Manufacturing Variances
October 20, 2009
Discrete Manufacturing SIG
Cost Sub-Committee
Manufacturing Variances
October 20th, 2009
Douglas Volz
OAUG Discrete MFG Cost Group
email: dvolz@comcast.net
tel:: +1 (510) 755-7050
Bruce Baggaley
Senior Partner, BMA Inc.
email: bbaggaley@maskell.com
tel:: +1 (609) 239-1080 x 2
OAUG Cost Sub-Committee – 1
Manufacturing Variances
October 20, 2009
Agenda

Welcome

Schedule for 2009 and 2010

New SIG: G/L

This Month’s Topic – Manufacturing Variances

Conclusion
OAUG Cost Sub-Committee – 2
Manufacturing Variances
October 20, 2009
Last Session for 2009 – November 17th

Oracle will present on Oracle Landed Cost Management

A new module which helps to give organizations financial visibility into their extended
supply chain costs, including transportation and handling fees, insurance, duties, and
taxes
OAUG Cost Sub-Committee – 3
Manufacturing Variances
October 20, 2009
Schedule for 2010
OAUG Cost Sub-Committee – 4
Manufacturing Variances
October 20, 2009
New Special Interest Group: G/L SIG

Introduced during Openworld on October 11th

Contact Mohan Iyer at mohan@fscpsolutions.com for more information

Meant to be more than G/L,
“The Multi-Org/Multi-National SIG group supports the formation of a special GL-SIG and will
closely collaborate with this new focus group. With the introduction of the E-Business Suite
Release 12 there is an even greater number of topics and challenges that need a new in-depth
analysis and user review, such as Legal Entity Model, MRC, Sub-Ledger Accounting, Multi-Org
Access Model. ”
OAUG Cost Sub-Committee – 5
Manufacturing Variances
October 20, 2009
This Month’s Topic: Manufacturing Variances


How Oracle Discrete Manufacturing Handles Variances

Overview for Variances by Costing Method

Purchase Price Variance / Invoice Price Variance

WIP Labor Rate, Assembly Scrap, Yield Factors

Types of WIP and Types of WIP Jobs

WIP Variances for Standard Costing

Standard Cost and Average Cost Updates
Contrast Full Absorption Standard Costing With Lean Accounting

What’s Wrong with Full Absorption Standard Costing?

Value Stream Costing

Comparing Assumptions

Comparing What Is Important

Comparing Measurements and Behaviors

Value Stream Cost Analysis - by Type of Cost

What Must Be in Place for Value Stream Costing to Be Effective?

Conclusions
OAUG Cost Sub-Committee – 6
Manufacturing Variances
October 20, 2009
Overview for Variances by Costing Method
Average Costing
Standard Costing
 Invoice Price Variance
 Purchase Price Variance
 Average Cost Update
 Invoice Price Variance
 Material Overhead
Over/Under Absorption
 Standard Cost Update
 Resource/Production Overhead
Over/Under Absorption
 Assembly Scrap
 Material Overhead
Over/Under Absorption
 Resource/Production Overhead
Over/Under Absorption
 Assembly Scrap
 Material Usage
 Resource, OSP, & Overhead
Efficiency
OAUG Cost Sub-Committee – 7
Manufacturing Variances
October 20, 2009
Purchase Price and Invoice Price Variances

Both Average and Standard Costing have invoice price variances (IPV)


Only Standard Costing has purchase price variances


IPV measures the difference between the PO unit price and the invoice actual cost
PPV measures the difference between the PO unit price and the standard cost
Set these up on the Inventory Parameters:
PPV Account
IPV Account
OAUG Cost Sub-Committee – 8
Manufacturing Variances
October 20, 2009
Material Overhead & Production Overh’d Over/Under Absorption Variances


Oracle MFG can earn material overhead at:

PO Receipt

Inter-Org Receipt

WIP Completion
You set up the absorption (or offset) account when you define sub-elements
Absorption
Account
OAUG Cost Sub-Committee – 9
Manufacturing Variances
October 20, 2009
Labor Rate Variances
• Actual rate X actual hours
• Actual rate X standard hours

Oracle MFG can earn resources at
• Standard rate X standard hours
• Standard rate X actual hours

Part of the resource sub-element setup
Standard
Rate
Checkbox
Resource Rate
Variance Account
OAUG Cost Sub-Committee – 10
Manufacturing Variances
October 20, 2009
Assembly Scrap and Yield Factors

Component Yield factors are unchanged from Release 11i

It increases the cost (and component requirements) for the assembly

Input on the bill of material

Assembly Shrinkage is unchanged from Release 11i

Depending on your setup you may record assembly scrap when you move
assemblies into Scrap or leave the value in the job
OAUG Cost Sub-Committee – 11
Manufacturing Variances
October 20, 2009
How to Enter the WIP Assembly Scrap Transaction
Move to
Scrap
Use aliases
OAUG Cost Sub-Committee – 12
Manufacturing Variances
October 20, 2009
Assembly Scrap Factor by Cost Type
Shrink
Rate by
Cost Type
OAUG Cost Sub-Committee – 13
Manufacturing Variances
October 20, 2009
Types of WIP Variances by WIP Class

WIP Discrete Production Jobs – recognized when you close the WIP Job

WIP Non-Standard Asset Jobs – recognized when you close the WIP Job

WIP Non-Standard Expense Jobs – recognized when you close the period

WIP Repetitive Schedules – usually recognized when you close the period

WIP Flow Manufacturing – no variances – all earned at standard usage & rates
OAUG Cost Sub-Committee – 14
Manufacturing Variances
October 20, 2009
Account Setup for WIP Variances – by WIP Class
Used for
OSFM
OAUG Cost Sub-Committee – 15
Manufacturing Variances
October 20, 2009
Formula for Usage and Efficiency WIP Variances (Standard Costing)
Costs-In
Costs-Out
Variances
Previous-level costs
@ actual usage
-
Previous-level costs
@ standard
=
Material usage variance
Resource
-
Resource
=
Resource efficiency
Outside processing
-
Outside processing
=
Outside processing
efficiency
Overhead
-
Overhead
=
Overhead efficiency
Sources of:
• components issued
• resources earned
• OSP earned
• overheads earned
• WIP completions @ standard
rolled up costs
OAUG Cost Sub-Committee – 16
Manufacturing Variances
October 20, 2009
Cost Update Variances


Average Costing
•
Separate material transaction, entered by cost element
•
There is no Average Cost Update for WIP
Standard Costing
•
Run by submitting the Standard Cost Update
•
You enter the desired offset (variance) account
•
WIP gets its offset account from the WIP Accounting Class
OAUG Cost Sub-Committee – 17
Manufacturing Variances
October 20, 2009
Contrast Traditional Costing with Lean Accounting
OAUG Cost Sub-Committee – 18
Manufacturing Variances
October 20, 2009
What’s Wrong with Full Absorption Standard Costing?
 Distorts
profitability by inappropriate overhead
application—assumes full/ “practical” capacity.
 Motivates
non-lean behavior; large batches, overproduction & make-for-inventory –economies of scale
significant detailed reporting of so-called “actual”
information.
 Requires
 Considers
labor as a variable cost when for practical
purposes labor is largely fixed.
Standard Costs “lie to you”.
They give misleading information leading to bad decisions;
make/buy, pricing, product introductions, etc.
OAUG Cost Sub-Committee – 19
Manufacturing Variances
October 20, 2009
Value Stream Costing
Production
Labor
Production
Materials
Machines & Production
Equipment
Support
VALUE STREAM
Operation
Support
Facilities &
Maintenance
All Other
VS Costs
All labor, machine, materials, support services, and facilities directly
within the value stream. Little or no allocation.
OAUG Cost Sub-Committee – 20
Manufacturing Variances
October 20, 2009
Comparing Assumptions
Traditional Assumptions
Lean Assumptions
• Profit comes from full
utilization of resources
• Profit comes from maximizing
flow on pull from customers.
• Waste = idle resources
• Waste = resources impeding the
flow
• Control the business thru
detailed tracking
• Control thru continuous attention
to flow & waste
• All excess capacity is bad
• Excess capacity provides
flexibility
OAUG Cost Sub-Committee – 21
Manufacturing Variances
October 20, 2009
Comparing What Is Important
Traditional Thinking
Lean Thinking
• Full utilization of resources
• Value to the customer
• Average part cost
• Value streams
• Overhead absorption
• Batch and Queue
• Flow & pull from the customers
• Inventory valuation
• Departmental structure and
individual efficiency
• Team structure and individual
empowerment, accountability
• Product quality
• System quality
• Pursuit of budget
• Pursuit of perfection
OAUG Cost Sub-Committee – 22
Manufacturing Variances
October 20, 2009
Comparing Measurements
Traditional Measurements
Lean Measurements
• Labor efficiency &
machine utilization
• Cycle time
• Cost variances vs.
standard
• First time quality
• Budget adherence
• Direct labor as % of sales
• Throughput
• Inventory Turns
• Delivery to customer
• Value stream focus
OAUG Cost Sub-Committee – 23
Manufacturing Variances
October 20, 2009
Comparing Behaviors
Traditional Behaviors
Lean Behaviors
• Make more product—
build inventory
• Eliminate barriers to flow
• Utilize resources to the
max
• Optimize dept.
efficiencies
• Track direct labor in
detail
• Allocate other costs
• Focus on value streams
rather than departments
• Continuous improvement
and team-work
• Eliminate waste,
inventory, and overproduction
OAUG Cost Sub-Committee – 24
Manufacturing Variances
October 20, 2009
Value Stream Cost Analysis - by Type of Cost
Customer Service
Configuration
Purchasing
Loop 1 SMT
Loop 2: Hand Load/ Wave /Post
Loop 3: Test & Rework
Assemble & Burn-In
Shipping
Quality Assurance
Mfg. Engineering
Maintenance
Accounting
Human Resources
Information Systems
Design Engineering
Other Support
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Material
358,512
25,608
128,040
-
Employee
Outside Cost
Cost
Machine Cost
$
$
12,933 $
$
$
$
$
$
12,933 $
$
$
17,280 $
16,956
$
$
27,755 $
2,016
$
$
17,280 $
3,528
$
$
10,800 $
$
$
2,700 $
$
$
5,173 $
$
$
7,760 $
$
$
2,587 $
$
$
10,347 $
$
$
5,173 $
$
$
5,173 $
$
7,760 $
$
$
7,760
$
137,895
$
22,500
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Facilities
20,000
20,000
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Total
12,933
12,933
392,748
55,379
20,808
138,840
2,700
5,173
7,760
2,587
10,347
5,173
5,173
7,760
20,000
188,155
700,315
OAUG Cost Sub-Committee – 25
Manufacturing Variances
October 20, 2009
What Must Be in Place for Value Stream Costing to Be Effective?

Report by value stream - not by department.

Ideally the people should be assigned to a single value stream with
little or no overlap.

Few shared services departments. Few monuments. Little
requirement for cost allocation.

Production processes must be largely under control, so that variability
is reasonably low

Thorough tracking of “out-of-control” situations and of excepts like
scrap, rework, etc.

Inventory must be under control, relatively low, and consistent
OAUG Cost Sub-Committee – 26
Manufacturing Variances
October 20, 2009
Conclusion
This session provided an overview for:

Oracle variances for average and standard costing

How lean accounting can offer significant advantages over traditional
cost accounting
2010 cost sessions are in the planning stages

If you have topics you would like to discuss send an email to Doug Volz

Looking for ways to improve our sessions and increase our membership
OAUG Cost Sub-Committee – 27
Manufacturing Variances
October 20, 2009
Thank You for Your Attendance and Participation
OAUG Cost Sub-Committee – 28