what you are getting yourself into with average costing... Not horrible - but go into it with your eyes wide open and pre-assess if your PO to invoice unit price variances and Job Mtl trans and labor entry is really accurate enough on a reliably consistent basis to make those average costs meaningfully accurate enough.
If not, wait to make the change (sticking with Std) and use the time to train & simplify processes so eventually they WILL be accurate enough.
Rob
Group 1 (if I understand your statement of their premise) is wrong.
With Average costing, the average cost of a part only gets updated upon receipt from a job or PO and, VERY importantly - is based upon the KNOWN actual costs of the jobs and/or POs at the time of receipt.
Example: Part A carries an ave cost of $1.00 each and 100 pc are in inventory.
A PO receipt of 100 pc's occurs and that PO line has a unit price of $1.10 each. Upon receipt, a new ave cost is calculated (pre-existing O/H * current ave cost + Rcpt Qty * PO Unit Cost) / (pre-existing O/H + Rcpt Qty) giving you 200 pc O/H at a new average cost of $1.05 each.
Any of this material issued to jobs before the next receipt (which will again possible change ave cost) is valued at $1.05 ea. The same is true if the part is shipped to fulfill a stocked part sales order line release. (Part A's contribution to COGS for the sales order line release will be $1.05 ea.)
Time passes and 100 of the 200 pc's O/H are consumed leaving a balance of 100 pc O/H when another PO receipt of 100 pc's occurs (PO still indicating a unit price of $1.10 each). That receipt triggers a recalculation of average cost from $1.05 to $1.075 each pc O/H (200 pc's).
Note I said KNOWN actual costs of the jobs and/or POs at the time of receipt.
For A/P, most companies have rules in place (rarely system supported) that allow receipt qty and/or INVOICED unit price to vary from the PO by either a percentage or fixed net $ threshold before Invoice Entry is halted and the Buyer is notified of the excessive discrepancy (and it is accepted or the vendor is asked to correct the billing via a re-invoice).
Similarly, any of you out there buying things made from copper, brass, chromium (stainless steels), petroleum based plastics and aluminum are familiar with the highly inflationary cycle of (example) metals surcharges that has been occurring over the last 3-4 years (and now appears to be easing as a result of a world wide recession and drop in demand).
Posted Invoice prices OFTEN don't match the PO price at time of receipt - Yet it is that PO price that SOLELY is used to recalculated the just received Part's new inventory asset average unit cost.
Later posted invoices with variant (to PO) unit costs DO NOT trigger a recalculation of the average. The variance's get posted to an Invoice (actual) to PO (expected) purchasing variance account instead.
Maybe you can live with that for solely purchased items. We don't like the weakness of the process... (A quarter million dollars worth of software should be able to go back and adjust the average costs to reality using accepted accounting practices) - but we can live with it.
Job receipts are another issue entirely. When Operations are set up as Backflush, at least the 'actual' labor component of the job cost matches your expected (effectively Standard) labor cost (not getting into any Scrap/Yield process losses).
Qty labor reporting method is a little better (although it prevents use of OP scrap loss/Job Qty recalc processing) as the operators simply have to accurately report qty's. (I say "simply" but I've never seen these done to any high degree of reliability or accuracy).
Time and Qty labor entry method Operations are a different animal entirely. The job receipt cost (that updates your new average cost) will include any distortions that sloppy (not real elapsed time accurate) or errant (qty reported) Labor activity record entries may contain.
In high volume (re job receipts per day) environments (with complex methods as in a CNC machining shop) the errors in the 'actual' reported labor cost for a job being received can be staggeringly inaccurate.
I've never seen anyone delay the receipt process (as you are presumably only making something on a job because you need it to ultimately meet a customer sales order requirement & date) and 1st review/correct job cost before receipt. (In Vantage, this would be done via Job Adjustment.)
Similarly, actual job material costs can be randomly quite inaccurate. Issue transactions (even with bar code enabled transaction processes) can simply be missed (resulting in missing material cost) or over-issued. Anyone who does a lot of back-flushing of materials has surely experienced the pain of someone inadvertently changing a part from back-flush to Issue only - and have dozen (even hundreds) of jobs be processed & received before someone notices the problem and (too late for average costing) corrects it.
That's what you are getting yourself into with average costing... Not horrible - but go into it with your eyes wide open and pre-assess if your PO to invoice unit price variances and Job Mtl trans and labor entry is really accurate enough on a reliably consistent basis to make those average costs meaningfully accurate enough.
If not, wait to make the change (sticking with Std) and use the time to train & simplify processes so eventually they WILL be accurate enough.
Rob
--- On Wed, 12/3/08, Marty <marty1325@...> wrote:
From: Marty <marty1325@...>
Subject: [Vantage] Switching from Standard to Average Costing
To: vantage@yahoogroups.com
Date: Wednesday, December 3, 2008, 2:41 PM
We have two different thoughts within our company on how this works.
One group thinks if we switch from Standard to Average the ONLY thing
thats going to change is the AVERAGE Raw Material Costs (labor and
burden costs will stay the same per part)
Other group says the Cost will be the Average Cost of Material/Labor
and Burden to make the part.
We are just trying to find out how it works before we decide to switch
from one method to another.
Any help will be appreciated