It is that time of year. You know, time to get the turkey, time to buy gifts, time to put up the decorations, time for baking treats.
But might it also be time to update your standard costs in Visual ERP? You might say: but we are an actual costing database- we don’t use standards. Even though that is true, did you know there are times where Visual will use the standard or estimated costs?
The #1 thing is when a part is adjusted into stock. Visual will use the standard cost, that is unless the user overrides. The practice of overriding the price has its own challenges as sometimes users calculate the cost wrong and mess up the cost layers. If you are using Visual’s physical inventory module, the adjustments into inventory will use the standard cost from part maintenance. The other aspect of the physical count is Visual ERP will use the standard costs on the report to show the potential variances. If your standards are incorrect or even worse zero, you may not be doing recounts on high ticket items.
The 2nd most important question from a financial perspective is “Do your work orders have estimates?” The possible components on:
- your material requirements.
- internal operations. That means a run rate plus a rate for labour and burden.
- external operations for outside services.
Now why would this matter in an actual costing database? If you always receive your work orders in 1 receipt, then it will not have a financial impact. If you partially receive your work orders this is extra important. Visual uses a projected cost to determine how to value the receipt. The calculation is a combination of:
- Estimated costs for the work not yet completed. That means you MUST enter a quantity complete. If not, Visual will take 100% of labour costs + 100% of the actual cost to determine the projected labour and burden cost on the operations. This would overstate the projected cost.
- Estimated costs for materials not yet issued. Here is the kicker, if your standard cost is zero, then the projected cost equals the actual cost. In this case, the material costs would be understated.
- Estimated costs are used for services not yet received.
- Actual costs are used for labour completed.
- Material issued will be a FIFO cost.
- Services received will use the actual cost from the PO.
Sounds pretty complicated. You can check out your system by going to the Manufacturing Window, under Info, Costs. Check the projected cost at the right-hand side of the grid. Or here’s an example of what Visual might do:
In this example, there is a projected cost of 4,658. Visual will use this cost to value the receipt. But what happens over time?
⇒ Costs added to work order.
⇒ Projected cost changes.
⇒ Value of receipt changes.
⇒ If the receipt was sold then cost of sale changes.
If the work order is receipts span multiple months, then this cost can fluctuate until the work order is closed. If your estimates are accurate (i.e. close to your actuals), the amount of the fluctuation is minimized. The good news is when the work order is closed, Visual will revalue all the work order receipts to the actual work order cost.
I have had calls from clients when they had profit numbers they couldn’t explain. After some digging, we determined that the fluctuation was caused be inaccurate estimates. I worked with another client updating their estimates and ensuring they reported quantity completed. We found that costs were over stated 10 – 15% due to this missing information.
The 3rd aspect of keeping accurate standards is providing a benchmark to compare to actual cost. Are you doing better or worse then expected? There are all kinds of reports in Visual that you can use for comparisons. Have a look the Eng./Mfg. menu of Visual ERP. Here a few that can help:
- Work Order Master Cost Report
- Comparative Materials
- Comparative Labour
- Gross Profit Report (click on the Show estimates checkbox)
I like to run the Inventory Valuation report based on estimates and then based on actuals. (Note – Make sure you have run the 1st 2 steps of costing first.) If the values are close, it is an indication that your standards are pretty accurate. But sometimes, you get different answers. During our recent class on Inventory, the students did this test. Some were really close. Others were out 2 or 3 times. It actually helped them find a problem with their estimates. Thank goodness, they discovered it prior to doing an inventory count.
Looking at these reports can help in management decision making. Should you be putting in a price increase? Or, do you have too much scrap and need to focus on the manufacturing process?
So next time one of my clients say, we don’t really need estimates- we use actual, I think I will refer them to this blog. Have I convinced you it is time to update your standards? I hope so. I want you to have as much information as possible to run your business and to have accurate financial information. I have to go. I have cookies to bake.