## Understanding Product Costing and Manufacturing Accounting

This chapter discusses:

- Product costing and manufacturing accounting features.

- Product costing for standard costing.

- Actual costing integration.

- Effective cost management.

- Tables used for product costing and manufacturing accounting.

### Product Costing and Manufacturing Accounting Features

The JD Edwards EnterpriseOne Product Costing and Manufacturing Accounting systems provide flexibility to accommodate the manufacturing environment. Maintaining accurate and complete records of the value of inventory is one of the major concerns of most businesses today. Keeping unprofitable stock or using inappropriate costing methods for inventory can quickly deplete profits.

The JD Edwards EnterpriseOne Product Costing system enables you to store and retrieve cost information. It also helps you to manage the costs by providing information to the company's business plan.

With accurate product costing, you can evaluate these manufacturing processes to determine how they affect a company's profitability:

- Manufacturing cost accounting (direct labor, indirect labor, and overhead).

- Product design (design and manufacturing engineering).

- Accounting (gross margin by product line or item).

After you establish costs in the JD Edwards EnterpriseOne Product Costing system, the JD Edwards EnterpriseOne Manufacturing Accounting system tracks the costs, reports variances, and posts manufacturing transactions to the general ledger.

This table describes some of the features and benefits of these systems:

Feature | Description
User-defined cost extras or add-ons | Define and maintain an unlimited number of cost components for tracking specific costs, such as freight, taxes, duty, and electricity.
User-defined cost rollup methods | Define an unlimited number of cost methods to use in cost simulation analyses.
User-defined cost factors and rates | Allocate cost factors and rates to a specific item. These factors and rates are used with cost extras or add-ons to calculate additional costs.
Cost variances | Print a set of reports to compare old costs with new costs before implementing any changes.
Bill of material rollup | Calculate the total material cost by retrieving the bill of material for all items and adding the total cost of the components.
Cost simulation | Run a complete simulation of costs before any live data is updated as the frozen cost standard.
Multifacility costing | Maintain cost information at the branch/plant level to allow for cost variances at different locations for identical manufactured items.
Variances | Review these kinds of variances: Engineering. Planned. Actual (material and labor). Other.
Journal entries for variances | Create detailed or summary journal entries for work order or rate schedule variances.
Journal entries for work order or rate schedule transactions | Create detailed or summary journal entries for work in process or completions.
Automatic accounting instruction (AAI) tables | Charge amounts to specified accounts.
Reports | Print reports listing detailed costs and variances for work orders or rate schedules.

### Product Costing for Standard Costing

To remain competitive in a changing business environment and to reduce the costs that are passed along to the consumer, companies must be aware of all aspects of their business and look for ways to refine operations to reduce lead times, expedite speed to market, and reduce the cost of operations. All of these processes help the company to be more flexible so that it can respond to changes in customer demands and to maintain or improve its market share.

To reduce costs that you incur as a part of conducting business, you must understand where costs are generated. For production industries, you must break down product costs into each contributing factor that influences the ultimate cost of the manufactured product. You should track not only the cost of the individual item, but also each additive feature or activity that adds cost to the end product or increases the value of the product.

Numerous activities or processes might add costs to the product. You should have processes and tools in place to identify each component of cost. You must also understand how those incurred costs might be passed along to customers.

As the company refines its production processes and automates costing activities, you should create detailed definitions of the costing processes. Ensure that the cost techniques support any manufacturing method that you use. Often, a company wants to decrease the lead time that is required to maintain and monitor product costing information throughout the entire manufacturing process. More accurate costing information enables you to identify wasteful costs and to lower costs that must be passed along to the consumer or that are absorbed. The goal is to increase the company's revenue and improve profit margins.

Product costing plays a significant role in the manufacturing environment. If you use standard costing, you must set up costs for the products that you produce before you can implement the JD Edwards EnterpriseOne Manufacturing Accounting system.

To calculate these costs, you must consider these aspects of the manufacturing environment:

- Product costing (detailed information) for material, labor, and overhead.

- Cost reporting (what does the item really cost to produce).

- Variance reporting (actual versus standard costs).

To use standard costing, you specify cost method 07 for the item and branch. After you calculate the cost component values in a simulated mode and are satisfied with the results, you must establish frozen standard cost components. All shop floor transactions use these frozen standards for cost calculations which, in turn, generate transactions in the general ledger and are the basis of the inventory valuation.

Standard costing is most applicable for a company with stable costs and little cost variance from one manufacturing run to another. Companies with minimal accounting staff often use standard cost accounting.

With standard costing, you estimate costs for each end item assembly and manufactured part on a level-by-level basis before production begins. These cost estimates are based on both past performance and analysis of future conditions.

This table shows the differences between components of net-added cost and total cost:

Net-Added Cost | Total Cost
Costs include: Labor. Overhead. Outside operations. Extra costs. Materials (for purchased parts only). | Costs include: This item's net-added cost. Total cost of lower-level components.

The net-added cost represents the cost to manufacture an item at a specified level in the bill of material. For manufactured parts, the cost includes labor, outside operations, and extra costs, but not materials (lower-level items). For purchased parts, the net-added cost includes the cost of materials. The total cost of an item represents the sum of the item's net-added cost and the total cost of all components.

By defining and monitoring standard product costs, you can measure the company's current manufacturing performance and compare it to the standard (target) costs. Product costing provides information about the monetary investments in the materials, work in process, and physical inventory. You can use this information to determine pricing for end items and service components.

### Actual Costing Integration

Many companies that use the JD Edwards EnterpriseOne Shop Floor Management system want to capture and track actual or average manufacturing costs. If you use actual costing, the system calculates the cost of the product built on a work order or rate schedule based on the actual hours used and the actual quantity of issued parts. The system updates the cost based on the most current information.

The system provides two methods for actual costing:

- Weighted average cost (cost method 02).

- Manufacturing last cost (cost method 09).

You can implement actual costing with the JD Edwards EnterpriseOne Manufacturing Accounting system without using the JD Edwards EnterpriseOne Product Costing system. If you use actual costing, you do not need to set up product costs for each item that you manufacture because product costs are calculated when work orders or rate schedules are completed.

A company can use a combination of actual costed items and standard costed items if the parent item is an actual costed item. Companies using one of the actual costing methods and cost extras should set up and freeze extra costs in the Item Cost Component Add-Ons table (F20026).

When you complete work orders for items that use the weighted average (02) cost method or the manufacturing last (09) cost method, the system:

- Calculates a new unit cost for the item based on shop floor activities.

- Revalues on-hand inventory for items that use cost method 09.

- Calculates and updates the weighted average cost.

- Updates the Item Cost table (F4105) with the new unit cost.

Weighted average costing (02) is useful for companies whose costs change often but not significantly.

Actual costing (09) is useful for companies that:

- Engineer or manufacture to order.

- Have costs that change often and significantly.

Comparing Standard and Actual Costing

A company should decide to use either standard or actual costing depending on its business requirements. This table identifies considerations that affect the decisions of whether to use standard or actual costing:

Consideration | Explanation
Manufacturing | When you use actual costing methods, you should: Use discrete manufacturing. Use engineer-to-order or make-to-order practices and oversee the entry of all information on the work orders.
Inventory transfer | When you use the Manufacturing Last Cost method (09), you should: Be aware that transferring inventory for any purposes other than the cost of goods sold (COGS) might result in incorrect inventory value. Understand that processing for physical inventory might be more time consuming than with other cost methods.
Costing | When you use actual costing methods, maintain the inventory cost level at the item, branch, and location levels (inventory cost level 3) for best results.

### Effective Cost Management

Most of the major areas or departments within the manufacturing company contribute information to the product costing activities and, therefore, affect the overall accuracy of the manufacturing budget.

This table lists examples of departments within a typical company and the aspects of the JD Edwards EnterpriseOne Product Costing and JD Edwards EnterpriseOne Manufacturing Accounting systems that are affected by each department:

Department | Description
Design Engineering | The design engineering group is responsible for ensuring that: The bill of material is complete. The make-buy information is accurate. The engineering change orders (ECOs) have been taken into account.
Sales | The sales force contributes important information regarding target markets, as well as the latest trends in manufacturing. For effective cost management, the sales force must provide timely and reasonable forecasts.
Manufacturing Engineering | The manufacturing engineering group is responsible for identifying: Correct processes. Changes to existing processes. Manufacturing overhead. Accurate information about work centers.
Purchasing | The purchasing department must provide: Accurate supplier costs Accurate transportation costs
Manufacturing | Manufacturing operations provide vital information to the costing effort. For example, they must: Enter their data in a timely and accurate manner. Identify any discrepancies in the bills of material and routings.
Cost Accounting | The cost accounting staff must: Ensure that all items have costs. Identify general and administrative overhead. Produce timely variance reports (standard costs versus current costs).

Consider these issues as you define and manage manufacturing costs:

- When (and how often) you change costs.

- How you limit access.

- When the cost of a new item is reflected.

- How you account for labor rates and work center overhead.

You might also encounter these circumstances as you define costs:

- Not all costs are available before the initial cost rollup.

- You have used incorrect units of measure.

- The company reports labor hours and costs inaccurately.

- New products are not updated in a timely manner.

- Standards are updated too frequently.

- Items have been added to or deleted from the bill of material since the last cost update.

- Steps in the routing master have been changed since the last cost update.

### Tables Used for Product Costing and Manufacturing Accounting

This is a list of the tables that are used throughout the JD Edwards EnterpriseOne Product Costing and Manufacturing Accounting systems:

Table | Description
Account Balances (F0902) | Contains net postings for each period and prior-year balances (net and cumulative). This table contains one record per account, ledger type, subledger, fiscal year, and transaction currency table.
Account Ledger (F0911) | Contains detailed transactions in the general ledger.
Account Master (F0901) | Contains account definitions, including numbers and descriptions.
Address Book Master (F0101) | Contains information about customers, suppliers, employees, and prospects.
Distribution/Manufacturing - AAI Values (F4095) | Contains account numbers that are used when journal entries are created.
Batch Control Records (F0011) | Contains system-generated batch header information, including the batch number, batch status, and batch entry date.
Bill of Material Master (F3002) | Contains information at the business unit level about bills of material, such as quantities of components. The system uses this information to calculate material costs.
Item Branch (F4102) | Defines and maintains warehouse or plant-level information, such as branch-level category codes.
Business Unit Master (F0006) | Identifies information about business units, such as company names and category codes assigned to the business unit.
Item Cost Component Add-Ons (F30026) | Contains standard costs by cost component.
Item Cost Component Detail (F300261) | Stores item cost components by work center.
Item Cost (F4105) | Contains the summarized item costs and inventory valuation method.
Equipment Rates (F1301) | Contains equipment rates that can be used for actual costing if you select this table as a machine rate source in the Manufacturing Constants program (P3009).
Generic Message/Rates (F00191) | Contains rate and factor tables, including: Costing Factors (30/CF) Costing Rates (30/CR) Employee Rates (31/ER)
Item Ledger (F4111) | Contains transactions that indicate changes in inventory value.
Item Location (F41021) | Determines the GL class code that is used in manufacturing accounting transactions.
Item Master (F4101) | Stores basic information, such as item numbers, descriptions, category codes, and units of measure, about each defined inventory item .
Job Shop Manufacturing Constants (F3009) | Stores variables that indicate which overhead values to use. For actual costing, you can specify the sources for labor and machine rates.
Item Manufacturing Data (F4101M) | Stores the accounting cost quantity, which the system uses as the standard quantity produced to determine the allocation of fixed setup costs for an item.
Work Order Parts List (F3111) | Contains the parts list that is attached to a work order or rate schedule. It contains one record for each part.
Production Cost (F3102) | Contains all costs that are associated with a particular work order.
Purchase Order Detail (F4311) | Contains transactions that are related to a purchase order.
Routing Master (F3003) | Stores routing information, including operation sequence, work center, run time, setup time, and machine time. The system uses this information to calculate labor, machine, and overhead costs.
Sales Flex Accounting (F4096) | Determines the information to use for flex accounting.
User Defined Codes (F0005) | Contains user-defined codes (UDCs) and their descriptions.
Work Center Master (F30006) | Contains detailed data about all defined work centers, including efficiency.
Work Center Rates (F30008) | Contains simulated and frozen rates, such as rates for overhead, labor, and machine time, for each work center.
Work Order Master (F4801) | Contains all work order header information. The data from this table appears on shop floor paperwork. The system updates this table when completion transactions occur for a work order.
Work Order Master Tag (F4801T) | Stores the cost method for the work order, which determines whether a work order is processed as standard or actual costing. Additionally, it includes the unaccounted amount and quantity for scrap units and the unaccounted work order completions.
Work Order Routing (F3112) | Contains the routing steps that are attached to a work order or rate schedule. It contains one record for each operation sequence number and work center.
Work Order Time Transactions (F31122) | Contains labor and machine time transactions by work order.