Cost Accounting

• Review Standard Cost Activity

Report (SCAR)

• Over/Under Absorption of
Manufacturing Variance

• Inventory Capitalization

2010 Finance
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 Cost Accounting

• Everything related to COST starts

with the BUDGET process

Budget >
Standard Cost >
Actual Results

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 Cost Accounting

• Material costs by part are based on

detail in final budget
• Purchase orders are downloaded at the beginning
of budget process
• Plants and Purchasing review current costs and
forward adjustments to Cost Accounting
• Known or anticipated sourcing changes
• Known or anticipated contract changes
• Final file is uploaded into Part Cost Structure as
first step to creating new standard costs

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 Cost Accounting

• After budgets are approved, Cost

Accounting requests labor and burden
rates, along with freight rates.
• Total budgeted direct labor (only straight time
portion, no benefits, shift premiums, etc.) per
budgeted hours
• 713200 in “M” departments
• Other budgeted manufacturing expenses per
budgeted hours
• Historically found in “A / H / L / M / P / Q”
• Excludes depreciation and amortization
(787000/788000/789000)
• Excludes “00000” department

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 Cost Accounting

• Standard Costs generated by applying

budgeted material costs, freight rates,
and labor and burden rates to BOMs
and routings
• Details provide values reflected in Standard Cost
Activity Report (SCAR)
• Inventory is purchased, manufactured, consumed,
scrapped and shipped at standard, or budgeted levels

• If you understand your standards, you

can better explain variances
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 Cost Accounting
SCAR
Account Description Debits Credits

130000 Direct Material – Purchased $ 10,000.00 $ 6,000.00

130045 Direct Material – Finished Goods $11,000.00 $ 9,000.00

510000 COGS Material @ Standard $ 4,900.00

530000 COGS Labor @ Standard $ 800.00

540000 COGS Burden @ Standard $3,300.00

580500 Material Incurred $ 10,000.00

701000 Labor Absorbed @ Standard $ 1,000.00

701400 Burden Absorbed @ Standard $ 4,000.00

Totals: $ 30,000.00 $ 30,000.00

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 Cost Accounting
SCAR – Inventory is Purchased
Account Description Debits Credits

130000 Direct Material – Purchased $ 10,000.00 $ 6,000.00

130045 Direct Material – Finished Goods $11,000.00 $ 9,000.00

510000 COGS Material @ Standard $ 4,900.00

530000 COGS Labor @ Standard $ 800.00

540000 COGS Burden @ Standard $3,300.00

580500 Material Incurred $ 10,000.00

701000 Labor Absorbed @ Standard $ 1,000.00

701400 Burden Absorbed @ Standard $ 4,000.00

Totals: $ 30,000.00 $ 30,000.00

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 Cost Accounting
SCAR – Inventory is Manufactured
Account Description Debits Credits

130000 Direct Material – Purchased $ 10,000.00 $ 6,000.00

130045 Direct Material – Finished Goods $11,000.00 $ 9,000.00

510000 COGS Material @ Standard $ 4,900.00

530000 COGS Labor @ Standard $ 800.00

540000 COGS Burden @ Standard $3,300.00

580500 Material Incurred $ 10,000.00

701000 Labor Absorbed @ Standard $ 1,000.00

701400 Burden Absorbed @ Standard $ 4,000.00

Totals: $ 30,000.00 $ 30,000.00

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 Cost Accounting
SCAR – Inventory is Sold
Account Description Debits Credits

130000 Direct Material – Purchased $ 10,000.00 $ 6,000.00

130045 Direct Material – Finished Goods $11,000.00 $ 9,000.00

510000 COGS Material @ Standard $ 4,900.00

530000 COGS Labor @ Standard $ 800.00

540000 COGS Burden @ Standard $3,300.00

580500 Material Incurred $ 10,000.00

701000 Labor Absorbed @ Standard $ 1,000.00

701400 Burden Absorbed @ Standard $ 4,000.00

Totals: $ 30,000.00 $ 30,000.00

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 Cost Accounting

• Concept of Over/Under
Manufacturing Variance similar to
Purchase Price Variance (PPV)
• PPV represents the difference between actual
and budget (standard) cost of purchased
material.
• Over/Under Manufacturing Variance represents
the difference between actual expense incurred
and the standard expense allowed through the
manufacturing process.

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 Cost Accounting

• In PLEX, we calculate and book PPV

and Over/Under Absorption of
Manufacturing Variance
• There is no impact to bottom line
• Provides “visual” of actual performance
relative to budget
• PPV is calculated in PLEX and booked by Cost
Accounting
• Over/Under is calculated outside of PLEX and
booked by the plants

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 Cost Accounting
Purchased Price Variance – booked by HQ
Account Activity SCAR

• Purchase Material @ Act • Finalize Receipt @ Std.

• Debit Material Incurred • Credit Material Incurred
(580500) (580500)

• Credit A/P (222005) • Debit Inventory (130000)

• Purchase Price Variance

• Debit/Credit Material Incurred (580500)
• Credit/Debit PPV (580000)

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 Cost Accounting
Over/Under Absorbed Manufacturing – booked by Plant

Account Activity SCAR

• Actual Expense • Consume/Absorb Labor

Incurred and Burden @ Std based
• Debit Various on production
Manufacturing • Credit Labor Absorbed
Expense Accounts (701000)
(71xxxx – 8xxxxxx) • Credit Burden Absorbed
(701400)

• Over/Under Absorbed Manufacturing

• Debit/Credit Labor/Burden Over/Under Abs. (590000/591000)
• Credit/Debit Capitalizable Variances (702000)
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 Cost Accounting

• Using template created after PLEX go-

live, plant should capture all
manufacturing expense, exclude
depreciation and amortization, and
segregate direct labor

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 Cost Accounting

• Actual Direct Labor expense (debit)

and Labor Incurred/Absorbed (credit
701000 in SCAR) are added together,
and posted to 590000
• Actual Other Manufacturing expense
(debit) and Burden Incurred/Absorbed
(credit 701400 in SCAR) are added
together, and posted to 591000

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 Cost Accounting

• Over/Under Manufacturing
• Debit/Credit Labor/Burden Over/Under Abs. (590000/591000)
• Credit/Debit Capitalizable Variances (702000)

• Debit entry - UNFAVORABLE (plant

spent more to make inventory than
what the standards allowed)
• Credit entry - FAVORABLE (plant spent
less to make inventory than what
standards allowed)
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 Cost Accounting
Over/Under Calculation

Absorption Actual Expense Over/Under

Account $$$ Account $$$ Account $$$

Labor 701000 ($ 1,000) 713200 $ 1,500 590000 $ 500

Burden 701400 ($ 4,000) All Other $ 3,000 591000 ($ 1,000)

Total
702000 $ 500
Cap.Var.

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 Cost Accounting
Account Activity -
Account Beg. Bal. Debit Credit End. Bal. Net Activity Account Number Department Base Account
711100-IP-A9000 Salaries IP-AIPin 167,230.81 63,172.58 0 230,403.39 63,172.58 711100-IP-A9000 A9000 711100
711100-IP-E6000 Salaries IP-Eng 163,399.02 52,721.34 0 216,120.36 52,721.34 711100-IP-E6000 E6000 711100
711100-IP-F1000 Salaries IP- 61,447.74 20,482.58 0 81,930.32 20,482.58 711100-IP-F1000 F1000 711100
711100-IP-H6000 Salaries IP-HR 40,449.91 11,870.32 0 52,320.23 11,870.32 711100-IP-H6000 H6000 711100
711100-IP-L3000 Salaries IP-PC&L 152,373.78 50,791.26 0 203,165.04 50,791.26 711100-IP-L3000 L3000 711100
711100-IP-M1000 Salaries IP- 84,207.78 28,069.26 0 112,277.04 28,069.26 711100-IP-M1000 M1000 711100
711100-IP-Q5000 Salaries IP- 127,197.54 42,223.77 0 169,421.31 42,223.77 711100-IP-Q5000 Q5000 711100
711100-IP-T4000 Salaries IP-IT 21,000.00 7,000.00 0 28,000.00 7,000.00 711100-IP-T4000 T4000 711100
712200-IP-H6100 Indirect Labor- 44,739.22 33,096.79 3,720.51 74,115.50 29,376.28 712200-IP-H6100 H6100 712200
712200-IP-L3000 Indirect Labor IP- 128,518.57 42,770.55 40,727.12 130,562.00 2,043.43 712200-IP-L3000 L3000 712200
712200-IP-M1000 Indirect Labor- 278,193.21 125,482.92 20,945.24 382,730.89 104,537.68 712200-IP-M1000 M1000 712200
712200-IP-M2105 Indirect Labor- 12,599.34 6,950.63 1,017.24 18,532.73 5,933.39 712200-IP-M2105 M2105 712200
712200-IP-M2108 Indirect Labor- 4,376.40 5,103.80 396 9,084.20 4,707.80 712200-IP-M2108 M2108 712200
712200-IP-Q5000 Indirect Labor IP- 7,563.64 2,969.16 435.84 10,096.96 2,533.32 712200-IP-Q5000 Q5000 712200
713200-IP-L3000 Direct Labor- 13,634.23 9,384.87 1,466.64 21,552.46 7,918.23 713200-IP-L3000 L3000 713200
713200-IP-M2101 Direct Labor IP- 274,259.13 169,733.81 33,658.68 410,334.26 136,075.13 713200-IP-M2101 M2101 713200
713200-IP-M2102 Direct Labor IP- 108,550.07 46,984.04 8,025.73 147,508.38 38,958.31 713200-IP-M2102 M2102 713200
713200-IP-M2103 Direct Labor IP- 40,647.06 17,707.09 3,149.34 55,204.81 14,557.75 713200-IP-M2103 M2103 713200
713200-IP-M2104 Direct Labor IP- 39,122.06 21,084.76 3,750.07 56,456.75 17,334.69 713200-IP-M2104 M2104 713200
713200-IP-M2105 Direct Labor IP- 75,769.25 34,396.28 5,682.45 104,483.08 28,713.83 713200-IP-M2105 M2105 713200
713200-IP-M2108 Direct Labor IP- 362,526.70 183,343.64 28,193.16 517,677.18 155,150.48 713200-IP-M2108 M2108 713200
713210-IP-H6100 Vacation 2,233.00 764 0 2,997.00 764.00 713210-IP-H6100 H6100 713210
713210-IP-L3000 Vacation 7,235.00 2,164.00 0 9,399.00 2,164.00 713210-IP-L3000 L3000 713210
713210-IP-M1000 Vacation 9,179.00 2,927.00 0 12,106.00 2,927.00 713210-IP-M1000 M1000 713210
713210-IP-M2101 Vacation 20,596.00 6,745.00 0 27,341.00 6,745.00 713210-IP-M2101 M2101 713210
713210-IP-M2102 Vacation 7,193.08 2,164.00 0 9,357.08 2,164.00 713210-IP-M2102 M2102 713210
713210-IP-M2103 Vacation 3,198.00 1,018.00 0 4,216.00 1,018.00 713210-IP-M2103 M2103 713210
713210-IP-M2104 Vacation 3,213.00 891 0 4,104.00 891.00 713210-IP-M2104 M2104 713210
713210-IP-M2105 Vacation 5,419.00 1,655.00 0 7,074.00 1,655.00 713210-IP-M2105 M2105 713210
713210-IP-M2108 Vacation 28,564.00 9,418.00 0 37,982.00 9,418.00 713210-IP-M2108 M2108 713210

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 Cost Accounting
Pivot Table -

M2101 5830
Sum of Net Activity M2105 3153.5
Base Account Department Total M2108 2840.61
731000 M1000 1430.15 766000 Total 40343.57
M2102 170.36 784100 A9000 -4824.98
731000 Total 1600.51 H6000 132.73
741000 A9000 148714.67 L3000 13465.69
741000 Total 148714.67 M1000 818.75
742000 A9000 13829.12 M2105 209.37
742000 Total 13829.12 784100 Total 9801.56
743000 A9000 124865.46 787000 A9000 6683.89
743000 Total 124865.46 787000 Total 6683.89 787000 6,683.89
751000 M2101 6159 788000 A9000 19299.74 788000 302,175.88
751000 Total 6159 H6000 613.21 789000 -
751030 A9000 649.4 L3000 8436.94
L3000 3825.29 M1000 19242.19 labor (713200) 398,708.42
M1000 16838.11 M2101 23775.58 burden 1,749,286.54
M2101 5311.18 M2102 18159.62
M2105 52856.92 M2103 25565.74
M2108 14243.36 M2104 29307.84
751030 Total 93724.26 M2105 2945.6
763000 A9000 51.32 M2107 2058.55
H6000 2300.84 M2108 150666.5
L3000 10.59 Q5000 2104.37
M1000 100.68 788000 Total 302175.88
763000 Total 2463.43 791300 M2101 2.2
766000 A9000 3665.84 791300 Total 2.2
H6000 192.86 794010 L3000 -338.4
L3000 472.17 M2108 29064.06
M1000 24188.59 794010 Total 28725.66

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 Cost Accounting

Over/Under Calculation -

(O)/U Absorbed
589000-DM-00000 Freight Incurred @ Standard- -212.41
589000-IP-00000 Freight Incurred @ Standard- -89,526.73 63,867.02 (25,872.12) 592000-IP-00000 25,872.12 702000-IP-00000
701000-DM-00000 Total Production Credits-Door -10.04
701000-IP-00000 Total Production Credits-IP- -341,187.51 398,708.42 57,510.87 590000-IP-00000 (57,510.87) 702000-IP-00000
701400-DM-00000 US Burden Absorption-Door -66.07
701500-IP-00000
701400-IP-00000 Manual Adjustments Absorption
U.S. Burden-Shared -2,249,406.91 1,749,286.54 (500,186.44) 591000-IP-00000 500,186.44 702000-IP-00000
� Shared 0.00
Absorption (2,680,409.67) 2,211,861.98
(468,547.69) (468,547.69) 468,547.69

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 Cost Accounting

• Inventory Capitalization of variances is

the process Inteva uses to
approximate inventory value at actual
cost
• Variances are initially reflected in income
statement (PPV and Over/Under Absorbed) in
current period
• Analysis determines how much of variance is
applicable to inventory purchased or
manufactured but not yet sold
• Move this impact from income statement to
balance sheet
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 Cost Accounting

• Calculation of Inventory Capitalization

• A. Capture rolling three months’ actual costs
• Smooths out wild swings that may occur due to one time
events
• B. Calculate cost of production per day based on
number of working days in the three months
• C. Calculate variance per day
• D. Calculate days of inventory on hand
• E. Apply variance per day to days of inventory to
determine amount to adjust inventory balance

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 Cost Accounting

• A. Capture rolling three months’ actual costs

Description Account $$$

COGS 510000-551000 $ 684,480
PPV / POV 580xxx/592xxx/593xxx ($ 29,760)
Mfg. Var 590000/591000 $ 89,280
Total Actual Costs $ 744,000

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 Cost Accounting

• B. Calculate cost of production per day based

on number of working days in the three
months

Total Actual Costs $ 744,000

Working Days (3 months) 62
Actual Costs per Day $ 12,000

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 Cost Accounting

• C. Calculate variance per day

PPV / POV ($ 29,760)

Manufacturing Variance $ 89,280
Total Variances $ 59,520
Working Days (3 months) 62
Variance per Day $ 960

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 Cost Accounting

• D. Calculate days of inventory on hand

Total Inventory $ 168,000

Actual Costs per Day $ 12,000
Inventory Days 14

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 Cost Accounting

• E. Apply variance per day to days of inventory

to determine amount to adjust inventory
balance

Variance per Day $ 960

Inventory Days 14
Capitalized Inventory $ 13,440

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 Cost Accounting

• Inventory Capitalization Entry –

• Total Variance is UNFAVORABLE (debit),

standards are lower than actual costs
• Increase value of inventory on balance sheet to reflect
actual cost to manufacture the part
• Decrease expense

• Total Variance is FAVORABLE (credit), standards

are higher than actual costs
• Decrease value of inventory on balance sheet to reflect
actual cost to manufacture the part
• Increase expense

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 Cost Accounting

• Total Variance is UNFAVORABLE

(debit), standards are lower than actual
costs
• Increase value of inventory on balance sheet to
reflect actual cost to manufacture the part

• Debit Inventory (130030)

$ 13,440

• Decrease expense

• Credit Capitalized Variance (572000/595000) ($ 13,440)

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 Cost Accounting
• Simple Income Statement

Sales $ 800,000

Standards COGS $ 684,480

PPV / POV ($ 29,760)
Manufacturing Variance $ 89,280
Total Actual Costs $ 744,000

Net Income - $ $ 56,000

Net Income - % 7.0%

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 Cost Accounting
• Simple Income Statement AFTER
Capitalization is posted
Sales $ 800,000

Standards COGS $ 684,480

PPV / POV ($ 29,760)
Manufacturing Variance $ 89,280
Capitalized Variance ($13,440)
Total Actual Costs $ 730,560

Net Income - $ $ 69,440

Net Income - % 8.7%
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 Cost Accounting

• Variance Capitalization entry is a

reversing entry
• Impact on a monthly basis should be minimal

• Volumes, balance of fixed vs. variable

costs, retro adjustments are just a few
examples of items that can impact
capitalization
• Reinforces importance of accruing for all known
items not reflected in financial results

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