Average Cost Accounting
WIP costs are the sum of component costs and shop floor control costs, and are reduced by the cost of co-products and by‑products received plus reject quantity. These transactions do not update GL or current costs.
Costs are averaged by taking the costs accumulated in WIP and adjusting the costs of items in inventory received from WIP. The system does this in two steps:
1 Co-products and by-products are received from work orders into inventory using their current average costs.
2 Average GL costs and average current costs are re‑averaged based on the costs accumulated for an item’s work order when the work order is closed. Co-product costs are re-averaged based on any WIP costs accumulated by this process. Costs can be accumulated when the Work Order Accounting Close program closes any work order operations that have not been closed.
Costs are not re-averaged for quantities received to sites other than the work order (WIP) site. Receipts are handled in two ways depending on whether the work order status is closed or not closed:
• Not closed. Co-product costs are not re-averaged. Items are received to the work order WIP site using current average costs. These costs are deducted from WIP. If quantities are received at a different site, they are received at the work order WIP site using current average costs, then transferred to the indicated site.
• Closed. Co-product costs are re-averaged. Items are received to the work order WIP site using current average costs. These costs are deducted from WIP. The re-averaging process takes into account quantities received during previous receipt transactions for the same work order.
If quantities are received to a different site than the work order WIP site, it is likely that the inventory quantity on hand is less than the quantity received. This increases the chance that some of the costs cannot be allocated and re-averaged at the WIP site and that costs will be booked to the Inventory Discrepancy account for the base process.
To maximize the accuracy of average costs and reduce costs booked to discrepancy accounts, the following should be emphasized:
• Complete reporting of co-product and by-product quantities when all quantities for all items are completed.
• Setting of work order status to Closed when receipt quantities are reported.
• Running of Work Order Accounting Close on a regular basis to process recently closed work orders.
Note: Re-averaging of co-product costs is time-sensitive. The greater the time between receipt and close, the greater the probability that some of the products produced have been consumed.
The cost change taken to inventory is bounded as follows:
• Upper limit. Greater of the existing average cost or calculated work order unit cost.
• Lower limit. Lesser of the existing average cost or calculated work order unit cost.