Calculating Historic Actual Costs

Outcome

The inventory value and the profit & loss statement are updated with the real costs incurred during the period.

The MITTRA, MWOTPS and CRACTR tables are updated (see below) as well as the product costing tables.

Before You Start

• The following settings must be made in 'Settings - Cost Accounting' (CAS900/H):
  • '310 Historic actual cost': This setting enables the calculation of historic actual costs and also makes it possible to create internal account entries for historic actual cost in 'Internal Account Entry. Create' (CAS950).
  • Settings '315 Historic actual cost - materials' and '320 Historic actual cost - operations' include materials and operations respectively when you create a proposal in 'Historic Actual Cost. Calculate' (CAS400).
  • '330 Method for calculating historic actual cost': This setting indicates how to calculate the cost. Select among 1 = Rolling average cost, 2 = Periodic average cost, 3 = FIFO and 4 = LIFO. For a further description, see below.
  • '345 Reversed transaction': If this setting is enabled, reversed transactions are considered in (CAS400). This parameter can only be enabled if parameter '310' is also enabled.
• The costing type to use to store the historic actual cost in product costing must be selected in 'Settings - Product Costing' (PCS001/E).
• If the company selected to include operations in the calculation, a cost rate must be defined for the applicable costing components and this costing type in 'Costing Component. Create Cost Rates' (PCS120). Cost rates can either be entered manually or calculated by using cost center accounting and then transferred in 'RD Rate. Transfer from Resource Driver' (PCS120).

About Historic Actual Cost

As of version 14.1.2.0, M3 Business Engine enables you to calculate a historic actual cost for purchased and manufactured items in arrears, regardless of their inventory accounting method. You can also update the General Ledger with any variance between the current product cost and the historic actual cost.

The historic actual cost represents the most accurate cost of the material or operation related to the product, since it is based on real costs incurred during the accounting period or the company-defined date range. M3 Business Engine applies the historic actual cost to the material or operation, throughout the product structure up to the top item, without changing the cost calculated according to the applicable inventory accounting method. M3 Business Engine then automatically calculates the difference between these two costs, thereby enabling companies to identify and act upon them as part of the product costing.

You can select among several methods for calculating the cost: the rolling average cost method, the periodic average cost method and acquisition cost methods FIFO and LIFO. With rolling average cost, M3 Business Engine uses the average cost at transaction date for each stock issue. With periodic average cost, the system calculates a cost for the period and then applies it to all stock issues within a user-defined date range. With the FIFO or the LIFO method, the cost to recalculate is either the invoice price or the acquisition cost for each specific item at each stock transaction. M3 Business Engine calculates the FIFO or LIFO cost by identifying the applicable stock receipts and multiplying the cost from each stock receipt by the quantity. If there are several stock receipts, M3 Business Engine accumulates the value - invoice price, if existing, otherwise the acquisition cost from the MITTRA table - with the quantity issued and then divides the total by the quantity to identify the acquisition cost.

For purchased items, a historic actual cost is calculated for stock issues only. For manufactured items, a historic actual cost is calculated for both stock receipts and stock issues; however, any variance between the historic actual cost and the product cost is only booked for stock issues. M3 Business Engine begins by recalculating the historic actual cost for purchased items in the product structure and then continues by recalculating the cost for manufactured items, level by level and item by item in the product structure.

Follow These Steps

1. Create Proposal

   Create a proposal with calculated historic actual costs in 'Historic Actual Cost. Calculate' (CAS400). The proposal includes all inventory items of the company division and allows you to drill down to display the costs for each order related to each item during the specified date range. In (CAS400) you can also print a report, CAS406PF, listing all stock movements within the date range. It is not possible to make any changes in the proposal.

   Transactions within the date range you defined for the proposal are updated with the historic actual cost and historic actual cost status 1, meaning that a cost has been calculated: MITTRA (Stock transactions), MWOTPS (Cumulative operation - transactions) and CRACTR (Various accounting transactions). The historic actual cost and the historic actual cost status in the MITTRA table are displayed together per stock transaction in 'Stock Transaction. Display History' (MWS070/E); For stock receipts for manufactured items the historic actual cost status will still be zero, since the status is only set for negative stock transactions. The product costing model in (PCS300) is also updated automatically for the selected costing type when you create the proposal. If you delete the proposal before approving it, the historic actual cost will remain in these tables until you create a new proposal.

   When you approve the proposal, M3 Business Engine changes the historic actual cost status in the MITTRA, MWOTPS and CRACTR tables to 2, meaning that internal account entries can now be created for this cost in 'Internal Account Entry. Create' (CAS950). In addition, a CRACTR transaction is created for each change in average cost for average-costed items, that is, items with inventory accounting method 2. If, for some technical reason, the proposal fails to update correctly, you can select option 18 = 'Regenerate' in (CAS400) to continue the update.

   The date of the latest approved proposal in (CAS400) is displayed in (CAS900/H). You are not allowed to create a proposal with a date range earlier than or overlapping this date.

2. Create Internal Account Entries

   Create the internal account entries for the extra costs calculated for materials and operations in 'Internal Account Entry. Create' (CAS950) by selecting the check box 'Update historic actual cost'. As the basis for these internal account entries, M3 Business Engine uses all the stock transactions with historic actual cost status 2 in the MITTRA, CRACTR and MWOTPS tables.

   Depending on the stock transactions, the following internal account entries are created:

   • OI20-928 HAC - order costing variance: The credit transaction representing the difference between transaction price and historic actual cost in the MITTRA table, created at customer order invoicing in 'CO Invoice. Print' (OIS180).
   • OI20-972 COGS revaluated: Offsetting account entry to OI20-928.
   • PM10-913 HAC - material cost: Created for materials issued to work in progress in 'Manufacturing Order. Report Issue' (PMS060).
   • PM10–918 HAC - order costing, material: Offsetting account entry to PM10-913.
   • PM11-913 HAC - material cost: Created for materials automatically issued during reporting of orderless production in 'Manufacturing Order. Report Orderless' (PMS260).
   • PM11-918 HAC - order costing, material: Offsetting account entry to PM11-913.
   • PM20-923 HAC - cumulative operations: Created for work performed based on reported operations in 'MO Operation. Report' (PMS070).
   • PM20-928 HAC - order costing variance, operation: Offsetting account entry to PM20-923.
   • PM21-923 HAC - cumulative operations: Created when operations are automatically reported during reporting of orderless production in (PMS260).
   • PM21-928 HAC - order costing variance, operation: Offsetting account entry to PM20-923.
   • PC10-932 Average cost changes: The change in average cost for average-costed items, based on transactions created in the CRACTR table when approving the proposal for historic actual costs in (CAS400).

   The historic actual cost status is automatically set to 3 for the stock transaction, meaning that internal account entries have been created.

3. Run Inventory Valuation

   Create a proposal for inventory valuation in 'Inventory Value. Open' (CAS180). The valuation type you select in (CAS180/E) determines which inventory value to use as basis for the inventory valuation. If you select valuation type 2 = 'Historic actual cost' in (CAS180/E), M3 Business Engine uses the historic actual cost, if there is such a cost in the MITTRA table, instead of the acquisition cost for all positive stock transactions with stock transaction type 10 (MO receipt), 12 (MO receipt of co-product), 17 (MO receipt QI) or 18 (MO receipt of co-product QI). For all other positive stock transactions, the acquisition cost in the MITTRA table is used.

   When you approve the inventory valuation proposal, M3 Business Engine updates the General Ledger with the difference between the historic actual cost and the previously booked inventory value. The general inventory valuation rules still apply, however. In practice, this means that M3 Business Engine still will select the value calculated by another inventory valuation method if it is lower than the acquisition cost. The inventory valuation method applied is displayed per line in the inventory valuation proposal in (CAS190).

4. Run Work in Progress

   Create a proposal for work in progress in 'WIP Value. Open' (CAS170) and select valuation type 1 = 'WIP reconciliation'. This valuation type replaces report layout 5 in 'Order Costing. Print' (CAS550), as of version 14.1.2.0 of M3 Business Engine. The output is report of all orders that are still open. When the report is being created, M3 Business Engine automatically checks the related order costing tables per reference order category to retrieve the accounting numbers that are required to accumulate the booked values. At the same time, the CPOHED table is being updated with the closing date for orders that were already closed, based on the accounting date in (CAS300).

   Then create a new proposal in (CAS170) but select valuation type 2 = 'WIP valuation' instead. The WIP value is then updated with the historic actual cost for orders that are still open. This two-step approach not only improves the performance considerably, it is also required for companies that need to calculate a historic actual cost.