BAAN
Parameter Settings for Production Order Costing
Bug Fixing	

Document information
Document
Document title	: Parameter Settings for Production Order Costing – 
								Bug Fixing
Month modified	: April 2000
Location	: Barneveld, Baan Development/ Backoffice Apps
Author		: Claudia Smit

© Copyright 1999 Baan Development B.V. All rights reserved 
The information in this document is subject to change without notice. No part of this document may be reproduced, stored or transmitted in any form or by any means, electronic or mechanical, for any purpose, without the express written permission of Baan Development B.V. 
Baan Development B.V. assumes no liability for any damages incurred, directly or indirectly, from any errors, omissions or discrepancies between the software and the information contained in this document. 

Table of contents
0. Introduction	4
0.1	Purpose	4
0.2	Definitions, acronyms, and abbreviations	5
0.3	Overview	5
1.	Description of current situation	6
1.1	Introduction	6
1.2	Wrong posting of calculation variances	6
2.	Solution Description	7
2.1	Possible solutions	7
2.2	Change completion posting	7
2.3	Parameter setting not allowed any more	8
2.3.1	Current parameter setting still can be used	8
2.3.2	Changing to “Results by Work Center” is “No”	8
2.3.3	Changing to “WIP Transfer Method” is “Always” or “Only Upon Completion”	8
3.	WIP transfer concept	9
3.1	Calculate WIP transfer amounts	9
3.2	Posting of WIP transfer amounts during operation completion	9
Appendix 1: Costing Parameters	12
     Costing Parameter Overview	12
     Results by Work Center	12  
     Posting Method Efficiency Variances/Posting Method Price Variances	14
     WIP transfer method	15
Appendix 2: Examples	16
     Example 1: Results by Work Center, no WIP transfers	16
     Example 2: No Results by Work Center	18
     Example 3: Results by Work Center and WIP transfers	19  
     Example 4: CST functionality	21

0. Introduction
0.1	Purpose
This document is used for implementing a bug fix on BaanERP5.0b/5.1a. This defect was reported by a couple of customers. Because the fix has quite some impact a small design was written to explain the background and the chosen solution.
This document can be used to provide customers with the necessary information on this bug fix and the WIP transfer concept.

0.2	Definitions, acronyms, and abbreviations 
Term	Description	
Additional Calculation (Office) Variance	The remaining value necessary to clear the WIP on the production level and the work center level after calculating efficiency and price variances.	
Calculation Office	The calculation office is a work center that determines the enterprise unit for a project or production order. The costs and results that are calculated and posted on the production order will be posted to the financial company of the calculation office. Thus, the calculation office carries out administrative functions, but can also act as normal work center (even in the same production order).	
Efficiency Variance	In BaanERP, efficiency is related to the usage of materials on a production order. Efficiency variances are caused by a difference between the estimated and actual production plan. The efficiency variance amounts are calculated according to the following formula:
Efficiency Variance = (Estimated Quantity -/- Actual Quantity) x Estimated Price. This calculation is made for both materials and hours.	
Operation Set	A group of linear connected tasks/operations in a routing that belong to the same work center.	
Price Variance	Price variances can be calculated for production orders. Price variances arise because of a difference between the estimated cost and the actual cost of an item or an hour. The price variances are calculated as an amount, according to the following formula:	
Price variance = (estimated price – actual price) x actual quantity.	
Production Results	The variance between production costs and the amount of receipts, which is recorded at the moment the production order is closed. The production results are split into:
Price variances
Efficiency variances
Calculation (office) variances	
Work in Process (WIP)	The amount of materials, hours, and other production effort, which is consumed, on the shop floor by producing manufactured items, which are not yet reported complete.	
CST	Production Order Costing, module within Baan Manufacturing	
WIP	Work in Process	

0.3	Overview
This document first gives an overview of the problems as this moment. In the second chapter the solution is described. Because the WIP transfer concept is not always clear, it is explained in chapter 3.
The appendices contain an explanation on the production order costing parameters and some examples of the financial transactions for different parameter settings. The last example is an extensive example of CST functionality including WIP transfers.

1.	Description of current situation

1.1	Introduction
In BaanERP5.0b/5.1a, a lot of new production order costing concepts were introduced. This resulted also in some new parameters in “SFC parameters” on the Costing Tab. A full explanation of these parameters can be found in the appendix.
Problems occur with one parameter combination:
•	Results by Work Center = Yes 
(Production order costs and results are posted to each work center separately.)
•	WIP Transfer Method = Not Implemented
(No WIP transfers are done between operation sets.)

1.2	Wrong posting of calculation variances

When the parameter combination described above is used, a lot of calculation office variance postings will be done. 
In this case the production order costs (material issue, operation costs) are posted to the work centers, because the parameter “Results by Work Center” is “Yes”. This means that the work centers have incoming costs. 
These costs, however, don’t have an outgoing counterpart because no WIP transfers are done. 
The completion posting is done against WIP transfer component (which is wrong). This results in a lot of additional calculation variances because variances are calculated per work center and cost component. 
The calculation office variances are used to clear the WIP after price and efficiency variances are calculated. For each cost component with incoming costs on work center level a calculation office variance will be posted.
Also on calculation office level the incoming and outgoing cost components do not match, so for this also a calculation office variance posting is done. 
When production took place according to estimates, the additional calculation office variances will add up to zero.
Example 1 in Appendix 2 illustrates this problem.

2.	Solution Description
2.1	Possible solutions	
Two approaches could be followed to resolve this issue.
1.	Change the completion posting in case of the parameter combination “Results by Work Center” is “Yes” and “WIP Transfer Method” is “Not Implemented”. The next paragraph describes the reason why this solution is not implemented.
2.	Don’t allow the parameter combination “Results by Work Center” is “Yes” and “WIP Transfer Method” is “Not Implemented”.
This was the chosen solution. A more detailed explanation is given in this chapter.
	
2.2	Change completion posting
There are a couple of reasons to not implement this solution.
The first one is rather technical: the code is not prepared for this. It was never meant to be used like this, and it was never taken into account that customers might use this parameter setting.
Changing the completion posting would take quite some effort with a high chance of infecting new defects because this is quite complex code.
The most important reason however, is that no real business requirement was seen for this. The only reason that was mentioned for setting up the parameters like this was the number of financial transactions. However, by using the described parameter setting, the number of financial transactions would not be significant lower compared to the setting with “WIP Transfer Method” put to  “Only Upon Completion”. Even when the completion posting would be corrected, the number of financial transactions would be high, because for each cost component on work center level, a financial transaction must be created during the completion posting to the calculation office. The WIP transfer functionality is new compared to Baan IV and no good documentation was available on this topic. So not knowing the complete functionality is also a reason why the parameter “WIP Transfer Method” is often put to “Not Implemented” during the implementation of BaanERP.

2.3	Parameter setting not allowed any more
This parameter setting is not allowed any more. 

2.3.1	Current parameter setting still can be used
When a customer is using the parameter combination “Results by Work Center” is “Yes” and “WIP Transfer Method” is “Not Implemented”, this can still be used. The completion posting and additional calculation office variances will be wrong, but for most customers this doesn’t lead to big problems, because the total production results will be zero.
Once the parameter settings are changed however, it cannot be put back.

2.3.2	Changing to “Results by Work Center” is “No”
When the parameter “Results by Work Center” reads “No”, the costs and production results will all be posted to the calculation office of the production order. Example 2 in Appendix 2 shows the financial transactions in this case.
No WIP transfers can be done in this scenario, so the WIP transfer method is not applicable in this case.

When changing the parameter, the running orders will be handled like in the old situation because the parameter “Results by Work Center” is copied to the production order header. All orders that are created after the parameter change will be handled as described in example 2 of appendix 2.

2.3.3	Changing to “WIP Transfer Method” is “Always” or “Only Upon Completion”
When changing the “WIP Transfer Method” parameter, WIP transfer postings will be done between work centers when operations are (partly) completed.
The orders with frozen estimated costs will be handled like the old situation. For all new created orders and orders for which the estimated costs are not yet frozen the WIP transfers will be done.
The associated financial transactions can be found in Example 3 of Appendix 2.
 
3.	
WIP transfer concept
3.1	Calculate WIP transfer amounts
WIP transfer amounts are only calculated if the parameter “Results by Work Center” is “Yes”  and operations are present.
First the operation sets are determined. An operation set contains one or more operations which are executed subsequently in the same work center.
The WIP transfer amounts are based on the estimated end item unit costs and calculated during the same process. So the WIP transfers for an operation set are calculated at the moment the production order is frozen (or before the costs are frozen on manual request). The WIP transfer amounts are calculated and stored per end item unit and for financial postings and display purposes multiplied with the transfer quantity to determine the total amount. The transfer quantity is the output of an operation. 
WIP transfers are only available if the production results are calculated at work center level and are only possible between operations that belong to different work centers. WIP transfers take care that the value of WIP per work center is corrected for the value of semi-finished products. This is especially important in production situations with a long lead-time and/or with a high value of work-in-process. The WIP transfer amounts are based on the estimated end item unit costs at the moment the production order is frozen (or when they are calculated on request of the user before the costs are frozen).

3.2	Posting of WIP transfer amounts during operation completion
During the (partial) completion of an operation WIP transfers must be handled, depending on the parameter settings.
As soon as quantities are reported completed or the operation is completed (dependent on “Transfer WIP method” parameter), the WIP transfers are done when this operation is the last one of an operation set. The last WIP transfer will take place from the last operation in the production planning to the calculation office.
When both work centers are within the same financial company, this is handled completely by Manufacturing. When this is not the case, a transfer must be done using Warehousing. At the moment of the WIP transfer the financial posting are done as well. 
•	WIP transfers handled by Warehousing
When the work centers belong to different financial companies, a Warehouse order must be created. This order has origin ‘Manufacturing’ and type ‘Transfer’. In case a positive quantity is transferred (normal completion), an outbound line is created for the ‘from work center’, and an inbound line for the ‘to work center’. These lines are processed directly, with user interaction. Within Warehousing a method of CST is called to determine the total WIP transfer amount associated with these lines. Afterwards, Warehousing is calling another method of CST to handle the financial posting belonging to the WIP transfers. 
When the WIP transfer is handled, the order status becomes active when this was not yet the case.
•	WIP transfers handled by Manufacturing
	The WIP transfer is handled as described as above, but without interaction	 with Warehousing. The financial posting can be made directly.

The financial posting must be done to General Ledger of BaanFinance and to “WIP and Inventory Transactions (PCS/SFC)” (tcfin100). In these postings the WIP transfer cost component (from the production order) is important. The WIP transfer issue posting transfers the costs from the detailed component to the transfer component before shifting the costs of WIP to the next work center.
			Example 3 and 4 of appendix 2 illustrate this WIP transfer concept.

Appendix 1: Costing Parameters
		Costing Parameter Overview

•	Results by Work Center
-	Yes
-	No
•	Posting Method Price Variances
-	On Work Center (only possible when ‘Results by Work Center’ is “Yes”)
-	On Production Order
-	Not Implemented
•	Posting Method Efficiency Variances
-	On Work Center (only possible when ‘Results by Work Center’ is “Yes”) 
-	On Production Order
-	Not Implemented
•	WIP transfer method (only enabled when ‘Results by Work Center’ is “Yes”) 
-	Always
-	Only upon completion
-	Not Implemented
		
		Results by Work Center
By means of this check box, the user can decide whether he or she wants to see the production results by work center or by production order.
		The pictures below explain the concept.
	
Cost structures if the production results are on order level
	
Cost structures if the production results are on work center level
This parameter has influence on a lot of processes and is very important for production order costing.
When calculating the estimated costs and a dependent currency system is used, this parameter determines the currency to be used. In case Results by Work Center are wanted, the local currency of the costing work center for which the costs are calculated is used. Otherwise, the currency of the calculation office will be used. This currency will also be used in case of unlinked materials (when a production order has no operations, and so no work centers, but only materials).
The calculation of the estimated end item unit costs also depends on Results by Work Center. The cost view is important in this case (item based/work center based).

Production results by 
work center 	Work center based costs	Item based costs 	
No	1	2	
Yes	3	4	

The following views are possible.

1.	This view shows the total end item unit cost for each work center by detailed cost components. In this case the only work center available is the calculation office. The amounts are expressed in the currency of the calculation office. 
2.	This view shows the end item unit costs of the calculation office on the aggregated cost components. These cost are stored in the currency of the calculation office. 
3.	This view shows the end item unit costs on detailed cost components for a work center or for the calculation office. For a work center this view contains operations costs and materials costs. Postings for (added) end item surcharges and for unlinked materials are shown on the calculation office. The amounts are stored in the local currency of the work center.
4.	This view shows the end item unit costs for the calculation office on the aggregated cost components. The amounts are expressed in the currency of the calculation office.
The calculation of WIP transfers will never be done when ‘Results by Work Center’ is “No” and the parameter “Transfer WIP Method” will be set to “Not Implemented”. When the results are only shown on the calculation office, there is no need for WIP transfers between different work centers because no costs will be posted to the work centers.
The process that determines WIP also depends on the parameter Results by Work Center. There will be no WIP value on work centers when this parameter reads “No”. In this case there’s only WIP on production order level, so on the calculation office of the production order.
During closing orders the parameter Results by Work Center defines the level on which the price and efficiency variances are calculated. (The posting, however, depends on the posting methods, which will be explained below.) 

		Posting Method Efficiency Variances/Posting Method Price Variances
These parameters indicate the financial company to which the price and efficiency variances are posted in case of FTP valued end items. (In case actual costing is used for the end item, the variances are posted to Warehousing.) The price and efficiency variances are calculated by work center. The user can choose where to post these variances. There are three options (which can be set different for price and efficiency variances): 
		On Production Order (Calculation Office)
Although the WIP is posted to the work center, the price and efficiency variances can be posted to the calculation office. This means that the work centers are responsible for the amount of WIP, but the company is only interested in the price and efficiency results on order level. If the calculation office and work center have different currencies, a conversion must be done. On the moment of posting the exchange rate is used that is valid at that moment. 
When the WIP is not stored on work center level, the variances can only be posted to the calculation office of the production order. In this case the results cannot be calculated by work center, because the actual costs are not posted to work centers but to the calculation office.
		On the work center
		(This option is only available when Results by Work Center is Yes) 
The price and efficiency variances are posted to the work center. The work center is responsible for the amount of WIP and for the price and efficiency variances. This is often done in situations where work centers are financially responsible for the operations. 
		Not applicable 
The price and/or efficiency variances are not calculated separately and are included in the calculation variances. Calculation variances are posted to the calculation office. For financial reporting, information on efficiency variances and/or price variances is lost.
		
			WIP transfer method 
		(This parameter is only enabled when Results by Work Center = “Yes”)
WIP transfer amounts are based on the estimated end item unit costs and calculated at the moment the estimated costs of the production order are frozen.
		The following values are available:
		Always
If the field value is “Always”, WIP transfers are generated during reporting a quantity completed on the operation. The operation needs not to be fully completed yet. The WIP transfer amounts are multiplied with the reported quantity to get the total WIP transfer amount for the financial transaction.
		Only upon completion
		In this case the WIP transfer takes place when the operation is fully completed.
		Not implemented
		This value is not allowed any more when “Results by Work Center” is “Yes”.
WIP transfers will not be done. This option is not advisable, because it will always generate production results because the work in process amount of each work center is not lowered by an outgoing WIP transfer.
The WIP transfer amounts are only calculated in case the WIP parameter reads “Always” or “Only upon completion”.
Appendix 2: Examples

Example 1: Results by Work Center, no WIP transfers
The situation when parameter setting is:
•	Results by Work Center = Yes
•	WIP transfer method = Not Implemented
This situation is not allowed any more!
In this example three work centers are used. The situation after issuing material and posting hours looks like the accounts below (only the to side is shown). The cost component is put in brackets after the amount.
						Work Center 1
Operation Costs	Hfl 10,-        	(opr1a)	   
Operation Costs 	Hfl  20,-          	(opr1b)     	   

						Work Center 2
Operation Costs  	Hfl 25,-         	(opr2a)	   
Operation Costs	Hfl  15,-          	(opr2b)     	   
Issue			Hfl 10,-     	(mat)
	
						Work Center 3
Operation Costs  	Hfl 5,-         	(opr3a)	   
Operation Costs	Hfl  5,-          	(opr3b)     	   

The production order is now ready for completion. The completion posting is done on the calculation office. The from side contains the WIP transfer cost component (which is wrong) and the to side is done on aggregated cost components. 
After completion, receipt in Warehousing can be done. The from side on calculation office will contain the aggregated cost components and matches with the to side of the completion posting (assuming that actual and estimated costs were the same).
The postings on calculation office will look like this:
						Calculation Office
Completion  	Hfl 80,-         	(OPR)	  Completion	Hfl 80,- 	(WIPtr)
Completion	Hfl  10,-          	(MAT)     Completion	Hfl 10,-	(WIPtr)	   
							   Receipt	Hfl 80,-	(OPR)
								                  Receipt	Hfl 10,- (MAT)
The production order can be closed.
During the closing procedure the efficiency, price, and calculation office variances are determined.
The calculation office variances are the remaining production results and will be calculated and posted after price and efficiency variances to clear the WIP. The calculation office variances are calculated by work center and cost component using the formula: Outgoing Costs -/- Incoming Costs -/- Posted Results.
After closing the situation will look like the accounts below.
						Work Center 1
Operation Costs	Hfl 10,-        	(opr1a)	   
Operation Costs 	Hfl  20,-          	(opr1b)     	   
Calc. Off. Var.	Hfl -/-10,-	(opr1a)
Calc. Off. Var	Hfl -/-20,-	(opr1b)

						Work Center 2
Operation Costs  	Hfl 25,-         	(opr2a)	   
Operation Costs	Hfl  15,-          	(opr2b)     	   
Issue			Hfl 10,-     	(mat)
Calc. Off. Var.	Hfl -/-25,-	(opr2a)
Calc. Off. Var	Hfl -/-15,-	(opr2b)
Calc. Off. Var	Hfl -/-10,-	(mat)
	
						Work Center 3
Operation Costs  	Hfl 5,-         	(opr3a)	   
Operation Costs	Hfl  5,-          	(opr3b)     	   
Calc. Off. Var.	Hfl -/-5,-	(opr3a)
Calc. Off. Var	Hfl -/-5,-	(opr3b)

						Calculation Office
Completion  	Hfl 80,-         	(OPR)	  Completion	Hfl 80,- 	(WIPtr)
Completion	Hfl  10,-          	(MAT)     Completion	Hfl 10,-	(WIPtr)	   
							   Receipt	Hfl 80,-	(OPR)
								                  Receipt	Hfl 10,- (MAT)
Calc. Off. Var.	Hfl 90,-	(WIPtr)	   Calc. Off. Var.	Hfl -/-10,-	(opr1a)
							   Calc. Off. Var	Hfl -/-20,-	(opr1b)
						   	   Calc. Off. Var.	Hfl -/-25,-	(opr2a)
							   Calc. Off. Var	Hfl -/-15,-	(opr2b)
							   Calc. Off. Var.	Hfl -/-10,-	(mat)
							   Calc. Off. Var	Hfl -/-5,-	(opr3a)
						   	   Calc. Off. Var.	Hfl -/-5,-	(opr3b)
							   Calc. Off. Var	Hfl  90,-		(WIPtr)

Example 2: No Results by Work Center
The situation when parameter setting is:
•	Results by Work Center = No
•	WIP transfer method is disabled, cannot be used when Results by Work Center = No

All the costs are posted to the calculation office and not to each work center separately.
After posting hours and issuing material, the postings on calculation office look like below.
						Calculation Office
Operation Costs	Hfl 10,-	(opr1a)
Operation Costs	Hfl 20,-	(opr1b)
Operation Costs	Hfl 25,-	(opr2a)
Operation Costs	Hfl 15,-	(opr2b)
Issue			Hfl 10,-	(mat)
Operation Costs	Hfl 5,-		(opr3a)
Operation Costs	Hfl 5,-		(opr3b)
						
The completion posting will be done for each cost component separately. After completion and receiving the end item in the Warehouse the postings will look like this:	   

						Calculation Office
Operation Costs	Hfl 10,-	(opr1a)      Completion	Hfl 10,-	(opr1a)
Operation Costs	Hfl 20,-	(opr1b)	    Completion	Hfl 20,-	(opr1b)
Operation Costs	Hfl 25,-	(opr2a)	    Completion	Hfl 25,-	(opr2a)
Operation Costs	Hfl 15,-	(opr2b)	    Completion	Hfl 15,-	(opr2b)
Issue			Hfl 10,-	(mat)	    Completion	Hfl 10,-	(mat)
Operation Costs	Hfl 5,-		(opr3a)	    Completion	Hfl 5,-	(opr3a)
Operation Costs	Hfl 5,-		(opr3b)	    Completion	Hfl 5,-	(opr3b)
		Completion	Hfl 80,-	(OPR)        Receipt	Hfl 80,-	(OPR)
		Completion	Hfl 10,-	(MAT)	    Receipt	Hfl 10,- (MAT)

In this case no production results exist and no variance posting are done in the order closing procedure.

Example 3: Results by Work Center and WIP transfers
	The situation when parameter setting is:
•	Results by Work Center = Yes
•	WIP Transfer Method = Only Upon Completion or Always (only determines moment of posting, not the way of handling WIP transfers is the same)

In this case, WIP transfers are done from one work center to the next when an operation is (partly) completed. The WIP transfer Issue posting transfers the costs to the WIP transfer component. The WIP transfer Receipt posting transfers the costs of WIP to the next work center. When the first operation is completed, the following postings are done:
						Work Center 1
Operation Costs	Hfl 10,-        	(opr1a)	   WIP tr. Issue	Hfl 10,-        	(opr1a)
Operation Costs 	Hfl  20,-          	(opr1b)     WIP tr. Issue	Hfl 20,-        	(opr1b) 	   
WIP tr. Issue	Hfl 30,-	(WIPtr)	   WIP tr. Receipt	Hfl 30,-		(WIPtr)

						Work Center 2
         	WIP tr. Receipt	Hfl 30,-	(WIPtr)

	This is done for each work center. The total overview after completion is shown below.

						Work Center 1
Operation Costs	Hfl 10,-        	(opr1a)	   WIP tr. Issue	Hfl 10,-        	(opr1a)
Operation Costs 	Hfl  20,-          	(opr1b)     WIP tr. Issue	Hfl 20,-        	(opr1b) 	   
WIP tr. Issue	Hfl 30,-	(WIPtr)	   WIP tr. Receipt	Hfl 30,-		(WIPtr)

						Work Center 2
         	WIP tr. Receipt	Hfl 30,-	(WIPtr)
Operation Costs	Hfl 25,-        	(opr2a)	   WIP tr. Issue	Hfl 25,-        	(opr2a)
Operation Costs 	Hfl  15,-          	(opr2b)     WIP tr. Issue	Hfl 25,-        	(opr3b) 	   
Issue			Hfl 10,-	(mat)	    WIP tr. Issue	Hfl 10,-		(mat)
WIP tr. Issue	Hfl 40,-	(WIPtr)	   WIP tr. Receipt	Hfl 80,-		(WIPtr)

						Work Center 3
         	WIP tr. Receipt	Hfl 80,-	(WIPtr)
Operation Costs	Hfl 5,-        	(opr3a)	   WIP tr. Issue	Hfl 5,-        	(opr3a)
Operation Costs 	Hfl 5,-          	(opr3b)     WIP tr. Issue	Hfl 5,-        	(opr3b) 	   
WIP tr. Issue	Hfl 10,-	(WIPtr)	   WIP tr. Receipt	Hfl 90,-		(WIPtr)

						Calculation Office
Completion  	Hfl 80,-         	(OPR)	  Completion	Hfl 80,- 	(WIPtr)
Completion	Hfl  10,-          	(MAT)     Completion	Hfl 10,-	(WIPtr)	   
WIP tr. Receipt	Hfl 90,-	(WIPtr)	   Receipt	Hfl 80,-	(OPR)
								                  Receipt	Hfl 10,- (MAT)

	Example 4: CST functionality
Data for this example
This example is kept simple and tries to illustrate some base functionality in CST. It does not include all exceptions.
The produced item contains two purchased materials. The BOM looks like this:

					ITEM

			PUR1(2)		PUR2 (1)

Each ITEM needs two pieces of PUR1 and one piece of PUR2. The first component has a cost price of Hfl 10,- and valuation method FTP. The second component has a cost price Hfl 15,- and valuation method MAUC.
The routing of this item consists of three operations, each executed in a different work center.
	10	20	30	
Cycle Time	1 hour	0.5 hour	1 hour	
Labor Costs/Hour	Hfl 50,-	Hfl 10,-	Hfl 25,-	
Machine Costs/Hour		Hfl 100,-		
Material	PUR1		PUR2	
Work Center	Work Center 1	Work Center 2	Work Center3	

The calculated cost price (CPR) s Hfl 165,- 
Material:
	2	Hfl 10,-	=	Hfl 20,-
	1	Hfl 15,-	=	Hfl 15,-
					Hfl 35,-
Operations:
	1	Hfl 50,-	=	Hfl 50,-
	0.5	Hfl 10,-	=	Hfl 5,-
	0.5	Hfl 100,-	=	Hfl 50,-
	1	Hfl 25,-	=	Hfl 25,-		
					Hfl 130,-

					Hfl 165,-

Parameter Settings
For this example it is assumed that results by work center are wanted and WIP transfers are done when an operation is completed. The costs of actual hours are calculated using the estimated (operation) rates.
The estimated costs are frozen ‘At Release’. The costs will be aggregated to the three aggregated cost components. In this example we assume these cost components are MAT, OPR, SUR.
The WIP transfer cost component is WIP.
Backflushing is not used, so material issuing and hours processing must be done manually.
The efficiency and price variances are posted on work center level.

Generation of a production order
A production order is created for ITEM with an order quantity of 5 pieces.
When the production order is created, the estimated material costs and estimated operation costs are calculated. 
In the session “Estimated and Actual Material Costs” the estimated quantity and the estimated cost price per unit of the material is displayed. For this example the results are:

	Estimated Quantity	Estimated Cost Price	Cost Component	
PUR1	10	Hfl 10,-	mat1	
PUR2	5	Hfl 15,-	mat2	

The operation costs are displayed in the session “Estimated and Actual Hours Costs”.

	10	20	30	
Quantity Planned Input	5	5	5	
Quantity Planned Output	5	5	5	
Estimated Hours	5 hours	2.5 hours	5 hours	
Labor Costs (cost component)	Hfl 250,- (opr1)	Hfl 25,-(opr2)	Hfl 125,-(opr4)	
Machine Costs (cost component)		Hfl 250,-(opr3)		

Release of the Production Order
When the production order is released, the estimated costs are frozen (see parameter settings for this example). At that moment the end item unit costs and WIP transfers are calculated.
The end item unit costs are based on the estimated order costs. The session “End Item Unit Costs” shows the cost per unit of end item in work center based view and in item based view.

This is shown in the table below.
	Estimated Quantity	Cost Component	Estimated Unit Costs	
Work Center Based				
Work Center 1	2	mat1	Hfl 20,-	
	1	opr1	Hfl 50,-	
Work Center 2	0.5	opr2	Hfl 5,-	
	0.5	opr3	Hfl 50,-	
Work Center 3	1	mat2	Hfl 15,-	
	1	opr4	Hfl 25,-	
Item Based (Calculation Office)	3	MAT	Hfl 35,-	
	3	OPR	Hfl 130,-	

Together with the end item unit costs, the WIP transfers are calculated. WIP transfers are done between work centers when an operation is (partly) completed. The results are summarized in the table below. The can be displayed using the session “WIP transfers”.

	Cost Component	Est. Transfer Qty.	Transfer Price/ Unit	Total Transfer Price	
Work Center 1  Work Center 2	mat1	5	Hfl 20,-	Hfl 100,-	
	opr1	5	Hfl 50,-	Hfl 250,-	
Work Center 2  Work Center 3	WIP	5	Hfl 70,-	Hfl 350,-	
	opr2	5	Hfl 5,-	Hfl 25,-	
	opr3	5	Hfl 50,-	Hfl 250,-	
Work Center 3  Calculation Office	WIP	5	Hfl 125,-	Hfl 625,-	
	mat2	5	Hfl 15,-	Hfl 75,-	
	opr4	5	Hfl 25,-	Hfl 125,-	

The cost component in the table above can be seen as the from-cost component in the ‘WIP transfer (Issue)’ posting (see example financial transactions).
The estimated transfer quantity is based on the quantity planned output from an operation (and not on the amount of hours or materials needed). In this example the estimated transfer quantity will be 5 on all operations. 

Operation 10
In operation 10, no strange things happen.
First the materials are issued, which results in postings in Finance (GLD) and TC FIN.

	PUR1	
Cost Component		mat 1	
Estimated Quantity	10	
Estimated Cost Price	Hfl 10,-	
Actual Quantity		10	
Actual Cost Price	Hfl 10,-	

So the total actual material costs for operation 10 are 10 * Hfl 10,- =  Hfl 100,-. This is posted in Finance (GLD) and TC FIN.

Besides that, hours are posted on Operation 10. Assume that 4.5 hours were posted.
 
	Operation 10	
Estimated Hours	5 hours	
Estimated Labor Costs	Hfl 250,-	
Actual Hours	4.5	
Actual Labor Costs	Hfl 225,-	

Also these actual costs will be posted to Finance and TC FIN.

After issuing material and posting hours, the operation can be set to completed. At that moment the WIP transfers are done.
The reported quantity complete is 5 pieces. So the WIP transfers will be done for an actual transfer quantity of 5. This means they are done according to the estimates in WIP transfer table above.

Operation 20
For operation 20, exactly 5 hours are posted against estimated rates, so the estimated costs will be equal to the actual costs.
	Operation 20	
Estimated Hours	2.5 hours	
Estimated Labor Costs	Hfl 25,-	
Estimated Machine Costs	Hfl 250,-	
Actual Hours	2.5 hours	
Actual Labor Costs	Hfl 25,-	
Actual Machine Costs	Hfl 250,-	

Something goes wrong in this operation, and only 4 pieces are reported completed, 1 piece is rejected.
This means that WIP transfers are only done for 4 pieces.

	Cost Component	Act. Transfer Qty.	Transfer Price/ Unit	Total Transfer Price	
Work Center 2  Work Center 3	WIP	4	Hfl 70,-	Hfl 280,-	
	opr2	4	Hfl 5,-	Hfl 20,-	
	opr3	4	Hfl 50,-	Hfl 200,-	

Operation 30
On operation 20 only 4 pieces are reported completed, so the input of operation 30 is 4 pieces.
This operation issues the materials. PUR2 uses actual costing (valuation method is MAUC) and the actual cost price of this material is Hfl 20,-. Only 4 pieces are issued.

	PUR2	
Cost Component		mat 1	
Estimated Quantity	5	
Estimated Cost Price	Hfl 15,-	
Actual Quantity		4	
Actual Cost Price	Hfl 20,-	

After material issuing, 4 hours are processed.
	Operation 30	
Estimated Hours	5 hours	
Estimated Labor Costs	Hfl 125,-	
Actual Hours	4	
Actual Labor Costs	Hfl 100,-	

Then 4 pieces are reported completed, so the transfer quantity for WIP transfers is equal to 4.

	Cost Component	Est. Transfer Qty.	Transfer Price/ Unit	Total Transfer Price	
Work Center 3  Calculation Office	WIP	4	Hfl 125,-	Hfl 500,-	
	mat2	4	Hfl 15,-	Hfl 60,-	
	opr4	4	Hfl 50,-	Hfl 200,-	

Completion of the Production Order
Four pieces are reported complete for this production order. This means that the completion posting is based on quantity of 4. The amounts for the completion posting are based on the end item unit costs (although they are technically stored into another entity type). 
So on cost Component MAT a posting is done of 4 * HFL 35,- = Hfl 140,-
On cost component OPR a posting is done of 4 * Hfl 130,- = Hfl 520,- 
The receipt posting from Warehousing is based on the cost price in CPR (see first section of this example), and equal in this case the completion posting. 

Closing the production order

Before calculating the production results, the estimated costs are updated in case this is needed. This will be done by calculating the input for each operation based on the quantity completed using the next formula:

Then the following formulas are used to calculate the production results.
•	Price variance = (estimated price – actual price) x actual quantity
•	Efficiency variance = estimated price x (estimated quantity – actual quantity)
•	Calculation variance = Production results – Price variance – Efficiency variance

This is applied for this example.
	Operation 10	Operation 20	Operation 30	
Quantity Completed	5	4	4	
Correction Factor	5/5 = 1	4/5 = 0.8	4/4 = 0.8	
				
Estimated material quantity	10		5	
Corrected estimated material quantity	10		4	
Estimated material cost price	Hfl 10,-		Hfl 15,-	
Corrected estimated material quantity	10		4	
Actual material quantity	10		4	
Actual cost price	Hfl 10,-		Hfl 20,-	
	Operation 10	Operation 20	Operation 30	
Estimated Hours	5	2.5	5	
Corrected Estimated Hours	5	2	4	
Estimated Labor Costs	Hfl 250,-	Hfl 25,-	Hfl 125,-	
Corrected Estimated Labor Costs	Hfl 250,-	Hfl 20,-	Hfl 100,-	
Estimated Machine Costs		Hfl 250,-		
Corrected Estimated Labor Costs		Hfl 200,-		
Actual Hours	4.5	2.5	4	
Actual Labor Costs	Hfl 225,-	Hfl 25,-	Hfl 100,-	
Actual Machine Costs		Hfl 250,-		

Variances operation 10

First the material PUR1. The estimated quantity and cost price are equal to the actual quantity and cost price, so there is no variance on this.

For the operation there is a difference in quantity. This results in an efficiency variance: 
(5 – 4.5) * Hfl 50,- = Hfl 25,- (which is equal to the difference between the corrected estimated labor costs and the actual labor costs.

Variances on operation 20
The estimates on this operation are corrected because an unplanned reject took place.
This means the efficiency variances are:
(2 – 2.5) * Hfl 10 = -/- Hfl 5
(2 – 2.5) * Hfl 100 = -/- Hfl 50,-

There’s also an efficiency variance on WIP transfers in this case. This is calculated by subtracting the incoming WIP amount from the outgoing WIP amount on the WIP transfer cost component

						Work Center 2
	Actual Costs  	Hfl 25,-     	(opr2)	   WIP out                         	Hfl 20,- (opr2)
Actual Costs	Hfl 250,-	(opr3)	   WIP out		Hfl 200,- (opr3)

Eff. Variance  -/-	Hfl  5,-          	(opr2)     	   
Eff. Variance -/- Hfl 50,-		(opr3)

WIP in           	Hfl   350,-         	 (WIP)	   WIP out		Hfl 280,- (WIP)

Eff. Variance	-/- Hfl 70,-	(WIP)

Variances on operation 30
The estimates on this operation are also corrected. The quantity planned input and quantity completed of this operation are 4.
For the material there is a price variance in this case.
(Hfl 15,- -/- Hfl 20,-) * 4 = Hfl 20,-
There’s no variance on the operation costs.

Calculation office variances
In this example there are no calculation office variances. They can exist for example when order quantity is unequal to economic order quantity or the cost price of the end item has changed. 
The calculation variances contains all production results that are not included in price and efficiency variances.