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Production Orders and Costs

Hello - Can anyone give me better understanding of the following:

A flow chart that shows after Production Orders are Closed the financial transactions that happen in the background.

- Is Manufacturing Labor being tracked to the Production Order is done by actual or standard cost?

- Are Manufacturing Labor Costs recorded in Projects by these Production Orders done by actual or standard?

- How do you track the variances associated with the Production Order?

- How do the costs effect WIP and direct costs in projects?



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1 Answer

  • Posted on Aug 22, 2007 at 04:04 PM

    Here is some relevant detail from costing perspective


    Production Order Costing</b>

    Production order is created for (header) materials which are produced or assembled. Usually these materials of type HALB or FERT has production order.

    These materials for which orders are created have a BOM Bills of Material (a list of the components, by which the header material is made of) and a Routing a list of activities involved in assembling or producing the header materials.The routing will tell which workcenter's activities are to be used and how much duration. The rates for the activities are maintained in the cost center to which the work center are assigned to.

    Product Cost Planning

    The header material will have a released current standard cost estimate. These derived cost estimates would been costed, marked and released to the material master.

    The cost estimate is derived by computing

    a) the material cost (based on the BOM)

    b) the labor cost or production cost (based on the routing) and

    c) Burden or overhead cost (based on the costing sheet associated with material)

    These cost estimates serve as the Standard for producing bulk quantities. Usually these relate to the cost of producing a certain number of costing lot.

    <b>Actual production cost</b>

    <b>Material Cost</b>

    When the order is created and released, the materials which have arrived from there warehouse, to the staging area within the production plant are issued to the order. Usually these are done by backflushing (auto issue of goods to the order)

    When this happens the production order captures the actual materials consumed cost. A material document together with accounting document gets created. The material consumption accounts are debited and the inventory of those components account is credited. At this point when you look at the order cost, you can see that the order has already captured the planned cost for the total quantity of the order . Under the actual column, the material cost actually issued is debited.

    <b>Labor cost or Manufacturing cost</b>

    The production supervisors later confirm that various activities as per the routing were done. This ensures that, whatever quantity of activities that have been confirmed, a debit is made to the production order with the labour cost. The credit is given to the cost center where the activities are performed. At this point the order cost will show the labour cost added to the actual column, depending upon how much quantities of activities are confirmed.

    <b>Overheads or Burden</b>

    Later at period end, when the overhead (the period end activity) is run, whatever the percentages that needs to be applied based on the material consumption or labour hours are applied and the production order is debited giving the credit to the cost center.



    Assuming the order complted, the total goods produced (the header material) is receipted.This gives credit to the production order for the quantity confirmed times the standard cost in the material master. The material/ Inventory account is debited

    The settlement run at period end ensures the whatever the differences are appearing in the order after the finished goods are delivered is settled to variance account. When this happens the production order will have zero balance

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