ManEx runs on a standard cost accounting basis. This means that the value of inventory is ALWAYS at a standard cost. Once a standard cost is established for an item, all transactions involving that item will move between Ledger Accounts at its standard cost. If the standard cost is adjusted, then all inventory on hand MUST also be adjusted to maintain the integrity of the value of inventory. We do this through the Standard Cost Adjustment module, where General Ledger inventory accounts are adjusted as needed for changes in inventory standards for existing quantities in inventory.
Changes in standard costs may be from a variety of sources. The price of a purchased part may change, for either better or worse pricing. As long as that part is used in inventory, it is advisable to make the change to both the part standard cost, and the Ledger Accounts tracking the value of the inventory, especially if the price change is expected to be long lasting. Momentary changes in pricing may be due to expedited purchases, limited quantity purchases, special conditions, etc. These kinds of momentary changes probably do not warrant modification of the standard cost of an item, and the difference between the standard cost and the price paid is charged to the account for Purchase Price Variance.
1. PURCHASING VARIANCE
When parts are procured, the purchase order may have a price different than the standard cost. To balance the accounts payable values with the increases in inventory, the difference between the standard cost and the purchase price (based on the PO Reconciliation done in Accounting with the actual invoice) is charged to PPV, or Purchase Priced Variance. E.G., if a parts standard cost is $1.00, and the INVOICE is $1.15, then $1.00 is credited to inventory, $0.15 is credited to PPV, and $1.15 is debited to AP.
Standard Costs for assemblies are usually determined by the sum of the extended values of the standard costs of all of the components in the assembly. Users may expect a small percentage of Run Scrap, or items lost in the normal handling of small parts. That too may be considered in the establishment of the standard cost of an assembly. The user may also wish to include a Setup Scrap Quantity for some items that will always experience a loss in starting up a work order (e.g. leader loss). For these assemblies, we also use the Standard Cost Adjustment module, where the costs of all of the materials including scrap may be rolled up to establish the standard cost of the assembly.
2. CONFIGURATION VARIANCE
Standard Costs for assemblies are usually determined by the sum of the extended values of the standard costs of all of the components in the assembly. Users may expect a small percentage of Run Scrap, or items lost in the normal handling of small parts. That too may be considered in the establishment of the standard cost of an assembly. The user may also wish to include a Setup Scrap Quantity for some items that will always experience a loss in starting up a work order (e.g. leader loss). For these assemblies, we also use the Standard Cost Adjustment module, where the costs of all of the materials including scrap may be rolled up to establish the standard cost of the assembly. However, the cost of the assembly may not be attended to every time there is a change in the components.
With ManEx's wide variety of conditions applicable to costs of assemblies (include or not: Scrap, Scrap setup, standard lot sizes, different work order sizes, etc.) this simple concept can become very complex. For example, when the standard cost of an assembly is different from the sum of the standard costs of its components, the difference must also be addressed in WIP. E.G., if the standard cost of an assembly is $10.00, and the sum of the standard cost of the BOM components is $11.00, then upon moving the assembly from WIP to FGI, WIP is credited with $11.00, Configuration Variance is Debited $1.00 and Inventory is debited $10.00. If you include 8 parts as a setup quantity at $10.00 each, then you have just added $80 to the standard cost of one part. But if you establish that a standard lot size for a given assembly is 50 assemblies, then you can amortize that $80 over 50 assemblies, or $1.60 additional cost per assembly. But, if you make a lot quantity of 100 (while still using 50 as the standard lot size), then the value of WIP left after all transactions won't be zero. Note: The configuration variances do NOT reflect any part of the actual purchases of components, it only deals with standard costs.
3. ROUNDING VARIANCE
Additionally, if there is a small percentage assigned to run scrap, and the components are in units of Each, we can't issue fractions of a component to the work order. So we would round up to the next integer. For example, if there is a qty of 1 part per assembly (with a 2% run scrap) @ $1.00/ea and the Work Order is for a quantity of 10 we would issue 11 parts @ a total of $11.00 instead of 10.2 parts @ a total of $10.20. So we would be adding the value $11.00 to WIP, but only taking out the quivalent value of $10.20 based on the BOM standard cost. So the difference between the std cost calculation and the actual kit issuance (in the example, $0.80) would be charged to the Rounding Variance upon kit close.
4. MANUFACTURING VARIANCE
When the work order has had material kitted to it in addition to that called out by the BOM, or the kit is finished with missing parts (maybe freebies that didn't get to inventory), the difference between the total issued to the work order and the total value of the BOM parts becomes the Manufacturing Variance. E.G. one batch of parts got lost even though they were kitted to the work order, and a second batch of parts was issued to the work order, the second batch would be a manufacturing variance, since they were lost in the manufacturing process.
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