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Costing Production Orders Linked to Sales Orders

  • 17 February 2024
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My client produces items for customers that are always custom made with sales order lines linked to production. They use FIFO as their costing method. In order to ensure that sales are properly matched to cost of sales, what is the best way to set up the manufactured items? Should finished goods be lot tracked using specific costing method?

If this is correct, how should the lot class be setup? I think the assignment method should be when received, using an auto generated number. What would the assignment method be to ensure that the costs are following the correct sales order and not require the shipping department to select the lot number? Will the lot number from production be automatically assigned to the issue transaction on the sales order?

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Best answer by lbarker 19 February 2024, 15:08

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You will definitely need to setup the stock items with specific costing, not FIFO so that the correct received cost items purchased are allocated to the sales order.  Specific has to have serial numbering / lot numbering.  Use serial numbers if its in single units, but lot numbers if they have more than one unit.

The components need to be set to specific costing if for instance they can buy them at variable prices each time. 

This then means when you buy them and issue to the production order, it is going at the correct cost price for that specific production order.  They can use the production order number as its serial number / lot number.  If this is not a variable, then FIFO will do.  If they simply use non stock items for buying costs,  this was problematic in regard to production orders, so always use stock items for any cost to a production order as this error is not resolved as far as I am aware.

Your manufactured finished good item will  be serial tracked - specific costing. 

Here you can make the lot class be generated by using say Month/day/year and then an auto increment, or a user enterable if they want to manually specify the serial number like the sales order number. (When Received is the assignment method).  This serial / lot number is assigned to the sales order item being shipped, so that the WIP cost of that production is correct on that sales order invoice. 

If the sales order is linked to the production order, the serial number should be auto allocated if I recall correctly.    

 

Lastly another method is to not use manufacturing at all, and use Projects.  Just depends if they need the auto purchasing ability of components or not.

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@lbarker Thanks. This is what I thought. I confirmed the solution works. I kept components used in production at FIFO and changed the manufactured finished good items to Specific with Lot Tracking. My client manufactures home furnishings which can be 1 or many of the same item.

@lbarker Thanks. This is what I thought. I confirmed the solution works. I kept components used in production at FIFO and changed the manufactured finished good items to Specific with Lot Tracking. My client manufactures home furnishings which can be 1 or many of the same item.

You may also note one “cost measurement” pitfall with using this method.  When we use specific costing, the sales order is generated, then a linked production work order is generated.  We have observed that the sales line unit cost (in 2023/R2 currently, but historically never correct) is set to the prior cost of the item produced under the same inventory ID.  This harms the sales level predicted profitability analysis provided at the sales order screen (in 2023/R2).

Upon completion of the work order, the total cost of the work order defines the value of the specifically costed item upon receipt into inventory, and does not push back to the sales line unit cost.  The sales order has no way to resolve the updated cost of goods (unit cost), and keeps using the prior cost, not the now current unit cost.  The new cost gets stored and reported on the sales order under the average cost (not the unit cost).  That value will be the unit cost the next time the sales order > production order process is run, ad infinitum, always 1 event out of phase for unit cost.

For profit analysis, this creates an issue for some users without access to other tools, or those who read the sales order cost of goods vs sell price for margin at the line level, or cases where data is being harvested and using the sales order’s unit cost.

Fortunately, the Sales Profitability Analysis screen and GLs are correct to the specific cost (once the unit leaves inventory with a shipment), but not all users know about these, or are permissioned for access. 

It’s almost like the cost indexing is off by 1 and this is unhandled and unsolvable.

Specific costing is great with some types of serialized items, but has this flaw.

 

PS - If anyone knows a way around this problem, we’d be eager to know what to do.


Cheers - Sean

 

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