Periodic Cost Processing Logic Examples TW

May 2004

Contents

1. INTRODUCTION ..................................................................................................................... 2 2. Transaction Types in PAC logic: .............................................................................................. 3 3. PERIODIC COST PROCESSING LOGIC................................................................................ 4 a) Compute Acquisition Cost................................................................................................. 4 b) Current Period Beginning Balance:................................................................................... 4 c) Low Level Computation .................................................................................................... 4 d) WIP Job Information: ........................................................................................................4 e) Cost Processing for Group 1 and 2................................................................................... 4 4. Periodic Cost Processing Logic Scenarios............................................................................... 6 4.1 Pre-Requisite .................................................................................................................. 6 4.2 Business Scenarios ........................................................................................................ 8 4.2.1 Scenario1: Standard Job....................................................................................... 8 4.2.2 Scenario2: Non-Standard Job............................................................................. 10 4.2.3 Scenario 3: finished good with complex transaction ........................................... 13

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1. INTRODUCTION
Periodic Costing is an option that enables customers to value inventory on a periodic basis. As an option to the mandatory perpetual costing system, which uses either the standard or average or FIFO or LIFO costing methods, Oracle Cost Management provides support for two methods of Periodic Costing: - Periodic Average Costing (PAC) - Periodic Incremental LIFO (Last In First Out) This paper describes in detail of the PAC cost processing logic for transactions in following scenarios: 1. Standard Job completion and Job partial completion with issue more materials and resources. 2. Standard job and non-standard jobs. 3. A finished good with complex transaction including purchasing, return to vendor, sales order shipping and RMA. The transactions have cross period.

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2. Transaction Types in PAC logic:

Basically we categorize material transactions under following categories based on Transaction types: 2.1 Cost Owned Transactions: The Cost Owned transactions carry its own transaction values and can be sub-divided into two sub-groups. a): These transactions will be processed first to calculate the period weighted average item costs (PWAC). It includes PO Receipt, Return To Vendor, PO Distribution Adjustment, MISC transactions with a value, and Inter-Organization Transfer. Referred in this paper as Group 1 transactions. b): WIP Scrap, Assembly Return, and WIP Completion. It is Cost Owned transactions, however, it requires to process previous level transactions first. Referred in this paper as Group 1' transactions. 2.2 Cost Derived Transactions Cost Derived transactions use system calculated PWAC which is based on Cost Owned transactions. Referred in this paper as Group 2 transactions. Group 2: Material Inventory Transactions to use above Period Average Costs. It includes Account Issues, WIP issues, Return from WIP, Material Issue, Cycle Count Adjustment, Physical Adjustment, Sub-Inventory Transfer, Sales Order Issues, and MISC transactions w/o a user entered value.

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3. PERIODIC COST PROCESSING LOGIC

Periodic Costing allows you to cost items from one or more inventory organizations on a periodic basis. This cost is based on invoice price if the invoice is available; otherwise, the purchase price is used for purchased items. For manufactured items, Periodic Costing is the sum of the actual cost of resources and materials consumed. Weighted average actual cost of a manufactured item is a rollup of average actual resource cost, average actual outside processing cost, average actual material cost and average standard overhead cost incurred up to a specified period for completing one unit assembly of that item. In Periodic costing WIP Module processes WIP related transactions, charges Materials to jobs and relieves costs from the jobs for completion, return or scrap. Logically periodic cost processing can be categorized under following phases:

a) Compute Acquisition Cost

This cost is calculated cost for all purchased items in the period based on receipt-invoice matching. If the invoice price is not available, it uses PO price for acquisition cost.

b) Current Period Beginning Balance:

In general, the last period ending balance is the current period beginning balance. This is used in computing the current cost of the item in the current period.

c) Low Level Computation

In this phase cost processor fetches items having WIP assembly completion, scrap or returns transactions and calculate the low level code. The periodic cost manager processes transactions these transactions and other cost derived transactions for these items based on low level codes starting from the lowest level.

d) WIP Job Information:

The WIP cost processor builds resource and overhead information for all relevant jobs. WIP Resource-Overhead cost is calculated based on move transactions quantity completed past each operation for a given job for the period and Resource/OSP charges based on periodic rates. For outside processing, the acquisition cost is taken. For each resource/OSP transaction, resource/OSP based overheads are applied to the WIP operation based on periodic Rates for the resources charged. The move-based overheads are charges based on periodic Rates set up in the periodic cost type for the inventory organization. WIP cost processor computes the net material quantity issued for this period (This information is build while processing the component material transaction or backflush transactions). Adds the charges incurred in this period to the beginning balance for the period (obtained from the prior period run). This is used to get the elemental job value of each discrete job. If a job close transaction lies in the period it flushes out values for discrete jobs. It also flushes out the value from all jobs (non standard) that do not have an assembly reference.

e) Cost Processing for Group 1 and 2

The periodic cost manager initially calculates periodic weighted average cost for all the items
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having un-costed material transactions, carrying their own acquisition cost (Group 1). While processing cost carrying transactions, they are ordered by transaction types, date and time. When the manager completes cost carrying transactions, it processes all un-costed cost derived transaction for items having no completion transactions in the period i.e.. those transactions, which do not require to process previous level transactions first, using the PWAC calculated above. Then periodic cost manager processes transactions for items having WIP assembly Completion, Assembly Scrap, and Return transactions, since previous level transactions are already processed for these items. Periodic cost manager fetches remaining cost derived transactions based on low level codes starting from the lowest level.

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4. Periodic Cost Processing Logic Scenarios

4.1 Pre-Requisite
Item Setup Table 1:Item Cost / Storage Details Items PUR01 PUR02 FG01 Item Type Unit Cost Subinventory Qty Stock Stock FGI 1000 1000 0 Purchased Item 20 Purchased Item 10 Finished Good

Routing Structure Figure 1:Routing Structure for Item FG01 OP10

RSC01

Table 2:Routing Details - Operations OP Seq 10 Op Code ASSY Department Count Point ASY1 Yes Backflush Autocharge Yes Yes

Table 3:Routing Details - Resources Rsc Seq 10 Resources Usage RSC01 1

Resource / Overhead Setup Table 4:Resource Rate Details Resources RSC01 Resources OVH01 Basic Item Basic Resource Rate 10 / Item Resource RSC01 Rate 1 / Resource Unit

Table 5:Overhead Rate Details

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BOM Structure Figure 2:Assembly Structure for Item FG01 FG01

PUR01 Table 6:BOM Details Item Seq Op Seq 10 20 10 10 Items PUR01 PUR02

PUR02

Qty 1 1

WIP Supply Type Operation Pull Operation Pull

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4.2 Business Scenarios 4.2.1 Scenario1: Standard Job

Step a) Create Standard Discrete Job #JOB-A01 for Item FG01 for Qty 100. Step b) Go to Move Transaction form. Move 100 units from OP10 Queue to OP10 To-Move for Job #JOB-A01. Step c) Complete 100 units for Job #JOB-A01. Step d) Create Standard Discrete Job #JOB-A02 for Item FG01 for Qty 100. Step e) Go to Move Transaction form. Move 100 units from OP10 Queue to OP10 To-Move for Job #JOB-A02. Step f) Go to Material Transaction form. Issue Material 10 units for Item PUR01 for Job #JOB-A02. Step g) Go to Resource Transaction form. Charge Resource 10 Usage for Resource RSC01 for Job #JOB-A02. Step h) Complete 30 units for Job #JOB-A02. Step i) Go to Move Transaction form. Scrap 10 units with Scrap Account at OP10 for Job #JOB-A02. Step j) Go to Move Transaction form. Scrap 10 units without Scrap Account at OP10 for Job #JOB-A02. Step m) Closed Period Step n) Complete 50 units for Job # JOB-A02 Process material transactions of items that have no WIP completions e.g. PUR01 and PUR02 first: 100 PUR01 issued to A01 in step b o A01 PL Material = 0+100x$20 = $2000 100 PUR02 issued to A01 in step b o A01 PL Material = $2000+100x$10 = $3000 100 PUR01 issued to A02 in step e o A02 PL Material = 0+100x$20 = $2000 100 PUR02 issued to A02 in step e o A02 PL Material = $2000+100x$10 = $3000 10 PUR01 issued to A02 in step f o A02 PL Material = $3000+10x$20 = $3200

Process resource transactions: 100 RSC01 charged to A01 in step b o A01 TL Resource = 0+100x$10 = $1000 100 OVH01 charged to A01 in step b o A01 TL Overhead = 0+100x$1 = $100
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100 RSC01 charged to A02 in step e o A02 TL Resource = 0+100x$10 = $1000 100 OVH01 charged to A02 in step e o A02 TL Overhead = 0+100x$1 = $100 10 RSC01 charged to A02 in step g o A02 TL Resource = $1000+10x$10 = $1100 10 OVH01 charged to A02 in step g o A02 TL Overhead = $100+10x$1 = $110

Process scrap transactions of items that have WIP completions e.g. FG01 next 10 FG01 scrapped with scrap account from A02 in step i. o A02 PL Material = $3200-10x($3200/100) = $2880 o A02 TL Resource = $1100-10x($1100/100) = $990 o A02 TL Overhead = $110-10x($110/100) = $99

Process completion transactions of items that have WIP completions, e.g. FG01 100 FG01 completed in step c o A01 PL Material = $3000-100x($3000/100) = $0 o A01 TL Resource = $1000-100x($1000/100) = $0 o A01 TL Overhead = $100-100x($100/100) = $0 o INV PL Material = 0+100x($3000/100) = $3000 o INV TL Resource = 0+100x($1000/100) = $1000 o INV TL Overhead = 0+100x($1000/100) = $100 o The completion cost is the total relieved value over the relieved quantity = ($3000+$1000+$100)/100 = $41 o The periodic cost at this point is the periodic value over the periodic quantity = ($3000+$1000+$100)/100 = $41 30 FG01 completed in step h o A02 PL Material = $2880-30x($2880/90) = $1920 o A02 TL Resource = $990-30x($990/90) = $660 o A02 TL Overhead = $99-30x($99/90) = $66 o INV PL Material = $3000+30x($2880/90) = $3960 o INV TL Resource = $1000+30x($990/90) = $1330 o INV TL Overhead = $100+30x($99/90) = $133 o The completion cost is the total relieved value over the relieved quantity = ($960+$330+$33)/30 = $44.1 o The periodic cost at this point is the periodic value over the periodic
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quantity = ($3960+$1330+$133)/(100+30) ~ $41.7153846154 Step k) Close Period Step l) Go to Miscellaneous Transaction form. Issue 10 units for Item FG01. Issue cost derived transaction at periodic cost: 10 FG01 issued in step l: o INV PL Material = $3960-10x($3960/130) ~ $3655.38462 o INV TL Resource = $1330-10x($1330/130) ~ $1227.69231 o INV TL Overhead = $133-10x($133/130) ~ $122.76923 Step m) Close Period. Step n) Complete 50 units for Job #JOB-A02. Process completion transactions of items that have WIP completions, e.g. FG01 100 FG01 completed in step n o A02 PL Material = $1920-50x($1920/60) = $320 o A02 TL Resource = $660-50x($1920/60) = $110 o A02 TL Overhead = $66-50x($1920/60) = $11 o INV PL Material = $3655.38462+50x($1920/60) = $5255.38462 o INV TL Resource = $1227.69231+50x($1920/60) = $1777.69231 o INV TL Overhead = $122.76923+50x($1920/60) = $177.76923 o The completion cost is the total relieved value over the relieved quantity = ($1600+$550+$55)/50 = $44.1 o The periodic cost at this point is the periodic value over the periodic quantity = ($5255.38462+$1777.69231+$177.76923)/(120+50) ~ $42.41674

When job A02 is closed, it will have a variance of $320+$110+$11 = $441 left in the job due to the scrap without account performed in step j.

4.2.2 Scenario2: Non-Standard Job

Step a) Create Standard Discrete Job #JOB-B01 for Item FG01 for Qty 100. Step b) Go to Move Transaction form. Move 100 units from OP10 Queue to OP10 To-Move for Job #JOB-B01. Step c) Complete 100 units for Job #JOB-B01. Step d) Create Non-Standard Asset Discrete Job #JOB-B02 for Item FG01 for
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Qty 100. Step e) Go to Move Transaction form. Move 100 units from OP10 Queue to OP10 To-Move for Job #JOB-B02. Step f) Complete 100 units for Job #JOB-B02. Step g) Create Non-Standard Expense Discrete Job #JOB-B03 for Item FG01 for Qty 100. Step h) Go to Move Transaction form. Move 100 units from OP10 Queue to OP10 To-Move for Job #JOB-B03. Step i) Complete 100 units for Job #JOB-B03. Process material transactions of items that have no WIP completions e.g. PUR01 and PUR02 first: 100 PUR01 issued to B01 in step b o B01 PL Material = 0+100x$20 = $2000 100 PUR02 issued to B01 in step b o B01 PL Material = $2000+100x$10 = $3000 100 PUR01 issued to B02 in step e o B02 PL Material = 0+100x$20 = $2000 100 PUR02 issued to B02 in step e o B02 PL Material = $2000+100x$10 = $3000 100 PUR01 issued to B03 in step h o B03 PL Material = 0+100x$20 = $2000 100 PUR02 issued to B03 in step h o B03 PL Material = $2000+100x$10 = $3000

Process resource transactions: 100 RSC01 charged to B01 in step b o B01 TL Resource = 0+100x$10 = $1000 100 OVH01 charged to B01 in step b o B01 TL Overhead = 0+100x$1 = $100 100 RSC01 charged to B02 in step e o B02 TL Resource = 0+100x$10 = $1000 100 OVH01 charged to B02 in step e o B02 TL Overhead = 0+100x$1 = $100 100 RSC01 charged to B03 in step h o B03 TL Resource = 0+100x$10 = $1000 100 OVH01 charged to B03 in step h o B03 TL Overhead = 0+100x$1 = $100

Process completion transactions of items that have WIP completions, e.g.

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FG01 100 FG01 completed in step c o B01 PL Material = $3000-100x($3000/100) = $0 o B01 TL Resource = $1000-100x($1000/100) = $0 o B01 TL Overhead = $100-100x($100/100) = $0 o INV PL Material = 0+100x($3000/100) = $3000 o INV TL Resource = 0+100x($1000/100) = $1000 o INV TL Overhead = 0+100x($1000/100) = $100 o The completion cost is the total relieved value over the relieved quantity = ($3000+$1000+$100)/100 = $41 o The periodic cost at this point is the periodic value over the periodic quantity = ($3000+$1000+$100)/100 = $41 100 FG01 completed in step f o B02 PL Material = $3000-100x($3000/100) = $0 o B02 TL Resource = $1000-100x($1000/100) = $0 o B02 TL Overhead = $100-100x($100/100) = $0 o INV PL Material = $3000+100x($3000/100) = $6000 o INV TL Resource = $1000+100x($1000/100) = $2000 o INV TL Overhead = $100+100x($1000/100) = $200 o The completion cost is the total relieved value over the relieved quantity = ($3000+$1000+$100)/100 = $41 o The periodic cost at this point is the periodic value over the periodic quantity = ($6000+$2000+$200)/200 = $41 100 FG01 completed in step i o B03 PL Material = $3000-100x($3000/100) = $0 o B03 TL Resource = $1000-100x($1000/100) = $0 o B03 TL Overhead = $100-100x($100/100) = $0 o INV PL Material = $6000+100x($3000/100) = $9000 o INV TL Resource = $2000+100x($1000/100) = $3000 o INV TL Overhead = $200+100x($1000/100) = $300 o The completion cost is the total relieved value over the relieved quantity = ($3000+$1000+$100)/100 = $41 o The periodic cost at this point is the periodic value over the periodic quantity = ($9000+$3000+$300)/300 = $41

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4.2.3 Scenario 3: finished good with complex transaction

Step a) Create Standard Discrete Job #JOB-C01 for Item FG01 for Qty 100. Step b) Go to Move Transaction form. Move 100 units from OP10 Queue to OP10 To-Move for Job #JOB-B01. Step c) Complete 100 units for Job #JOB-C01. Step d) Create PO #PO-C01 for Item FG01 for Qty 100 @60. Receive the PO. Step e) Create Invoice for Item FG01 for Qty 50 @70. Match the Invoice. Step f) Go to Return to Vendor form. Return 50 units to Vendor for Item FG01. Step g) Create Debit Memo. Step h) Go to Miscellaneous Transaction form. Issue 10 units for Item FG01. Step i) Go to Subinventory Transfer form. Transfer 10 units for Item FG01 to Expense Subinventory. Step j) Go to Inter-Org Transfer form. Transfer 10 units for Item FG01 to another Organization. Step k) Go to Physical Count Adjustment from. Gain 50 units for Item01. Step l) Loss 30 units for Item 01. Step m) Create Sales Order #SO-C01 for Item FG01 for Qty 100. Step n) Ship 100 units for Sales Order #SO-C01. Process cost carrying transactions before cost derived transactions. Process Non-WIP related transactions are processed first: o PO Receipt (step d) and Return to Vendor (step f) transactions are performed at the Acquisition Cost (Weighted Average between Invoiced Quantity times Invoiced Price and Uninvoiced Quantity and PO Price) = (50x$70+(100-50)x$60)/100=$65 o INV TL Material = 0+(100-50)x$65 = $3250 o The periodic cost at this point is the periodic value over the periodic quantity = $3250/50 = $65

WIP related transactions are processed next: o WIP Completion (step c) are performed at the Completion Cost (similar to scenario 1 and 2) at $41 o INV TL Material = $3250 o INV PL Material = 0+100x($3000/100) = $3000 o INV TL Resource = 0+100x($1000/100) = $1000 o INV TL Overhead = 0+100x($1000/100) = $100 o The periodic cost at this point is the periodic value over the periodic quantity =($3250+$3000+$1000+$100) / 150 = $49 Process cost derived transactions next: Miscellaneous Issue without user specified cost (step h), Subinventory
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Transfer (step i), Interorg Transfer* (step j), Physical Count (step k and l) and Sales Order Issue (step n) are all processed at the current cost o INV TL Material = $3250+(-10-10-10+50-30-100)x($3250/150) ~ $866.66667 o INV PL Material = $3000+(-10-10-10+50-30-100)x($3000/150) = $800 o INV TL Resource = $1000+(-10-10-10+50-30-100)x($1000/150) ~ $266.66667 o INV TL Overhead = $100+(-10-10-10+50-30-100)x($100/150) = $26.66667 o The periodic cost at this point is the periodic value over the periodic quantity = ($866.66667+$800+$266.66667+$26.66667)/40 ~ $49 Step o) Close Period. Step p) Create RMA Sales Order #SO-C02 for Item FG01 for Qty 100. Step q) Receipt 100 units for RMA Sales Order #SO-C02. Step r) Go to Move Transaction form. Return 100 units for Job #JOB-C01. Step s) Go to Material Transaction form. Issue Material 10 units for Item PUR01 for Job #JOB-C01. Step t) Go to Resource Transaction form. Charge Resource 10 Usage for Resource RSC01 for Job #JOB-C01. Step u) Complete 100 units for Job #JOB-C01. Step v) Update Item Cost @80 for Item FG01. Cost Update with new Periodic Cost is processed first: Assuming no details are entered, the cost is prorated across the existing costs (: o TL Material = ($866.66667/(40x$49))x(40x$80) ~ $1414.96599 o PL Material = ($800/(40x$49))x(40x$80) ~ $1306.12245 o TL Resource = ($266.66667/(40x$49))x(40x$80) ~ $435.37416 o TL Overhead = ($26.66667/(40x$49))x(40x$80) ~ $43.53742 o The periodic cost at this point is the periodic value over the periodic quantity = ($1414.96599+$1306.12245+$435.37416+$43.53742)/40 ~ $80

Process material transactions of items that have no WIP completions e.g. PUR01 next: 10 PUR01 issued to C01 in step s o C01 PL Material = 0+10x$20 = $200

Process resource transactions:

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10 RSC01 charged to C01 in step t o C01 TL Resource = 0+10x$10 = $100 o C01 TL Overhead = 0+10x$1 = $10

Process completion transactions of items that have WIP completions, e.g. FG01 100 FGI are returned (step r) and completed (step u) from C01. These two transactions are processed at the same cost (prior period completion cost of $41) and has no net effect on WIP and INV valuations.

Process other cost derived transactions: 100 FGI are received via RMA (step q) at current periodic cost o TL Material = $1414.96599+(100x$1414.96599/40) ~ $4952.38097 o PL Material = $1306.12245+(100x$1306.12245/40) ~ $4571.42858 o TL Resource = $435.37416+(100x$435.37416/40) ~ $1523.80956 o TL Overhead = $43.53742+(100x$43.53742/40) = 152.38097 o The periodic cost at this point is the periodic value over the periodic quantity = ($4952.38907+$4571.42858+1523.80956+152.38097)/140 ~ $80

If job C01 is closed without further completions, it will have a variance of $200+$100+$10 = $310 left in the job due to the extra charges in steps s and t. *Note that if step j was an intransit shipment across Periodic Cost Group with FOB shipment, the transaction would have been a cost carrying transactions (instead of a cost derived transactions) in other words, instead of being processed at the periodic cost, it will be processed at the perpetual transaction cost.

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The results for Scenario 3 above can also be viewed in the following format: Period 1 Transaction Transaction Date(ASC) Type Step c WIP Assembly completion PO Receipt 100 Step f Return to Vendor Miscellaneous issue Subinventory Transfer Inter-Org Transfer Physical Count Adjustment Physical Count Adjustment Sales Order Issue Qty Transaction Processing Group 100 WIP Cost Carrying Transactions Non-WIP Cost Carrying Transactions Non-WIP Cost Carrying Transactions Cost Derived Transactions Cost Derived Transactions Cost Derived Transactions Cost Derived Transactions Cost Derived Transactions Cost Derived Transactions Transaction TL Processing Mat Order PL Mat TL TL Res Ovh

3 21.67 20.00 6.67 0.67

Step d

1 65.00 0.00 0.00 0.00

-50

2 65.00 0.00 0.00 0.00

Step h Step i Step j Step k

-10 -10 -10

4 21.67 20.00 6.67 0.67 5 21.67 20.00 6.67 0.67 6 21.67 20.00 6.67 0.67

50

7 21.67 20.00 6.67 0.67

Step l

30

8 21.67 20.00 6.67 0.67

Step n

-100

9 21.67 20.00 6.67 0.67

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Period 2 Transaction Transaction Qty Date(ASC) Type Step q RMA return Transaction Transaction TL Mat PL Processing Processing Mat Group Order TL Res TL Ovh

Cost 100 Derived Transactions WIP Cost -100 Carrying Transactions WIP Cost 100 Carrying Transactions Periodic Cost Update with a New Cost / Percentage Change

4 35.37 32.65 10.88 1.09

Step r

Assembly Return Assembly Completion Periodic Cost Update

3 21.67 20.00

6.67 0.67

Step u

2 21.67 20.00

6.67 0.67

Step v

1 35.37 32.65 10.88 1.09

As one can see, the transaction date does not always correspond to the transaction processing order. The reason is because in PAC, the order in which a transaction occurs within the period should not have an impact on the resulting item cost. As mentioned in section 3 PERIODIC COST PROCESSING LOGIC, all cost carrying transactions are processed before the processing of cost owned transactions. This is done to calculate the periodic cost, which is then use to process the cost owned transactions. They are processed based on their types in the following order: - Periodic Cost Updates with a New Cost / Percentage Change - Non-WIP Cost Carrying Transactions (See section 2.1 a) - WIP Component Issue to Rework Jobs (Issuing a component which is the same as the assembly item of the job the issue is done at the currently calculated periodic cost e.g. taking into account the Periodic Cost Updates with a New Cost / Percentage Change and Non-WIP Cost Carrying Transactions performed in the current period) - WIP Cost Carrying Transactions (See section 2.1 b) - Periodic Cost Updates with a Value Change Basically, Periodic Cost Updates with a New Cost / Percentage Change are processed before Non-WIP Cost Carrying Transactions. And Non-WIP Cost Carrying Transactions are processed before WIP Component Issue to Rework Jobs and so on.
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