System Calculation for Average Cost Assembly in WIP Accounting

In the case of average cost assembly that uses WIP accounting, the system will perform the following:

 

1.  During completions, the system will grab an estimate of the assembly cost for costing purposes because there is no direct connection between the component and the assembly.  Thus, we provide the estimate during the completion "receipt" transaction.

2.  During work order close, the system will review all of the component cost and the assembly cost and generate a variance based on the difference.  This difference is generated because of multiple completions and issues that are occurring in the system.

 

3.  If the user wants to update the average cost by applying the variance back into the asset amount, we recommend the usage of the inventory adjustment worksheet.   The reason why we do not provide a direct update on the asset amount is because there might be instances where some quantitities are being shipped between the time of close and completion.  The full variance asset amount may not apply directly to the asset.

 

To illustrate,

 

1.  A work order is entered  for assembly A which requires component B.  The quantity per assembly is 1 for component B.

2.  We record completion of 3 quantities of assembly A with a cost of $5 each for a total of $15.00.   The cost of A is an estimate.  It is the last purchase price ($5).  The reason why we use the estimate is because there is a timing issue where the completion may be inputted into the system before the component issue.

3.  We record an issue of 4 quantities of B at the unit cost of $3 for a total cost of  $12.00.  The component cost is calculated because it is an inventory decrease.

4. Then, 2 quantities of Assembly A is shipped.  

5.  Upon close time(WO Close) , we have a variance of $3 ($15.00-.$12.00). 

 

If the user wants to allocate the variance amount into the asset, they can use the inventory adjustment worksheet.  We do not directly apply it because only a portion of this variance amount can be applied to the asset since portions of it is already shipped.