How to cost account for the direct labor using cost categories (Route)

Hi, we have a simple route with two operations - 1 to account for internal labor and another for sub-contracting. Question is how to cost account for the labor both direct and outsourced?

for operation 1, we defined a cost category with cost group of “direct manufacturing” with ledger accounts for WIP/costing.

Human Resource w/resource group is assigned to the route. We specified ledger accounts for both resource and resource group.

Question #1 To cost account for this labor, do we need to explicitly specify costing resource? or Will the above set up allow us to capture the costs associated with the run time and account for it?

for operation #2), we set up a service item ‘sub-contractor service’ that is stocked in the model group. We set up a cost group ‘direct outsourcing’ and assigned to this item. Vendor account is also assigned in the BoM line. Set up a vendor resource group and assigned to this route operation. ledger account is defined for the vendor group as well.

But I was looking for this cost group to be associated with the route operation but the cost categories with a cost group of 'Direct Manufacturing" type is allowed. This system behavior I think is correct.

So do I need to define a sub-contracting price in the Cost Sheet and associate the cost group for “direct outsourcing” that we used in the service item? I think I am missing something. Could someone help me in the right direction?

Many thanks in advance

Question #1 - if you are using MES it will come from teh setup here, if you are not teh active cost in the costing version for the cost category will be used for the setup and process elements recorded in the posted route card.

Question #2 - You should also attach a service item to the BOM to reflect the service undertaken by the vendor, but it really depends if it is an in-process service or if they are producing an end product, there are different ways to setup and configure sub-contracting elements.

Thanks Adam. Appreciate it. I have an active costing version set up here for item price, cost category and indirect (labor overhead). So I think I can look in to the posting route card journal to see which accounts are affected. The ledger account settings are present in the cost category form, resource form as well as resource group. If we were to track cost incurred by a specific resource, then I assume to include that resource in the resource group and have the ledger accounts set up for that resource. Is that correct?

#2) we sometime hire the sub-contractors to complete the production job in-house. this job is performed by a contractor in our production site (to fill our internal resource shortages). So I created a service item with model (stocked), vendor selected, purchase and cost price set up in the item price with an active costing version. On the BoM line, i chose line type ‘vendor’ for this service item. specified site/warehouse settings…

On the route card, 1 operation for material with a run time cost category A; 2nd operation for sub-contracting item service with run-time cost category set up, a resource group with vendor resource (same vendor as in the service item).

When i ran the BoM calculation, i see material cost and the process associated to it are showing up correctly. For the Service Item, the process calculation is correct. However, I noticed that service item of Qty 1 appears in the costing tree. I would need to send a PO for this service item to the vendor. How? I would like to run Master Planning which should create PO for material and PO for the service Item to the vendor.

Many Thanks

Another related question. In the Overlead calculation, the labor overheads are calculated for the total process that include the direct labor for operation 1 & sub-contract labor for operation II. I might have to use a cost group in the costing sheet to restrict it from calculating the total process.

No, you chose how to post in the Production Parameters, depending upon the setting it uses the accounts defined against the item group, resource or produciton group.

On the PO yes planning would create it, when you estimate the production order there will be a route referenced purchase order for the service.

Thanks Adam. Yes. I see that the ledger posting is driven by the parameter set up. Thanks for the clarification. Production group almost mimic the accounts as in the Item group (production tab) settings.

When the planned PO is created, it will create an order with a quantity of 1. Which means, we need to modify the units (8 hours in this case). Also, we probably need to set the quantity on the BoM line to 0 otherwise this cost will show up in the BoM calculation. Is it?

How could we segregate the overheads applied to direct labor and restrict such overheads for sub?

Thanks a lot

The quantity should mimic the BOM line quantity from memory.

Do not set it to zero, use the routing group to remove it from the BOM Calc, but it is a real cost so should be included.

You segregate the overheads by using different cost categories by the routing steps.

Thank you adam.

I have 2 questions related to route operation and resources. We thought of having one resource to be assigned to a single Route (which is used across all of our BoM) to essentially calculate the lead time and capture the labor cost.

  1. As I understand that resource is mandatory for the route operations. I thought having 1 resource of machine type or HR be assigned to the Route, which is consumed across all of our BoM. I am afraid that the capacity might pose an issue assuming the resource follow a calender of 8 hours per day. Could I set to ignore the overbookings?

ie. 3 BoMs are being produced at the same time and all of them uses the same route operations with that single resource or resource group.

Assuming, if the run time required for each BoM is 5 hours, then a total of 15 man hours needed in the 5 hour period to finish all three BoMs. Does that mean, I can run the BoM one by one but not all at once with that single resource? Could I not associate a resource to the route but capture the cost via cost category?

the production lead time is calculated based on the run time that I set up which is used by the master planning and is important for us.

Also we need to capture the cost for completing each BoM and be able to compare any variance with this regard.

I would like to know of thoughts.

  1. As I understand that resource is mandatory for the route operations. I thought having 1 resource of machine type or HR be assigned to the Route, which is consumed across all of our BoM. I am afraid that the capacity might pose an issue assuming the resource follow a calender of 8 hours per day. Could I set to ignore the overbookings?

Set the resource to be of infinite capacity

Assuming, if the run time required for each BoM is 5 hours, then a total of 15 man hours needed in the 5 hour period to finish all three BoMs. Does that mean, I can run the BoM one by one but not all at once with that single resource? Could I not associate a resource to the route but capture the cost via cost category?

Infiinte would put 15 hours into a 5 hour bucket.

the production lead time is calculated based on the run time that I set up which is used by the master planning and is important for us.

Well that depends on the resource and whether you can do 15 hours in 5!

Also we need to capture the cost for completing each BoM and be able to compare any variance with this regard.

Variance cost or time - standard does variance, FIFO variance to estimation, depends if it is an accounting or reporting variance.

Hi Adam, with regard to variance, it is accounting. Our accountant is in favor of FIFO. Is there a document that detail FIFO and considerations while implementing FIFO. Also any comparison between Std costing vs FIFO.

what baffles me is that - I set the model to FIFO. But I added a costing version for purchase/cost price. my purchase order reflect the purchase price; SO reflect the suggested BoM price - which calculated to be cost + markup as per cost group assigned to raw materials. Why? I thought the costing version for the material is irrelevant if I choose FIFO. May be I haven’t made any purchase yet.

You would have to search partnersource for documents like that, but to be honest I doubt it exists, it is why you would employ your partners financial consultant for a day. Usually the business costing needs drive AX, not the other way around, so either the accountant wants a static cost for the period with purchase and production variances to standard expenses in the period (or not) otherwise FIFO gives you a more accurate costing but this value is also held in inventory until it is sold.

The purchase order reflects the purchase price because there is no “purchase” cost in the costing version, it is your inventory cost, your purchase price comes from the item or trade agreements. The sales order however will use the costing version if populated to put the cost on the sales line, but to be honest this will change anyway depending upon your dimension group settings and the running of the inventory close to push all of the costs through.

Thanks adam. one quick clarification on “FIFO does variance to estimation”. As I understand, with FIFO, we can have active planned costing version for indirect and cost categories. What about the costing version allowed for direct material under FIFO? Assuming I set up the planned cost for indirect & cost categories (for direct manufacturing i would assume for labor),

  1. will I have the cost rolled up at BoM level automatically so when I create a SO, the price will reflect automatically. Unlike for Std, where I would have to run the BoM price calculation.

  2. The variance you mentioned here, does it compare with the planned cost and compare with overheads and direct manufacturing cost as well as material cost?

  3. I would like system to auto-calculate the sale price for Finished Good. In such case, does it make sense to activate a planned cost for the BoM?

So, it seems to me, (though technically I can have std costing versions for material, labor and overheads), planned costing version are more likely the option to go with while using FIFO. Is that a fair statement?

many thanks

No, the price will come from the item record/TA’s. You can still run the price calculation on the item record and set this on the item record if you wish, it is no different to standard in this respect.

It is a screen showing you the costing sheet at estimation and actual. So it does everything, you probably need to open it and have a look at it to see what I mean.

Standard does not “automatically” calculate it without you running the process and defining the sales price in the costing version. All of the same functionality exists in FIFO. It is a fair statement that planned costing version is used for FIFO because it is the only one you can actually use with this costing method.

Ok. Awesome. Thank you Adam for the clarification. Now I understand that I can have a planned costing version for material, cost category and overheads, that way I can run the BoM calculation to see the suggested sale price.

Do I need to define a planned purchase price for the material as I believe that cost will come from the inventory cost (which is a running average until we run the inventory close) or purchase price as I set in the purchase tab or trade agreement. Is that so?

On the BoM calculation settings – we like the sale price model to be of cost group.

What would we set the cost price model to be? → we would like it to be purchase price + markup (cost group). Assuming we set up the cost group for each material.

So I assume the cost price model will be selected as “Purchase Price” or “inventory price”. Inventory price seems more likely as it would reflect the running cost price as we receive items.

Thanks again.

I believe it is the inventory price that is picked up form the cost price model in this instance, but a simple test would confirm it.

Hello Adam, I have another related query - With FIFO model, our account says he still be able to apply a static a purchase price on a PO - say 50$ for item A over a period of 1 month. I beleive, when we run the inventory close, the AX will apply the FIFO and re-adjust the cost. Now during this period or in any other scenario will be be able to capture the purchase price variance? I guess my question is, whether would we need to have a GL accounts set up for Std Cost variance as in the Item Group (posting) - such as PPV, ICV etc.,

Another related question, I looked at the Stock variance in the PO (item group posting profile), will this be related to purchase price variance under FIFO. I got a error when I try to post a invoice from PO prompting for posting type 'stock variance not set up. I have the Item on FIFO and set up a costing version for purchase price.

many thanks .

You cannot get a Purchase PPV with FIFO, there is no need to populate the standard cost variance in the item group - FIFO is FIFO, it is as simple as that, the close applies the financial updates and pushes them through.

No, stock variance on the PO is not related to any FIFO PPV. However in the Item Model Group you do have the Fixed Receipt Price concept whereby the receipts are adjusted to a “standard” cost price, but these post to the fixed price accounts. The stock variation account (not variance if you mean this one) I beleive is used in France and Belgium. Can you post the exact message in a screen shot?

Hello Adam, I have a question related to the WIP account as we define for cost category. The offset account for WIP seems to be a WIP account from Balance sheet. The offset account for “Accounts - costing” seems to be a COG type of account (P&L). Is there any explanation of what type of accounts to be specified for this cost category? We are not using project module. In order to capture overhead and its variance, do we need to define these accounts? appreciate if you could shed more lights on the same.

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It depends where your accounts want to account for the WIP elements of the indirect costs until the order is costed - which has an impact on the timing of your ending process and the timescales from RAF to ended.

As for variance this will depend upon the costing method and not set here. I suggest you load a standard costed item and alter an impact on the indirects and see what it does. I am not a financial accountant I am afraid.