Manufacturing Variance Report

Manufacturing Variances
October 20, 2009
Discrete Manufacturing
SIG
Cost Sub-Committee
October 20th, 2009
Douglas Volz
OAUG Discrete MFG Cost Group
email: dvolz@comcast.net
tel:: +1 (510) 755-7050
Bruce Baggaley
Senior Partner, BMA Inc.
email: bbaggaley@maskell.com
tel:: +1 (609) 239-1080 x 2
OAUG Cost Sub-Committee – 1

October 20, 2009
Agenda
 Welcome
 Schedule for 2009 and 2010
 New SIG: G/L
 This Month’s Topic – Manufacturing Variances
 Conclusion

October 20, 2009
Last Session for 2009 – November 17th
 Oracle will present on Oracle Landed Cost Management
 A new module which helps to give organizations financial visibility into

their extended supply chain costs, including transportation and handling
fees, insurance, duties, and taxes

October 20, 2009
Schedule for
2010

October 20, 2009
New Special Interest Group: G/L SIG

 Introduced during Openworld on October 11th
 Contact Mohan Iyer at mohan@fscpsolutions.com for more information
 Meant to be more than G/L,
“The Multi-Org/Multi-National SIG group supports the formation of a special GL-SIG

and will closely collaborate with this new focus group. With the introduction of the
E-Business Suite Release 12 there is an even greater number of topics and
challenges that need a new in-depth analysis and user review, such as Legal Entity
Model, MRC, Sub-Ledger Accounting, Multi-Org Access Model. ”

October 20, 2009
This Month’s Topic: Manufacturing Variances
 How Oracle Discrete Manufacturing Handles Variances

 Overview for Variances by Costing Method
 Purchase Price Variance / Invoice Price Variance
 WIP Labor Rate, Assembly Scrap, Yield Factors
 Types of WIP and Types of WIP Jobs
 WIP Variances for Standard Costing
 Standard Cost and Average Cost Updates
 Contrast Full Absorption Standard Costing With Lean Accounting

 What’s Wrong with Full Absorption Standard Costing?
 Value Stream Costing
 Comparing Assumptions
 Comparing What Is Important
 Comparing Measurements and Behaviors
 Value Stream Cost Analysis - by Type of Cost
 What Must Be in Place for Value Stream Costing to Be Effective?
 Conclusions

October 20, 2009
Overview for Variances by Costing Method
Average Costing Standard Costing
 Invoice Price Variance  Purchase Price Variance

 Average Cost Update  Invoice Price Variance
 Material Overhead  Standard Cost Update
Over/Under Absorption
 Material Overhead
 Resource/Production Overhead Over/Under Absorption
 Resource/Production Overhead
 Assembly Scrap
 Assembly Scrap
 Material Usage
 Resource, OSP, & Overhead
Efficiency OAUG Cost Sub-Committee – 7
October 20, 2009
Purchase Price and Invoice Price Variances
 Both Average and Standard Costing have invoice price variances (IPV)
 IPV measures the difference between the PO unit price and the invoice
actual cost
 Only Standard Costing has purchase price variances

 PPV measures the difference between the PO unit price and the standard
cost
 Set these up on the Inventory Parameters:
PPV
Account
IPV Account

October 20, 2009
Material Overhead & Production Overh’d Over/Under

Absorption Variances
 Oracle MFG can earn material overhead at:
 PO Receipt
 Inter-Org Receipt
 WIP Completion
 You set up the absorption (or offset) account when you define sub-
elements
Absorptio
n Account

October 20, 2009
Labor Rate Variances • Actual rate X actual hours
• Actual rate X standard

 Oracle MFG can earn resources at hours
• Standard rate X standard

hours
 Part of the resource sub-element setup
•Standard rate X actual
hours
Standard
Rate
Checkbox
Resource Rate
Variance Account

October 20, 2009
Assembly Scrap and Yield Factors
 Component Yield factors are unchanged from Release 11i
 It increases the cost (and component requirements) for the assembly
 Input on the bill of material
 Assembly Shrinkage is unchanged from Release 11i
 Depending on your setup you may record assembly scrap when you
move assemblies into Scrap or leave the value in the job

October 20, 2009
How to Enter the WIP Assembly Scrap Transaction
Move to
Scrap
Use
aliases

October 20, 2009
Assembly Scrap Factor by Cost Type
Shrink
Rate by
Cost Type

October 20, 2009
Types of WIP Variances by WIP Class
 WIP Discrete Production Jobs – recognized when you close the WIP Job
 WIP Non-Standard Asset Jobs – recognized when you close the WIP Job
 WIP Non-Standard Expense Jobs – recognized when you close the period
 WIP Repetitive Schedules – usually recognized when you close the

period
 WIP Flow Manufacturing – no variances – all earned at standard usage &

rates

October 20, 2009
Account Setup for WIP Variances – by WIP Class
Used for
OSFM

October 20, 2009
Formula for Usage and Efficiency WIP Variances (Standard

Costing)
Costs-In Costs-Out Variances
Previous-level costs Previous-level costs
@ actual usage - @ standard = Material usage variance
Resource - Resource = Resource efficiency
Outside processing
Outside processing - Outside processing = efficiency
Overhead - Overhead = Overhead efficiency
Sources of:
• components issued • WIP completions @ standard

• resources earned rolled up costs
• OSP earned
• overheads earned
October 20, 2009
Cost Update Variances
 Average Costing
• Separate material transaction, entered by cost element
• There is no Average Cost Update for WIP
 Standard Costing
• Run by submitting the Standard Cost Update
• You enter the desired offset (variance) account
• WIP gets its offset account from the WIP Accounting Class

October 20, 2009
Contrast Traditional Costing with Lean Accounting

October 20, 2009
What’s Wrong with Full Absorption Standard

Costing?
 Distorts profitability by inappropriate overhead
application—assumes full/ “practical” capacity.
 Motivates non-lean behavior; large batches, over-
production & make-for-inventory –economies of scale
 Requires significant detailed reporting of so-called
“actual” information.
 Considers labor as a variable cost when for practical
purposes labor is largely fixed.
Standard Costs “lie to you”.

They give misleading information leading to bad
decisions; make/buy, pricing, product introductions, etc.
October 20, 2009
Value Stream Costing
Production Production Machines & Production

Labor Materials Equipment Support
VALUE STREAM
Operation Facilities & All Other

Support Maintenance VS Costs
All labor, machine, materials, support services, and facilities directly

within the value stream. Little or no allocation.

October 20, 2009
Comparing Assumptions
Traditional Assumptions Lean Assumptions
• Profit comes from full • Profit comes from maximizing

utilization of resources flow on pull from customers.
• Waste = idle resources • Waste = resources impeding the

flow
• Control the business thru • Control thru continuous attention

detailed tracking to flow & waste
• All excess capacity is bad • Excess capacity provides

flexibility

October 20, 2009
Comparing What Is Important

Traditional Thinking Lean Thinking
• Full utilization of resources • Value to the customer

• Average part cost • Value streams
• Overhead absorption
• Batch and Queue • Flow & pull from the customers
• Inventory valuation
• Departmental structure and • Team structure and individual
individual efficiency empowerment, accountability
• Product quality • System quality
• Pursuit of budget • Pursuit of perfection
October 20, 2009
Comparing Measurements
Traditional Measurements Lean Measurements
• Labor efficiency & • Cycle time

machine utilization • Throughput
• Cost variances vs. • First time quality
standard
• Inventory Turns
• Budget adherence
• Delivery to customer
• Direct labor as % of
sales • Value stream focus

October 20, 2009
Comparing Behaviors
Traditional Behaviors Lean Behaviors

• Make more product— • Eliminate barriers to flow
build inventory
• Utilize resources to the
max • Focus on value streams
rather than departments
• Optimize dept.
efficiencies • Continuous improvement
and team-work
• Track direct labor in
detail • Eliminate waste,
inventory, and over-
• Allocate other costs production
October 20, 2009
Value Stream Cost Analysis - by Type of Cost

Employee
Material Outside Cost Cost Machine Cost Facilities Total
Customer Service $ - $ - $ 12,933 $ - $ - $ 12,933
Configuration $ - $ - $ - $ - $ - $ -
Purchasing $ - $ - $ 12,933 $ - $ - $ 12,933
Loop 1 SMT $ 358,512 $ - $ 17,280 $ 16,956 $ - $ 392,748
Loop 2: Hand Load/ Wave /Post $ 25,608 $ - $ 27,755 $ 2,016 $ - $ 55,379
Loop 3: Test & Rework $ - $ - $ 17,280 $ 3,528 $ - $ 20,808
Assemble & Burn-In $ 128,040 $ - $ 10,800 $ - $ - $ 138,840
Shipping $ - $ - $ 2,700 $ - $ - $ 2,700
Quality Assurance $ - $ - $ 5,173 $ - $ - $ 5,173
Mfg. Engineering $ - $ - $ 7,760 $ - $ - $ 7,760
Maintenance $ - $ - $ 2,587 $ - $ - $ 2,587
Accounting $ - $ - $ 10,347 $ - $ - $ 10,347
Human Resources $ - $ - $ 5,173 $ - $ - $ 5,173
Information Systems $ - $ - $ 5,173 $ - $ - $ 5,173
Design Engineering $ - $ 7,760 $ - $ - $ 7,760
Other Support $ 20,000 $ 20,000
$ 7,760 $ 137,895 $ 22,500 $ 20,000 $ 188,155
$ 700,315

October 20, 2009
What Must Be in Place for Value Stream Costing to Be

Effective?
 Report by value stream - not by department.
 Ideally the people should be assigned to a single value stream
with little or no overlap.
 Few shared services departments. Few monuments. Little
requirement for cost allocation.
 Production processes must be largely under control, so that
variability is reasonably low
 Thorough tracking of “out-of-control” situations and of excepts
like scrap, rework, etc.
 Inventory must be under control, relatively low, and consistent

October 20, 2009
Conclusion
This session provided an overview for:

 Oracle variances for average and standard costing
 How lean accounting can offer significant advantages over
traditional cost accounting
2010 cost sessions are in the planning stages

 If you have topics you would like to discuss send an email to Doug Volz
 Looking for ways to improve our sessions and increase our membership

October 20, 2009
Thank You for Your Attendance and Participation

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Manufacturing Variances

October 20, 2009

OAUG Cost Sub-Committee – 1

OAUG Cost Sub-Committee – 2

Last Session for 2009 – November 17th

 Oracle will present on Oracle Landed Cost Management

 A new module which helps to give organizations financial visibility into

OAUG Cost Sub-Committee – 3

OAUG Cost Sub-Committee – 4

New Special Interest Group: G/L SIG

 Contact Mohan Iyer at mohan@fscpsolutions.com for more information

 Meant to be more than G/L,

“The Multi-Org/Multi-National SIG group supports the formation of a special GL-SIG

OAUG Cost Sub-Committee – 5

This Month’s Topic: Manufacturing Variances

 How Oracle Discrete Manufacturing Handles Variances

 Contrast Full Absorption Standard Costing With Lean Accounting

OAUG Cost Sub-Committee – 6

Overview for Variances by Costing Method

Average Costing Standard Costing

 Invoice Price Variance  Purchase Price Variance

Purchase Price and Invoice Price Variances

 Only Standard Costing has purchase price variances

 Set these up on the Inventory Parameters:

OAUG Cost Sub-Committee – 8

Material Overhead & Production Overh’d Over/Under

OAUG Cost Sub-Committee – 9

Labor Rate Variances • Actual rate X actual hours

• Actual rate X standard

• Standard rate X standard

OAUG Cost Sub-Committee – 10

Assembly Scrap and Yield Factors

 Component Yield factors are unchanged from Release 11i

 It increases the cost (and component requirements) for the assembly

 Input on the bill of material

 Assembly Shrinkage is unchanged from Release 11i

OAUG Cost Sub-Committee – 11

How to Enter the WIP Assembly Scrap Transaction

OAUG Cost Sub-Committee – 12

Assembly Scrap Factor by Cost Type

OAUG Cost Sub-Committee – 13

Types of WIP Variances by WIP Class

 WIP Repetitive Schedules – usually recognized when you close the

 WIP Flow Manufacturing – no variances – all earned at standard usage &

OAUG Cost Sub-Committee – 14

Account Setup for WIP Variances – by WIP Class

OAUG Cost Sub-Committee – 15

Formula for Usage and Efficiency WIP Variances (Standard

Resource - Resource = Resource efficiency

Overhead - Overhead = Overhead efficiency

• components issued • WIP completions @ standard

Cost Update Variances

• Separate material transaction, entered by cost element

• There is no Average Cost Update for WIP

• Run by submitting the Standard Cost Update

• You enter the desired offset (variance) account

OAUG Cost Sub-Committee – 17

Contrast Traditional Costing with Lean Accounting

OAUG Cost Sub-Committee – 18

What’s Wrong with Full Absorption Standard

Standard Costs “lie to you”.

Value Stream Costing

Production Production Machines & Production