<?xml version="1.0" encoding="utf-8"?>
<ManualTopic ID="/baanerp/ti/onlinemanual/000340" xml:lang="en">
   <Header>
      <Title>Correction for setup costs</Title>
      <Keyword type="header" order="d1e2096816">
         <Level1>Actual costing</Level1>
         <Level2>correction for setup costs</Level2>
      </Keyword>
      <Keyword type="header" order="d1e2096821">
         <Level1>Setup costs</Level1>
         <Level2>correction for setup costs in actual costing</Level2>
      </Keyword>
   </Header>
   <GeneralSection>
      <Paragraph>If you apply actual
		costing, you must deal with the setup costs for a production order. In case of
		partial completion of the production order, the setup costs must be spread over
		all quantities that are completed. If you book all setup costs for the first
		completed quantity, this quantity will be more expensive than the following
		deliveries, and inventory valuation will not be correct.</Paragraph>
      <Paragraph>To correct for the setup
		costs, a formula is used that assumes that setup hours are always posted at the
		start of an operation. So, the hours must be corrected in such a way that setup
		related costs are spread evenly over the end items.</Paragraph>
      <Paragraph>The algorithm that is
		used as setup costs correction factor is based on the ratio of the following
		hours:</Paragraph>
      <Formula space-and-orientation="indented-estimated">
         <Paragraph> A = Production hours * %complete * (1 + Average setup ratio).

 Average setup ratio = Planned setup time / Planned production hours </Paragraph>
      </Formula>
      <Paragraph>In words: Hours that are
		required to report a production order as completed in case the setup time is
		spread over all time units.</Paragraph>
      <Formula space-and-orientation="indented-estimated">
         <Paragraph>B = (Production hours * %complete + Setup time).</Paragraph>
      </Formula>
      <Paragraph>In words: Hours that are expected to report a production order
		as completed if the setup time is consumed first.</Paragraph>
      <Formula space-and-orientation="indented-estimated">
         <Paragraph>Correction factor = A/B
= Production hours * %complete * (1 + Average setup ratio) /
(Production hours * %complete + Setup time)</Paragraph>
      </Formula>
      <ExampleSection>
         <SectionTitle>Example</SectionTitle>
         <Paragraph>For operation 10 the
		  following is applicable:</Paragraph>
         <List>
            <ListItem>Setup time = 1 hour</ListItem>
            <ListItem>Production time = 20 hours</ListItem>
            <ListItem>Completion = 25%</ListItem>
         </List>
         <Paragraph>Average setup ratio:</Paragraph>
         <Formula space-and-orientation="indented-estimated">
            <Paragraph>1/20 = 0.05</Paragraph>
         </Formula>
         <Paragraph>Setup correction
		  factor:</Paragraph>
         <Formula space-and-orientation="indented-estimated">
            <Paragraph>20 * 0.25 * (1 + 0.05) / (20 * 0.25 + 1) = 5.25 / 6.00 = 0.875</Paragraph>
         </Formula>
         <Paragraph>The setup correction
		  factor is applied to all operation cost of the specified operation, including
		  machine hours.</Paragraph>
      </ExampleSection>
   </GeneralSection>
</ManualTopic>