Production overheads

Finance and Operations/AX User Forum
1

In AX2009, How to add the cost of water assumption into the production order after received the water bill from water supply department at the end of the month?

Based on my research,

  1. Using Costing Sheet? Seems not appropriate, it’s based on the ratio on actual operation or materials used on production and what I want is to input fix-amount expense only.
  2. Create Service item inside BOM? most of customers are not happy to do that.

Any idea? Can we use Cost Accounting module to fulfull this requirement?

Thanks a lot!!!

2

The cost accounting module has no impact on this.

Basically how do you cost the water. Your water bill arrives for $1000 how much is directly attributable to the production process, and therefore what percentage is split by the respective production orders completed in the period?

Presuming this is in reality a need to attribute the cost of water to the actual inventory cost of the item (which I am not sure most accountants would agree with) then you would have to analyse the water usage and cost based upon the average cost per item manufactured, then would you add a service item to the BOM and have this autoflush at the finish with no inventory impact, however the expense of this is the water expense account, then you can reconcile this inventory account driven negative to the offset of the warter charges. All differences are either variances in consumption or your calcualtion and you can contra the two off and accounts decide what to do with any difference as it has already been accounted for in COGS.

3

I think Cost Accounting is Nothing do with your production costs.

You are saying that the Water bill will be paid at the end of the month. Means the actual cost will be known at the month end.

So in the mean while some of the production order may get completed. Once the production order is completed you cannot add the cost to the production. It is always referable to take the budgeted cost of it. (May be previous months or quarter something).

At least you need to arrive the cost per one quantity or cost per each production.

4

Thanks for all reply, so is it the best workaround to create an Service items for the cost of water? my customer just wants to have an easy way to input the lumpsum of some actual cost like gas, water, electricity. Thanks again.

5

You enter the lump sum as an invoice, this is seen as an expense under cost of goods sold and affects the net profit margin. The moment you want to attribute this lump sum to the work undertaken in production you diverge massively from the ability to have an “easy way”.

6

Hi AdmaRoue, thanks for your reply again! what’s the best practice you think to manage this kind of fixed cost expense?

7

You need to talk to the accountant and business, but I would say in my experience it is unusual to attribute this to the inventory cost of the item, it is an overhead that is expenses separately and seen in the overall profit and loss affecting gross margin, but not at an item level.

8

This functionality is implemented for Brazil localization GLS layer. Production companies in Brazil charge the overhead costs to the items produced. The name of the functionality is called Absortion costs.

9

Absorption costs is the financial term for it as well.

So what you are saying Fabricio is that in the Braziliian version you can take any random AP invoice and apportion the costs to current production in the period, part complete or not, affect the BOM costing, create standard cost variances, update the average cost and post everything onwards through COGS?

10

Thanks for the correction Adam. First of all Brazil doesn’t use standard cost functionality and production orders should not be ended.

I don’t have anymore the Brazilian layer so I cannot check to give you details but costs are distributed to the production orders in the period.

11

That sounds interesting - can you apportion part to the non-production? So in the water example if 70% was attributed to production and the 30% to the rest?

Why do they not end production in Brazil? How is the costing ever realised? Interesting though!

12

I believe you could do different kinds of absorption, just don’t remember in detail.

Regarding the status I was wrong, looking to some code I saved I found this:

if (prodTable.ProdStatus != ProdStatus::Completed)
transactionTxt = this.initTransactionTxt(LedgerTransTxt::ProdIndirectCost);
else
transactionTxt = this.initTransactionTxt(LedgerTransTxt::ProdHistoricalCostAdjustment);

So this means that when the production order is not completed is post costs as Indirect cost and when it is completed it adjusts the finantial cost as closing inventory would do.

Hope it is clearer now.

13

Absorption costs

According to the Brazilian legislation, it is mandatory to calculate and post the direct and indirect costs incurred in the production orders for a financial period. The manufacturing real costs are known at the end of a financial period. The absorption cost method involves distributing the total manufacturing costs among the products manufactured during the financial period.

14

The accounting debate would be on the level of this - water as a commodity would be difficult to apportion correctly to the penny, therefore a service BOM and post reconciliation would be the way to go to fulfill absorption costing concepts, but that will depend upon the requirements of the inventory cost.

15

I think there may be some standards saying that only these type of expenses and over heads need to added to cost of producion.