Manufacturing Costing and Variance Analysis with JD Edwards EnterpriseOne

Introduction

This topic may not be the most exciting with broad appeal, but to those working in manufacturing cost accounting, standard costing, work order processing, and with the JD Edwards Costing and Manufacturing Accounting application, this may be of interest.

For a manufacturer, to achieve a business goal of increasing the company’s revenue and improving profit margins, you need to understand your manufacturing costs and how to effectively manage and improve those costs.

With reduction to manufacturing costs a company can improve their market competitiveness, increase sales and market share. Critical to this goal is the understanding and the management of manufacturing costs. Solid understanding and effective use of your JD Edwards EnterpriseOne costing system is critical to managing cost.

For the manufacturer who is working with standard costing (versus actual costing), an essential piece of managing cost is understanding manufacturing cost variances – the difference between standard product cost, and the actual cost produced. Cost variances are a key component of the standard costing system. Cost variances within the JD Edwards costing system explain differences between standard, predefined or expected costs of the manufacturing output.  These variances can be the result of differences in labor or overhead costs, or changes to the bill of material or routing.  Along with this, a requirement of successful cost management, and the continual improvement of manufacturing product cost, is effective communications between cost accounting and manufacturing.

Questions for Cost Accounting

First, ask yourself these questions of your manufacturing cost accounting:

Are manufacturing costs captured appropriately?

Are costing standards reflected accurately in manufacturing?

Are the cost variance types and their causes well understood?

Are cost variances captured appropriately?

Who is accountable for manufacturing cost variances?

Who sets policy rules for cost variance tolerance?

Who establishes manufacturing rate setups (labor, machine, setups, overhead, etc)?

Are JD Edwards Costing and Manufacturing Accounting setups and functions well understood?

Where is the value in the cost/variance reporting? How does it add value to your organization?

Are meetings regularly scheduled with cost accounting and manufacturing functions to discuss variances, standards, actuals, improvement planning and related tasks status?

Answering these questions is essential to control and manage product costs and ensure continual operational improvements.

Finance and Manufacturing – Vital Integration Points

In my experience as a consultant and former manufacturing operations manager, I have found that finance and manufacturing personnel often lack sufficient understanding of the ERP system’s integrated points between manufacturing and finance: the ’cause and effect’ of costing and related processes, how manufacturing variances occur in detail. Other challenges relate to misunderstanding of the twists and turns that can occur with a work order: changes to the parts list, routing, labor rates, work center rates, shop floor time entries, bill of material, scrap, and cost freeze and the timing thereof. All of which will contribute to the cause of a cost variance from the standard rate setup.

Over the years I’ve worked with finance departments on their need for understanding of the manufacturing process, work centers, labor time, machine time, routing setups, work order flow and transaction points. As we streamlined manufacturing operations – automating processes, implementing kanban, backflush, JIT, and lean practices – finance involvement was important for appropriate product costing and adjustments. Refinement of production processes require prompt re-assessment and adjustment of costs associated.

Manufacturing and finance are vital integration points for a business’ profitability. They need to effectively work together in managing manufacturing costs, continually examining the process and the supply chain to reduce costs. Understanding the JD Edwards Costing and Manufacturing Accounting system will go far in understanding the numbers and the ’cause and effect’ that takes place in manufacturing that result in variances.

One of my clients had a $1.8 million manufacturing cost variance over the course of 12 months. They had no idea what caused the variance. A review of their operational process identified a lack of communications with manufacturing and cost accounting, limited understanding of the JD Edwards system’s costing functionality including cost setups impact  to work orders in process. The solution was a four step process:

  1. Train the finance department on the JD Edwards costing and manufacturing accounting functionality, and cause and effect of variances;
  2. Make an adjustment to processes of a ‘build to order’ product line;
  3. Build a communications bridge to encourage manufacturing and finance to discuss manufacturing cost variances on a routine basis; and
  4. Include cost improvement initiatives review on a routine scheduled basis with finance leading.

Another recent client had over $3 million in manufacturing cost variance, with no understanding how these occurred: certainly not a good situation. Again, the solution was to train cost accounting with the JD Edwards system functionality and understanding the ’cause and effect’ related to costing and variances.

Manufacturing Costs 

Costs flow throughout manufacturing; from the procurement of raw materials, issuing materials to a manufacturing work order, through the manufacturing assembly process, all collecting costing standard’s and/or actual’s along the way, to the customer sale. Cost may also include overhead, (a.k.a. ‘other costs’) such as electricity, water, tooling,  maintenance, etc.

In manufacturing,  to be competitive and profitable you must understand and control the three basic elements of manufacturing costs: I. direct materials; II. direct labor; and III. manufacturing overhead.

I. Direct materials consist of all the materials that become the finished product. Direct materials should include the actual cost of the materials, as well as freight in, purchasing, receiving costs, storage and other acquisition costs.

II. Direct labor consists of all of the personnel costs/employee rates required to manufacture the finished product. Direct labor typically includes wages, payroll taxes, and benefits associated with personnel assigned to manufacturing the product/work center.

III. Overhead consists of all the other costs of the finished product beyond the direct material or labor cost components. These mainly consist of indirect material, indirect labor, depreciation, rent, utilities, repairs, maintenance and insurance.

What is cost variance analysis in manufacturing accounting?

variance is the difference between an expected or planned amount and the actual amount.

A variance analysis identifies and explains the reasons for a discrepancy between a budgeted amount and the actual amount of the manufactured product.

Manufacturing cost variances are expected, but not always understood. Generally a cost variance is the difference between an item’s actual amount and its budgeted, standard, or planned amount.

These cost variances signal management that the company is experiencing costs that differ from its expectation (standard). As discussed above, standard costing systems report variances for each of the following manufacturing costs:

  • direct materials
  • direct labor
  • manufacturing overhead

Rather than assigning the actual costs of each of these to a product, many manufacturers assign a standard cost. Such manufacturers’ inventories, and cost of goods sold, begin with expected, standard costs, rather than the actual costs of a product. The manufacturer nonetheless pays the actual costs. A discrepancy between actual and standard costs; the difference is a variance.

Standard costing and the related variances is an important, valuable tool for management. Variances alert management that manufacturing costs have differed from the standard (planned, expected) costs. This creates a binary set of possibilities:

  1. If actual costs are greater than standard costs the variance is unfavorable. An unfavorable variance informs management that the company’s actual profit is trending below expectations.
  2. If actual costs are less than standard costs the variance is favorable. A favorable variance informs management that current trends indicate an actual profit exceeding the planned profit.

Manufacturing accounting needs to capture and allocate the manufacturing cost as accurately as possible for cost management and reporting.

Variance analysis investigates the discrepancy, quantifies the divergence from planned costs, and identifies the cause of the variance.

This level of detailed variance analysis informs management why the variances occur in its business for appropriate follow-up action.

Manufacturing variance analysis with JD Edwards EnterpriseOne

JD Edwards EnterpriseOne costing functionality not only enables management to control its costs and make them transparent, but also provides features to assist in resolving cost issues, including manufacturing cost variances;

  • Engineering Variance: the difference between the frozen, standard costs (material, labor, and overhead) and the current costs as derived from the bills of material, routings, and overhead rates.
  • Planned Variance: the difference between the current costs that are derived from the bills of material, routings, and overhead rates, at the time that the parts list and routing were attached, and the costs that are based on the work order or rate schedule parts list and routing instructions. Planned variances can occur when you revise a work order or rate schedule.
  • Actual Variance: the difference between the cost values derived from the work order, or rate schedule parts list and routing, and the material and labor that were actually reported for that work order or rate schedule.

Actual variance can occur when you;

– Issue material

– Enter hours and quantities

– Enter completions

  • Labor Efficiency: The difference between the planned and actual labor costs, based on the work order or rate schedule routing.
  • Material Usage:  The difference between the planned and actual material costs, based on the work order or rate schedule parts list.
  • Other: Variances that result from:

-A cost roll-up that occurred in the middle of a work order or routing;

– A rounding error;

– Over- or under-completing a work order.

So, why analyze variances?

Variances are analyzed, first, to validate the variance; second, to identify a course of action; and, third, to ensure initiation of that action. Identifying relevant variances and initiating action can lower manufacturing costs, improve the production process, and ultimately increase profits.

When is a variance large enough to warrant action?

In most manufacturing  environments using standard costing method, there will always be variances. Focus the analysis on variances with the greatest impact on the company and when underlying issues can be rectified. Set relevance guidelines/policy for determining variance research priorities. For example, finance might set a guideline of 10 percent or more variance from standard to trigger an investigation.

It is important to note that such standards are only estimates. Some divergence between standard and actual amounts is expected.

Following up on Variances

Investigating variances can take time. It may take a while to identify the best person to answer your specific variance questions. This person could be a manufacturing manager or engineer, or a line supervisor. Ideally, the review of variances occurs in a routinely scheduled Costing Variance Meeting with manufacturing and finance.

JD Edwards EnterpriseOne tools used for cost variance analysis;

  • Production Cost Inquiry: The Production Cost Inquiry displays the costs and variances that are associated with a work order or rate schedule. You can view variances by comparing amounts the system calculated in one mode to amounts the system calculate in another mode; modes include; standard, Current, Planned, Completed, and Scrapped.
  • Costed BOM Inquiry: When budgeting and planning for the future cost of items, or reconciling cost variances, you can use the Costed Bill of Material program to review standard costs and quantities for parent items and the components of the parent.The program displays summarized costs for the direct components, net-added costs, and total costs for the parent item from the Item Cost Component Add-Ons table. For each component, the program displays costs that it calculates based on the as of date from the bill of material and the required quantity multiplied by the value from the F30026 table. The program uses the as of date to exclude obsolete component lines in the bill of material.You can review all costs of manufacturing a parent item, including assembly, subassembly, and component costs in either the simulated or the frozen view. The program displays costs in five user-defined categories:
    • Purchase
    • Labor
    • Machine
    • Overhead
    • Extras
  • Costed Routing Inquiry: Use the Costed Routing/Process Inquiry program  to review the summarized standard costs of an item for each operation in the routing.This information supports effective control of production costs and can help in reconciling manufacturing variances. For example, you can:Identify the work center that is responsible for an operation.

– Determine whether a work center performs multiple operations.

– Display simulated or frozen costs for labor values for cost methods.

– Calculate the totals for all costs by cost categories.

  • Work Center Rates: use the Work Center Rates program to inquire or to update frozen work center rates.
  • Cost Components: review frozen costs in the Cost Components program
  • Cost Simulation: use the Cost Simulation program to calculate costs for discrete and process items based on hypothetical situations. The program updates the Item Cost Component – Add-Ons table with the calculated simulated net-added and total costs. To calculate simulated labor, machine, and overhead costs, the Cost Simulation program calls the Cost Simulation – Routing Sheet program. After calculating all costs, the Cost Simulation program calls the Cost Simulation report to print the cost information. You can also review simulated costs in the Cost Components program. After performing the cost simulation, you can analyze costing information to determine the effects of the current rollup scenario and revise the costing information, as necessary. When costs are correct, run the Frozen Standard Update program.
  • Costing Exception Report: before you run a cost simulation, run the Costing Exceptions report (R30801). Costing exceptions are problems that are associated with an item and result in error messages. An example of a problem is an item without a routing.
  • Item Ledger Inquiry:The Item Ledger Inquiry program provides information about the transactions that have affected the item that you are reviewing, including cost changes.

EnterpriseOne One View Reporting; Manufacturing Variances

The Manufacturing Costing One View reports allow users to view the following variances for each Branch or Item/Branch combination:

  • Actual Variances between Planned and Actual Costs
  • Engineering Variances between Frozen and Current Costs
  • Planned Variances between Current and Planned Costs Additionally users can review details of the Work Order and the breakdown of the variances based on cost type.

The reports delivered with the One View Work Order Cost Analysis Inquiry application are:

  • Calculated Actual Variance
  • Calculated Engineering Variance
  • Calculated Planned Variance
  • Calculated Variances Analysis

One View Reporting – Calculated Actual Variance;

This report provides the actual variances that exist between planned costs and actual costs for each branch or item/branch combination. The report also shows details of the work order and the breakdown of the variances based on cost type.

This report contains the following components:

  • Calculated Actual Variance Greater Than Zero – by Branch (pie chart)
  • Calculated Actual Variance Greater Than Zero – by Item/Branch (bar graph)
  • Calculated Actual Variance Less Than Zero – by Item/Branch (bar graph)
  • Calculated Actual Variance (table)

One View Reporting – Calculated Engineering Variances;

This report provides the engineering variances that exist between frozen costs and current costs for each branch or item/branch combination. The report also displays details of the work order and the breakdown of the variances based on cost type.

This report contains the following components:

  • Engineering Variances by Branch (pie chart)
  • Engineering Variance Greater Than Zero – by Item/Branch (bar graph)
  • Engineering Variance Less Than Zero – by Item/Branch (bar graph)
  • Engineering Variance by Item/Branch (bar graph)
  • Calculated Engineering Variance by MCU (table)

One View Reporting – Calculated Planned Variance;

This report provides the planned variances that exist between current costs and planned costs for each branch or item/branch combination. The report also displays details of the work order and the breakdown of the variances based on cost type.

This report contains the following components:

  • Calculated Planned Variance by Branch (pie chart)
  • Calculated Planned Variance Greater Than Zero – by Item/Branch (bar graph)
  • Calculated Planned Variance (table)

One View Calculated Variances Analysis;

This report enables you to analyze variances in depth across your branches. This interactive report gives you complete control over the information shown on the graphs, charts, and table by providing filtering by branch and item/branch.

This report contains the following components:

  • Top Net Variance by Branch/Plant and Item Number (gauges)
  • Calculated Engineering Variance by Item/Branch (pie chart)
  • Calculated Planned Variance by Item/Branch (pie chart)
  • Calculated Actual Variance by Item/Branch (pie chart)
  • Calculated Net Variance by Item/Branch (pie chart)
  • All Calculated Variances (polar graph)
  • Engineering/Planned/Actual Variance by Branch (horizontal bar graph)
  • Calculated Planned Variance by Item/Branch (bar graph)
  • Calculated Actual Variance by Item/Branch (bar graph)
  • Calculated Actual Variance (table)

Conclusion:

Understanding and controlling manufacturing costs is essential for the business. It can be the difference between making or losing the sale. It can be the difference between making a profitable or an unprofitable sale.  Both lost sales and unprofitable sales can lead down a disastrous path for the business. Understanding and controlling your manufacturing costs can make the difference in remaining competitive, increasing market share, and improving profit margin, or closing the business’ doors.

Understanding and effectively using your JD Edwards  EnterpriseOne costing and manufacturing accounting system will enable you to effectively manage those costs.

For more information on JD Edwards Costing and Manufacturing Accounting or to schedule training, contact;

John Paulson, JD Edwards EnterpriseOne Consultant

Email: jpaulson@jderesource.com

Linkedin: https://www.linkedin.com/in/johnpaulson

Cell: 503-819-0190

Content sources: JD Edwards EnterpriseOne Applications Documentation, Release 9.1.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: