ERP 101: Tracking Costs Using ERP
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The document outlines a webinar session on tracking costs using ERP, detailing various cost types, including material, labor, and overhead, and their significance in the manufacturing process. It discusses two primary costing methods: standard and actual (or weighted average) costs, along with how to calculate and manage overhead expenses. Ultimately, accurate cost tracking is emphasized as vital for identifying improvement areas and ensuring profitability in manufacturing operations.
![Simple Actual Cost Example
• Part ‘A’ is a purchased item. Our company purchased 100 at $1.00 each and now has
25 remaining in inventory, after the other 75 were issued to work orders at a cost of
$1.00 each.
[Part ‘A’ purchased at $1.00, times 25 in inventory, equals an actual cost (value) of $25.00.]
• Our company needs to purchase 25 more, but the price has gone up to $1.50 each. The new 25 are
received into inventory, resulting in 50 part ‘A’ with a total cost (value) of $62.50. That is the result of
the original 25 in inventory at a total value of $25.00 plus the new 25 in inventory at a value of $37.50,
for a total of $62.50.
[The weighted average cost of part ‘A’ is now $1.25, or, $62.50 divided by 50 total pieces.
Any of these 50 that are issued to a work order will be issued at $1.25 each.]
• Remember, using the actual cost method, the actual cost is always determined by the value of the
parts already in inventory, plus the value of any new parts added, divided by the total number of parts
now in inventory.
Let’s see what happens when further activity takes place.](https://image.slidesharecdn.com/erp101w12trackingcostsusingerpfinal-170613171405/85/ERP-101-Tracking-Costs-Using-ERP-13-320.jpg){kind=tracking}
ERP 101: Tracking Costs Using ERP
- 1. ERP 101 Session 12 Tracking Costs Using ERP David Bush Senior Manufacturing Consultant, Rootstock Software
- 3. The ERP 101 Webinar Series Date Topic Aug 2, 2016 An Introduction to ERP for Manufacturing Aug 16, 2016 Engineering – Learn how to create Part Master Records and Bills of Material Aug 30, 2016 Engineering – Learn how Change Orders and/or Revisions ensures that ERP system data is accurate and up-to-date Oct 11, 2016 Shop Floor – Explore how ERP is used to create and maintain Work Centers, Routings and Procedures Nov 1, 2016 Shop Floor – See how scheduling the Shop Floor through ERP controls Labor and Machines Nov 29, 2016 Procurement – Link your Vendors and Purchased Parts via ERP Dec 13, 2016 MRP – Step through an overview of this vital ERP subset Jan 24, 2017 Work Orders – Manufacturing’s Starting Point Feb 14, 2017 Inventory – Maintaining Accurate and Reliable Data Mar 21, 2017 Sales – Linking your Customers and Products with ERP Apr 25, 2017 Project Control – A Vital ERP Tool for Many Manufacturers Jun 13, 2017 Tracking Costs Using ERP July 18, 2017 Succeed with Rootstock – Pro-Tech Replaces Spreadsheets and Old Software with Rootstock
- 4. Meet Our Speaker David Bush Senior Manufacturing Consultant, Rootstock Software • 30+ years of manufacturing and MRP/ERP systems experience • Previously at General Microcircuits, Consona Corporation, Relevant Business Systems, Inc.
- 5. A Quick Recap • What we have covered in our first 11 episodes – How the ERP System handles all aspects of manufacturing: • Introduction to ERP • Items • Bills of Material • Sales Orders/Customers • Purchasing or Procurement/Vendor Control • Inventory • Shop Floor Control/Routings • Scheduling • Work Orders • Inventory Planning via MRP • Project Control Today we will look at a different yet very important aspect of ERP, the ability to track costs.
- 6. What, exactly, does ‘Tracking Costs’ mean? • Identifying the various costs incurred to supply your product to your customers – Material – Labor – Outside Contracting – Overhead – ODC (other direct costs) • Capturing those costs in their various forms throughout the entire manufacturing process, from when first incurred until the final costs are identified – Estimating – Order Taking – Manufacturing – Shipping – Invoicing • Using software tools to compare actual costs with expected costs (estimate) to determine profit/loss by order, project or division Lets take a closer look at some of the specific costs to be captured.
- 7. What types of cost will I track and evaluate? • Direct material purchased or manufactured • Direct labor used in manufacturing • Sub-contract labor purchased for manufacturing • LESS OBVIOUS COSTS • Machine costs • Overhead (labor, machine or both) • Indirect material What decisions must my company make to accurately capture costs?
- 8. First, What Method will I use? • Two Primary Costing Methods are used ‐ Standard Cost • Uses ‘standards’ to measure profit/loss ‐ Average (or Weighted Average) Cost • Also known as ‘Actual’ Cost ‐ Other methods are generally a variance of one of the previous options Must decide on how to handle overhead, but…. What does ‘Overhead’ mean to me, and how is it calculated?
- 9. What is Overhead? • Simply put, overhead is the cost of doing business that is not directly related to a specific project, order or item. • Overhead can include: – Utilities to run the building – Wages and salaries of indirect labor – Office and shop supplies – Vacation, holiday and other paid leave time Will you roll these costs into the cost of goods produced? If so, how? What are the options for calculating overhead costs?
- 10. Rolling Overhead Costs into Manufacturing Costs • Company decision as to how overhead is calculated and what is included – Percent of labor costs? – Percent of material costs? – Percent of machine costs? – Combination of these? – Not part of direct costs? • Although this is a ‘company’ decision, the software provides functionality for each of these choices. – The Rootstock Costing method is determined at the DIVISION level, so different divisions can choose their own options. Let’s take a closer look at the two main costing options.
- 11. What is Standard Cost? • Based on company-identified ‘standard’ cost for each item and/or labor hours, as opposed to using the actual purchased cost or employee rate • Must be reviewed on a regular basis, either annually, quarterly, or even monthly • The system tracks and maintains ‘variances’... the difference between the standard cost and actual costs (Purchased Price Variance (PPV) for example) • Goal is to have as small a variance as possible between the actual costs incurred and standard ‐ Negative variance means costs are less than expected, resulting in higher profits, but, possibly at the risk of losing business to lower-priced competitors ‐ Positive variance means expenses were more than expected, cutting into profits • Standard costing is often used by companies that do a lot of estimating because looking at the variances while a job is active can be a much simpler method than using an ‘average’ cost system Now let’s look at ‘Actual’ costing.
- 12. What is Actual Cost? • Based on the actual cost (price paid, incurred) of material and labor, actual cost is, by far, the most popular costing method currently used by Rootstock customers. • Also known as ‘weighted average cost', where, generally speaking, the system maintains an average cost of material going in and out of inventory • Tracks labor costs at actual employee rates rather than grade rates • Overhead is typically calculated the same as when using a standard cost system, using a percentage of labor, machine and/or material costs, defined at the division level • There is no purchased price variance using actual cost as material goes into inventory at the purchase order price, not at a standard that is compared to actual. Because the actual cost method is the most commonly used method, we will focus the remainder of our time today on that method. First, an example of how actual cost works.
- 13. Simple Actual Cost Example • Part ‘A’ is a purchased item. Our company purchased 100 at $1.00 each and now has 25 remaining in inventory, after the other 75 were issued to work orders at a cost of $1.00 each. [Part ‘A’ purchased at $1.00, times 25 in inventory, equals an actual cost (value) of $25.00.] • Our company needs to purchase 25 more, but the price has gone up to $1.50 each. The new 25 are received into inventory, resulting in 50 part ‘A’ with a total cost (value) of $62.50. That is the result of the original 25 in inventory at a total value of $25.00 plus the new 25 in inventory at a value of $37.50, for a total of $62.50. [The weighted average cost of part ‘A’ is now $1.25, or, $62.50 divided by 50 total pieces. Any of these 50 that are issued to a work order will be issued at $1.25 each.] • Remember, using the actual cost method, the actual cost is always determined by the value of the parts already in inventory, plus the value of any new parts added, divided by the total number of parts now in inventory. Let’s see what happens when further activity takes place.
- 14. Simple Actual Cost Example (continued) • Remember, we currently have 50 of part ‘A’ in inventory at a value of $1.25 each, total $62.50. • We will issue 10 of part ‘A’ and receive 100 more at a new PO price. • After issuing those 10 (at $1.25 each), we are left with 40 in inventory with a total value of $50.00 (40 X 1.25). • Our new PO got a deal.. $.90 each for 100 pcs., or a total of $90.00 (100 X $.90). This brings our inventory value up to $140.00. That’s $50.00 from the original 40 in inventory, plus another $90.00 from the new purchase order receipt. The new per-piece value is the total of part ‘A’s in inventory, 140, divided by the new total value, $140.00, or $1.00 each. • My weighted average cost has gone down by .25 each, reflecting the lower price I paid for the new 100 pcs,while still considering the older, more expensive pieces already in inventory. • Any of these 50 that are issued to a work order will be issued at $1.00 each. • The term ‘Actual’ cost, is not exactly accurate, while ‘weighted average’ is closer to reality. Let’s see how Rootstock helps you follow the costs on a work order.
- 15. Cost Elements of a Work Order Let’s look at the same work order AFTER issuing material.
- 16. Work Order With Material Costs Now we’ll see what adding labor does to our costs.
- 17. Work Order with Material, Labor and Overhead Cost How does this look when all operations are complete?
- 18. Work Order is complete… 250 assemblies went into inventory at a total cost of $6255.00, or $25.02 ea.
- 19. Custom reports are used to track mfg. costs Looking at Project Costs…
- 20. Examining Project Costs Now we will review what we’ve covered today.
- 21. What have we covered today? • Collecting and Tracking Cost is one of the most vital aspects of ERP systems. • Methods used to track costs include: – Standard Cost • Establishing ‘standard cost’ for each item and comparing the standard to actual using variances – Average Cost • Also known as ‘Actual Cost’ and ‘Weighted Average’ Cost • Uses weighted average purchased or manufactured cost of inventory to establish current value of parts • Most commonly used (by far) is ‘Average Cost’ • Rootstock Work Orders provide up to the moment costing information, including material, labor, machine and overhead. • Report Writer is used to create user-defined costing reports. Accurate costing information, regardless of the method used, identifies areas for improvement, possible future issues and the overall profitability of your company.
- 22. Where Do We Go From Here? • We have now covered the basics of: – Manufacturing, from creating parts and bills of material to purchasing material – Creating demand for items via sales orders – Building sub and final assemblies using routings and shop floor scheduling – Using the basic planning tool used by all ERP systems – Material Requirements Planning – Project Control – Manufacturing Cost Tracking • This concludes our popular ERP 101 series. But we are proud to announce our new monthly series entitled ‘Discover Rootstock’ and ‘Succeed with Rootstock’. • Debut webinar: Succeed with Rootstock - Pro-Tech Replaces Spreadsheets and Old Software with Rootstock July 18 at 2 PM ET/11 AM PT Let’s go back to our moderator, David Cosgrove…
- 24. “Discover Rootstock” and “Succeed with Rootstock” Date Topic July 18, 2017 Succeed with Rootstock Pro-Tech Replaces Spreadsheets and Old Software with Rootstock August 15, 2017 Discover Rootstock How to Survive and Thrive in High Growth Mode September 12, 2017 Succeed with Rootstock October 10, 2017 Discover Rootstock November 14, 2017 Discover Rootstock December 12, 2017 Succeed with Rootstock
Editor's Notes
- #3: INTRO SCRIPT: Good Morning and Afternoon everyone, and welcome to today's webinar sponsored by Rootstock Software Our last topic was “PROJECT CONTROL – A Vital ERP Tool for Many Manufactures”. This is the 12th and final webinar in our ERP101 webinar series. Our topic today is “Tracking Costs Using ERP”. Moving on to some housekeeping. Before we get started, I’d like to go over a few items so you know how to participate in today’s event. We've taken a screen shot of an example of the Attendee interface. You should see something that looks like this on your own computer desktop in the upper-right corner. You’re listening-in using your computer's speaker system by default. If you prefer to join over the phone, just select “Telephone” in the Audio pane and the dial-in information will be displayed. All attendees will be on mute throughout the presentation. You’ll have the opportunity to submit text questions to today’s presenter by typing your questions into the Questions pane of the control panel. You may send in your questions at any time during the presentation; we will collect these and address them during the Q&A session at the end of today’s presentation.
- #4: Now we’ll take a look at our upcoming schedule. Today we will be covering our final ERP 101 webinar topic: “Tracking Costs Using ERP.” “Discover Rootstock” and “Succeed with Rootstock”, our new monthly webinar series, will debut on July 11. We will provide more information on these exciting new webinars at the end of today’s presentation. I encourage you to follow Rootstock Software on LinkedIn, Twitter, Facebook, Google Plus and more for the latest and most important information about Cloud ERP. Follow Rootstock Software on social media!
- #5: ABOUT PRESENTER : I would now like to introduce our Presenter, David Bush, Senior Manufacturing Consultant at Rootstock Software. David Bush has 30+ years of manufacturing and MRP/ERP systems experience. David was previously at General Microcircuits, Consona Corporation, and Relevant Business Systems. David will now introduce us to our final ERP 101 webinar “Tracking Costs Using ERP”. Hi David…
- #23: Our first ‘Discover Rootstock’ and ‘Succeed with Rootstock’ will take place on July 11 at 2 PM ET. Webinar title: Succeed with Rootstock - Pro-Tech Replaces Spreadsheets and Old Software with Rootstock You will all receive an invitation to this new series shortly. Focus of the new “Discover Rootstock” monthly webinar series: Top manufacturing pain points and how to solve them What makes Rootstock unique Periodically we will Invite a customer to tell their story. These customer-led webinars will be called: “Succeed with Rootstock” We are looking forward to seeing you on July 11 for this can’t miss new webinar series.
- #24: Q&A SCRIPT: Thank you David, that was impressive! Before we go to your questions, just a quick reminder this webinar will be posted on our website at www.rootstock.com. And of course after the webinar if you have any further inquiries, please email us at marketing@rootstock.com. We’ll now answer questions submitted during today’s presentation as well as take any new questions – And just a reminder, you can still submit questions through the Questions pane in your attendee control panel. Our first question today is….. What is the reason for having employee 'grade rates' when using an actual cost system? What is the purpose of 'machine cost' and when would it be used? Is it better to include more items in overhead or is it better to view them as direct costs and inventory them?
- #25: Before we end today’s webinar, I’d like to present a brief look ahead at the upcoming topics in our new “Discover Rootstock and Succeed with Rootstock” Webinar series. Join us on July 11, 2017 Succeed with Rootstock: Pro-Tech Replaces Spreadsheets and Old Software with Rootstock. Registration will be available in your follow up email that you receive tomorrow. I encourage you to follow Rootstock Software on LinkedIn, Twitter, Facebook, Google Plus and more for the latest and most important information about Cloud ERP. Follow Rootstock Software on social media! Thank you for joining us today. We look forward to seeing you at our next webinar on July 11. Today’s webinar is now over.