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Transcript of Variance Accounting Using the Material Ledger – A Business Perspective Presented by: Mary L. Ruth...
Variance Accounting Using the Material Ledger – A Business
Perspective
Presented by: Mary L. Ruth – SAP Cost & Pricing Strategy Team Lead, McCormick Global Business Solutions May 20, 2003
Proprietary & Confidential - 2 -McCormick & Company Inc. - Confidential
Agenda
McCormick & Company, Inc. Overview
Beyond 2000 (B2K) Project Overview
Product Costing Implementation
Why use Material Ledger?
Lessons Learned
Questions & Answers
Proprietary & Confidential - 3 -McCormick & Company Inc. - Confidential
Strategic Partner Confidentiality
The information contained in this presentation is confidential and proprietary information developed by
McCormick & Company, Incorporated.Any disclosure, copying, distribution or unauthorized use of this information without the
prior consent of McCormick is prohibited.
Proprietary & Confidential - 4 -McCormick & Company Inc. - Confidential
Headquartered InSparks, Maryland
8,100 Employees Worldwide
47 Plants/LaboratoriesIn 17 Countries
Operates In More Than 90 Countries
Largest Spice Company
In The World
$2.4 Billion In Sales
Traded PubliclyOn NYSE (MKC)
Founded In 1889
"Make the best...Someone will Buy it“"Make the best...Someone will Buy it“““Deliver Consumer PreferredDeliver Consumer Preferred™ Flavors.”™ Flavors.”
McCormick & Co., Inc.Flavor Solution Provider
Proprietary & Confidential - 5 -McCormick & Company Inc. - Confidential
Marinades & Glazes, Batters & Breaders,
Specialty Mixes
Spices, Herbs, Seeds,Seasonings, & Blends
ColorBits®
Tomato PowderSpice Alternatives
Fruit Powders
IQF Herbs, Soft Frozen Vegetables
Flavors, Extracts, Oils& Oleoresins
Vanilla Extract& Flavors
Wet Sauces,Dressings,
Condiments
McCormick Products
Proprietary & Confidential - 6 -McCormick & Company Inc. - Confidential
F la vors -C o m p un d edS e aso n in gsV a n illaS p ice s/H e rbsO le o re s in s /O ilsC o lo rB its ®
F la vo r-C e ll®T o m ato P ow d erF ru it D is tilla tesF ru it B a se d F la vo rsF la vorS p ice ®
R etail F oo d &B everage
M cC orm ick F lavor
C u s tom C oa tin gsC u s tom S e a son in gsC u s tom Co n d im e n ts
Q u ick S erviceC asua l Din ing
R estau ran t Su p plie rs
G lobal R estaurant
B ra nd e d S p ices & He rbsB ran d ed S e a so n in gsB ra nd e d M a rina d esB ra nd e d S a uce s & G ra v iesB ra n de d F la vo red O ilsB ra n de d Co lo rs & E xtra c ts
F u ll ServiceS u perm arke t Prepared
N o n-C o m m erc ialC a fete r ias /B uffe ts
Food Service
Global Industrial Group McCorm ick/U .S.Consum er Products Division
M cCormick & Co., Inc.
Proprietary & Confidential - 7 -McCormick & Company Inc. - Confidential
McCormick’s 14 Consumer Brands
Proprietary & Confidential - 8 -McCormick & Company Inc. - Confidential
McCormick Mission Statement
Our primary mission is to deliver Consumer Preferred™ flavor solutions
Proprietary & Confidential - 9 -McCormick & Company Inc. - Confidential
Beyond 2000 Project Overview
Objectives
Organizational Structure
Profit Center Scope
SAP Modules
Finance Implementation
Proprietary & Confidential - 10 -McCormick & Company Inc. - Confidential
Beyond 2000 Is A Coordinated And Synchronized Approach To Major Improvement Opportunities
Global TechnicalSystems
Profitable DemandCreation
Value ThroughService
FinancialReengineering
Supply ChainOptimization
BACKBONE: Enterprise Transactional Effectiveness
Business process improvement enabled by information technology
Common purchasing data and processes to sustain strategic sourcing benefits
Supply chain integration and optimization across the enterprise
Trading partner integration
Automating and streamlining manual transaction processes
Leveraged global technical capabilities
eBusiness support platform (B-to-B, B-to-C, B-to-E)
Proprietary & Confidential - 11 -McCormick & Company Inc. - Confidential
McCormick’s Organizational Structure
Plant
Hunt ValleyManufacturing
Hunt ValleyManufacturing
Spice Mill Manufacturing
Spice Mill Manufacturing
Global RegionUSA
Global RegionUSA
Controlling Area
Controlling Area
EnterpriseMcCormick & Co.
Global Region Canada – Phase 3
Global Region Canada – Phase 3
Global Region EUR –Phase 4Global Region EUR –Phase 4
MGIL
ProcurementMGIL
Procurement
SalinasManufacturing
SalinasManufacturing
RM Storage
Spices -EastRM Storage
Spices -East
McCormick
& Co.McCormick
& Co.
Global RegionCayman Island
Global RegionCayman Island
MD. Distribution
CenterMD. Distribution
Center
US Industrial
HQ and Plants
Phase 2:
6 Manufacturing
2 Distribution
US Industrial
HQ and Plants
Phase 2:
6 Manufacturing
2 Distribution
CompanyCode
SAL. Distribution
CenterSAL. Distribution
Center
RM Storage
Spices - WestRM Storage
Spices - West
RM Storage
Vanilla - EastRM Storage
Vanilla - East
Proprietary & Confidential - 12 -McCormick & Company Inc. - Confidential
F la vors -C o m p un d edS e aso n in gsV a n illaS p ice s/H e rbsO le o re s in s /O ilsC o lo rB its ®
F la vo r-C e ll®T o m ato P ow d erF ru it D is tilla tesF ru it B a se d F la vo rsF la vorS p ice ®
R etail F oo d &B everage
M cC orm ick F lavor
C u s tom C oa tin gsC u s tom S e a son in gsC u s tom Co n d im e n ts
Q u ick S erviceC asua l Din ing
R estau ran t Su p plie rs
G lobal R estaurant
B ra nd e d S p ices & He rbsB ran d ed S e a so n in gsB ra nd e d M a rina d esB ra nd e d S a uce s & G ra v iesB ra n de d F la vo red O ilsB ra n de d Co lo rs & E xtra c ts
F u ll ServiceS u perm arke t Prepared
N o n-C o m m erc ialC a fete r ias /B uffe ts
Food Service
Global Industrial Group McCorm ick/U .S.Consum er Products Division
M cCormick & Co., Inc.
Profit Center Scope – Phase 1
US
US
Proprietary & Confidential - 13 -McCormick & Company Inc. - Confidential
R/3R/3Client / ServerClient / Server
ABAP/4ABAP/4
FIFinancial
Accounting
COControlling
AMFixed AssetsManagement
PSProjectSystem
WFWorkflow
ISIndustry
Solutions
MMMaterials
Management
HRHuman
Resources
SDSales &
Distribution
PPProductionPlanning
QMQuality
ManagementPM
PlantMaintenance
X
X
X = Out of Scope
X
ERP Backbone - SAP 4.6 C
SAP ScopeBusiness
Warehouse
APO
Workplace
KnowledgeWarehouse
Bolt-ons
VISTATrade
Promotions
Win CHEMNew
ProductDevelopment
Proprietary & Confidential - 14 -McCormick & Company Inc. - Confidential
B2K ERP – FI/CO Implementation
SAP 4.6C Finance Modules
Financial Accounting– GL, AR, AP & Asset Accounting
Controlling– Cost Center Accounting,
– Product Costing
– Activity Based Costing
– Profitabiity Analysis (CO-PA)
– Profit Center Accounting
Material Ledger– Parallel Valuations
– Actual Costing
Reporting – Heavy focus on CO - PA for alternate PA views – ex: Global Customers, Customers serviced by
multiple business units
– Self Service reporting through BW and LIS
Proprietary & Confidential - 15 -McCormick & Company Inc. - Confidential
McCormick SAP – FI/CO ImplementationKey Design/Policy Decisions
Single Instance – Single Controlling Area for Global McCormick
Legal Entity – All McCormick US Business Units & Plants in a single Company Code
EVA Balance Sheet used for Management Performance Indicators
Previously separate Business Units with separate Financial systems & management
Purpose of single Company Code
– Reduce Intra-company transactions and reconciliation
– Lay foundation for Financial Shared Services
Hyperion will be used for Consolidation – no Special Purpose Ledger, no EC
Proprietary & Confidential - 16 -McCormick & Company Inc. - Confidential
McCormick SAP – FI/CO ImplementationKey Design/Policy Decisions
Inter-company markups will be implemented to the extent required to meet Legal and Tax requirements
All management reporting will exclude Inter-company markups – difference will be held at Corporate
Parallel Valuations & Material Ledger implemented to exclude IC markup in Reporting
Visibility to Inter-company markup at an item level desired to support Pricing Decisions
Within McCormick US, all products will be transferred at Actual Cost
Transfer Pricing module was not implemented
All variances from purchasing and manufacturing are passed through to the selling profit center
Services (such as R&D or Logistics) provided for divisions will be handled via CCA allocations
Manufacturing facilities moving toward a Shared Services model (not fully implemented)
All plants will implement Activity Based Costing methodology for Product Costing
Proprietary & Confidential - 17 -McCormick & Company Inc. - Confidential
Parallel Valuation - Group Costing
Hunt Valley Plant Virtual MGIL Plant
Goods & Services
US Company MGIL Company
McCormick Group Company
Valuation
Legal View
Group View
Profit Center View
Costing Type
Materials are moved without Inter-company Profit
Individual Statutory requirements are considered. Includes markups between trading partners
Internal Profit can be calculated using Transfer Prices
Proprietary & Confidential - 18 -McCormick & Company Inc. - Confidential
Product Costing – Process manufacturing with ABC
Recipe
Blend
Sterilize
Quantity Structure
Production Order
Material Cost
Raw Materials $Semi-Finished Materials $
Direct Cost of ProductionBlend Product $Sterilize Product $
Indirect Cost of ProductionQuality Assurance $Scheduling $
BOM CO-PCProduct Costing
ABCActivity based costing
Testing QAProcess (Activity)
Proprietary & Confidential - 19 -McCormick & Company Inc. - Confidential
Standard Cost Standard Cost EstimateEstimate
Standard Cost Standard Cost EstimateEstimateMaterial MasterMaterial MasterMaterial MasterMaterial Master Material Ledger Material Ledger
Document OverviewDocument OverviewMaterial Ledger Material Ledger
Document OverviewDocument Overview
Document itemsDocument itemsDocument itemsDocument items Source Source documentdocument
Source Source documentdocument
Document Document headerheader
Document Document headerheader
Accounting Accounting documentsdocumentsAccounting Accounting documentsdocuments
FIFIPPPP MMMM
MMMM CO-PCCO-PC
COCOCO-CO-PAPACOCO
Receipts 100 10.000 1.000 110
Cumulative inventory 170 17.000 3.400 120
Ending inventory 140 14.000 100
Other receipts/consumption 50 5.000 2.400 148
Consumption 30 3.000 100
Beginning inventory 20 2.000 100
Prel. val.Category Quantity Price diff. Price
Actual Costing with Material Ledger
Proprietary & Confidential - 20 -McCormick & Company Inc. - Confidential
Why use the Material Ledger?
Raw Material Prices fluctuate and there is a need to track the the associated variances to the Finished Product
Standard material prices require frequent manual updates due to fluctuating prices
Plants produce products for many Selling Business Units and there is a need to distribute all costs appropriately
Ability to track multiple valuations and/or currencies at the material level.
Proprietary & Confidential - 21 -McCormick & Company Inc. - Confidential
Why did McCormick chose to use the Material Ledger?
Policy Decisions:
Within McCormick US, all products will be transferred at Actual Cost– Purchasing & manufacturing variances passed on to selling Profit Ctr.
Group Valuation will be used for all Management Reporting
Raw and Packaging material costs are updated monthly to support gross margin analysis for complex products. Utilize system calculated PUP vs. manual updates.
Visibility to both Group & Legal values at material level for Pricing
McCormick US plants produce products for Multiple Profit Centers regardless of formal Reporting Relationship
Enables Shared Services model for manufacturing
Legacy system replacement for Corporate Owned Spice Mill
Replaces “homegrown” mainframe application developed to support requirement to transfer all variances
Manufacturing Shared Services model already implemented for this facility
Proprietary & Confidential - 22 -McCormick & Company Inc. - Confidential
What does the Material Ledger Do?
The Material Ledger is similar to a sub-ledger for all inventory related transactions. Transactions can be tracked in:
• multiple currencies (Company code plus 2 others)
• multiple valuations (legal, group, profit center)
• at actual cost for each material / plant.
• Actual costing functionality enables the distribution of variances (PPV and manufacturing) to semi-finished and finished product
• Revaluation variance is automatically recorded when the price for a material is updated.
• Revaluation is also tracked at the plant/material level through the material ledger.
• Automated calculation and capitalization of direct material variances
Proprietary & Confidential - 23 -McCormick & Company Inc. - Confidential
Material Ledger/Valuation practices at McCormick
• At McCormick, two valuations are tracked in the Material Ledger
• Group Valuation – always USD, excludes Inter-company profit
• Legal Valuation – local currency
• At McCormick, Profit Center Accounting uses the Group Valuation from the Material Ledger
• During month end processing, Periodic Unit Prices (PUP) are calculated and variance distribution and capitalization is performed automatically.
• Variances related to Sales remain in the P&L as “net” amounts – not easily traceable
• New transaction for Not Included/Not Distributed amounts helps.
• System calculated PUP is used to update Raw and Packaging Standards for Future period
Proprietary & Confidential - 24 -McCormick & Company Inc. - Confidential
McCormick Month End Process with Material LedgerMcCormick Month End Process with Material Ledger
The Standard Cost for Raw & Packaging materials is updated each month to equal the Periodic Unit Price.
one-month lag between the price recalculation and price update.
Standard Cost Estimates are generated monthly for all Semi-Finished and Finished Goods to incorporate:
Raw & Packaging price changes
Master Data, BOM & Recipe changes
Currently, Labor, Machine Activity Types and ABC Business Process rates are updated annually or upon significant business change only
Rate variances are not passed through to process orders or materials.
Cost Center and ABC Business Process variances are analyzed off-line and manually distributed to selling Profit Centers.
Proprietary & Confidential - 25 -McCormick & Company Inc. - Confidential
Reporting & Analysis with Actual Costing/Material LedgerReporting & Analysis with Actual Costing/Material Ledger
Gross Margin analysis is focused on Actual Cost and Cost Component Analysis
Direct material Variances within a period are minimized due to frequent updates.
Planned price fields are populated with Annual standards developed during budget cycle and used for price change analysis.
Cost Component structure incorporates Top 20 commodities to support price change analysis
Reporting not developed yet – looking at BW as a source
- 26 -
How Does Material Ledger work?
Proprietary & Confidential - 27 -McCormick & Company Inc. - Confidential
Parallel Valuation – thru Material Ledger – Inventory values
Prod.order
Distributioncenter Sales
order
Finishedproduct
Raw materials
Co Code 1101 - MGIL
Plant 1010 - VirtualPlant 1000 Spice Mill Plant 1020 – MDC
Cost center
L $ 70G $70
L $ 70G $ 70
L 120G 90
L 120
G 90
NB PO$100
MfgCCtr $ 20
MfgCCtr $ 20
L $120G 90
- Plant-Plant trfr
Co Code 1100 - US Co Code 1100 - US
Both Values post to FI. PCA is recorded at Group Value only. Both Values are tracked for all transaction until inventory is sold (or Shipped to a unit not on SAP)
Proprietary & Confidential - 28 -McCormick & Company Inc. - Confidential
Structured Value Chains – Periodic Unit Price
1000
...
...
...
...
250
...
...
...
...
30
...
...
...
...
28.00
...
...
...
...
Cumulative inventory 2000 500 30 26.50
Other receipts/cons. 0 0 0
Preliminary Preliminary valuationvaluation
Preliminary Preliminary valuationvaluationQuantityQuantityQuantityQuantity
1000 250 25.00
PricePricedifferencedifference PricePrice
Beginning inventory
Receipts
Production
Purchase order
Stock transfer
Subcontracting
Proprietary & Confidential - 29 -McCormick & Company Inc. - Confidential
Price Differences
External procurement (PO value / invoice value)
In-house production (settlement of process orders)
Initial entry of Inventory balances (external value posted)
Transfer price variance (stock transfer – plant to plant)
Subcontracting
Debit / credit of material (MR22)
Revaluation due to a Price Change (CK24, CKME)
Material Ledger – transactions that impact valuation
Material consumptionMaterial consumptionVB 3250
Material InventoryMaterial Inventory3250 VBBI 2500
ZU 2500
GR/IR allocationGR/IR allocationRE 2600 2600 ZU
VendorVendor
2800
Price differencePrice difference
ZU 100RE 200
Posting Example: Purchase Price Variance
GRGR
GRGRIRIR
IRIRIRIR
CNSCNS
CNSCNSGRGR
Standard price: 25 $ per EAPeriodic unit price: 26.50 $ per EAStandard price: 25 $ per EAPeriodic unit price: 26.50 $ per EA
Beginning inventory (BI): 100 EA / 2500 $Goods receipt/purchase order:100 EA / 2600 $Invoice receipt: 100 EA / 2800 $ Consumption: 130 EA / 3250 $Ending inventory: 70 EA
Receipts -PO 100 2500 100 26
Cumulative inventory 200 5000 300 26.5
Ending inventory 70 1750 26.5 105
Receipts-Invoice 0 0 200
Consumption 130 3250 25
Beginning inventory 100 2500 25
Prel. val.Category Quantity Price diff. Price
Proprietary & Confidential - 31 -McCormick & Company Inc. - Confidential
Period 1 Period 2
Period 1:Prel.ValuationPeriod 1:Prel.Valuation
Inventory Price Dif
Period 1: Act.CostingPeriod 1: Act.Costing
Inventory Price Dif
+
BASIC CONCEPT: Allocation of Price Differences
Proprietary & Confidential - 32 -McCormick & Company Inc. - Confidential
Costing Cycle with Material Ledger (ML)
Day 0
Open New Period
(MMPV)
Day 0
Open New Period
(MMPV)Day 0
Release new Cost Estimates&
(Material Prices (CKME)
(Post Reval to new Period)
Day 0Release new Cost Estimates&
(Material Prices (CKME)
(Post Reval to new Period)
Day 1 (PM)
Perform OH Allocation
ABC Templates
Day 1 (PM)
Perform OH Allocation
ABC Templates
Day 2 (PM)
Settle Process Orders
(ML updated with variances)
Day 2 (PM)
Settle Process Orders
(ML updated with variances)
Day 3
Execute CCA Allocations
Day 3
Execute CCA Allocations
Day 2 (PM)
ML Single Level Settlement
Day 2 (PM)
ML Single Level Settlement
ML Mark Future Raw & Pkg
Material Prices (CKMPRP)
ML Mark Future Raw & Pkg
Material Prices (CKMPRP)
Pre-close
Create Std. Cost Estimates
(CK40N)
Pre-close
Create Std. Cost Estimates
(CK40N)
Day 3 (PM)
ML Multi Level Settlement
Day 3 (PM)
ML Multi Level Settlement
Day 4Manual variance
Closeout
Day 4Manual variance
Closeout
Day 4 (PM)
Post ML Closing
(Capitalization)
Day 4 (PM)
Post ML Closing
(Capitalization)
Close Complete
1 month lag
For PUP update
Proprietary & Confidential - 33 -McCormick & Company Inc. - Confidential
Material Ledger- Actual Costing
Preliminary Valuation at Preliminary Valuation at standard and recordingstandard and recordingprice differencesprice differences Price determination:Calculation ofPeriodic Unit Price
Period End Closing:Revaluation of materialswith Periodic Unit Price
Preliminary Valuation at Preliminary Valuation at standard and recordingstandard and recordingprice differencesprice differences Price determination:Calculation ofPeriodic Unit Price
Period End Closing:Revaluation of materialswith Periodic Unit Price
Three Steps in Actual CostingThree Steps in Actual Costing
Receipts
Cumulative inventory 1000 25,000 25.00
Ending inventory 1000 25,000 25.00
Other receipts/consum
Consumption
Preliminary Preliminary valuationvaluation
Preliminary Preliminary valuationvaluationQuantityQuantityQuantityQuantity
Beginning inventory 1000 25,000 25.00
PricePricedifferencedifference PricePrice
Differences between Standard Price and
actual priceReal time valuation with Standard Price
Average Actual price
PERIOD 1PERIOD 1 - Beginning inventory Value - Beginning inventory ValueML STATUS – PERIOD OPEN (MMPV)
Receipts 1000 25,000 3000 28.00
Cumulative inventory 2000 50,000 3000 26.50
Ending inventory 700 17,500 25.00
Other receipts/consum 0 0 0
Consumption 1300 32,500 25.00
Preliminary Preliminary valuationvaluation
Preliminary Preliminary valuationvaluationQuantityQuantityQuantityQuantity
Beginning inventory 1000 25,000 25.00
PricePricedifferencedifference PricePrice
Beginning Inventory+
all Goods Receipts
Average Actual price
Differences between Standard Price and actual price
PERIOD 1PERIOD 1 – Transactions – Transactions ML STATUS – Quantities and values posted
Proprietary & Confidential - 36 -McCormick & Company Inc. - Confidential
Multi-Level Actual Costing (Overview)
Preliminary Valuation at standard and recording Price Differences Price determination:Price determination:Calculation ofCalculation ofPeriodic Unit PricePeriodic Unit Price
Period End Closing:Revaluation of materialswith Periodic Unit Price
Preliminary Valuation at standard and recording Price Differences Price determination:Price determination:Calculation ofCalculation ofPeriodic Unit PricePeriodic Unit Price
Period End Closing:Revaluation of materialswith Periodic Unit Price
Three Steps in Actual CostingThree Steps in Actual Costing
PERIOD 1PERIOD 1 – Closing – PUP determination – Closing – PUP determination ML STATUS – Single Level Price DeterminedSingle Level Price Determined
- Standard price: $25.00 -Periodic Unit Price: $26.50 = $53,000 (Preliminary Valuation at STD + Price Diff)
2,000 (Cumulative Inventory)
Receipts 1000 25,000 3000 28.00
Cumulative inventory 2000 50,000 3000 26.50
Ending inventory 700 17,500 25
Other receipts/consum 0 0 0 0
Consumption 1300 32,500 25
Preliminary Preliminary valuationvaluation
Preliminary Preliminary valuationvaluationQuantityQuantityQuantityQuantity
Beginning inventory 1000 25,000 25.00
PricePriceDiDiffff..
PricePrice
PERIOD 1PERIOD 1 – Closing – single level price determination – Closing – single level price determination ML STATUS – Single Level Price DeterminedSingle Level Price Determined
- Standard price: $25.00- Inventory value: $17,500+ $1050(period end)- Periodic Unit Price: $26.50
Receipts 1000 25,000 3000 28.00
Cumulative inventory 2000 50,000 3000 26.50
Ending inventory 700 17,500 26.50 1050
Other receipts/consum 0 0 0 26.50
Consumption
1300 32,500 25
Preliminary Preliminary valuationvaluation
Preliminary Preliminary valuationvaluationQuantityQuantityQuantityQuantity
Beginning inventory 1000 25,000 25.00
PricePriceDiDiffff..
PricePrice
Not Distributed 1950
PERIOD 1PERIOD 1 – Closing – Multi-level price determination – Closing – Multi-level price determination ML STATUS – Multi-level price determined
-Standard price: $25.00 -- Inventory value: $17,500 + $1050 (period end)- Periodic Unit Price: $26.50
Receipts 1000 25,000 3000 28.00
Cumulative inventory 2000 50,000 3000 26.50
Ending inventory 700 17,500 26.50 1050
Other receipts/consum 0 0 0 26.50
Consumption 1300 32,500 1950 26.50
Preliminary Preliminary valuationvaluation
Preliminary Preliminary valuationvaluationQuantityQuantityQuantityQuantity
Beginning inventory 1000 25,000 25.00
PricePriceDiDiffff..
PricePrice
Consumption Multi-level settlement
Proprietary & Confidential - 40 -McCormick & Company Inc. - Confidential
Multi-Level Actual Costing (Overview)
Preliminary Valuation at standard and recording Price Differences Price determination:Calculation ofPeriodic Unit Price
Period End Closing:Period End Closing:Revaluation of materialsRevaluation of materialswith Periodic Unit Pricewith Periodic Unit Price
Preliminary Valuation at standard and recording Price Differences Price determination:Calculation ofPeriodic Unit Price
Period End Closing:Period End Closing:Revaluation of materialsRevaluation of materialswith Periodic Unit Pricewith Periodic Unit Price
Three Steps in Actual CostingThree Steps in Actual Costing
Proprietary & Confidential - 41 -McCormick & Company Inc. - Confidential
Period 1 Period 2
Price ControlDuring Period: Preliminary Valuation Price (S)After Closing Entries: Periodic Unit Price (V)
For Period 1:
Price Control: S
For Period 2:
Price Control S
For Period 1:
Price Control V
For Period 0:
Price Control V
Revaluation: Change of Price Control
Financial Postings –Period 1
InventoryInventory PayablesPayables
VendorVendor
Procedure Inventory Inventory value$Standard Begin. inventory: 1000 EA at$2$ 1000 25,000 25
Goods receipt : 1000 EA at 28$ 2000 50,000 25
Consumption : 1300 EA at 25$ 700 17,500 25
Invoice receipt : 1000 EA at 28$ 700 17,500 25
ML Closing : 700 EA at 1.5 $ 700 18,550 25 (PUP 26.5)
Procedure Inventory Inventory value$Standard Begin. inventory: 1000 EA at$2$ 1000 25,000 25
Goods receipt : 1000 EA at 28$ 2000 50,000 25
Consumption : 1300 EA at 25$ 700 17,500 25
Invoice receipt : 1000 EA at 28$ 700 17,500 25
ML Closing : 700 EA at 1.5 $ 700 18,550 25 (PUP 26.5)
BIBI
GRGR
CNSCNS
BIBI 25000
25000
1050
25000
25000
1050
GRGR2800028000 GRGR
CNSCNS
2800028000
2800028000
IRIR
ConsumptionConsumption
3250032500
IRIR
CLCL
3250032500
CNSCNSIRIR
Inventory GR/IR Account
Price difference Price difference
CLCL10501050GRGR 30003000
CLCL
Variance (P&L)Variance (P&L)
Receipts
Cumulative inventory 700 17,500 25.00
Ending inventory 700 17,500 25.00
Other receipts/consum
Consumption
Preliminary Preliminary valuationvaluation
Preliminary Preliminary valuationvaluationQuantityQuantityQuantityQuantity
Beginning inventory 700 17,500 25.00
PricePricedifferencedifference PricePrice
PERIOD 2PERIOD 2 – Day 0– Day 0 - Open period – (MMPV) - Open period – (MMPV)
ML STATUS – Period open
Price change 700
Cumulative inventory 700 18,200 26.00
Ending inventory 700 18,200 26.00
Other receipts/consum
Consumption
Preliminary Preliminary valuationvaluation
Preliminary Preliminary valuationvaluationQuantityQuantityQuantityQuantity
Beginning inventory 700 18,200 26.00
PricePricedifferencedifference PricePrice
PERIOD 2PERIOD 2 – Day 0 -– Day 0 -Standard Price Change to $26 Standard Price Change to $26 (Based on info from periods prior to period1)(Based on info from periods prior to period1)ML STATUS – Price change complete
Receipts
Price change 700
Cumulative inventory 700 18,200 350 26.50
Ending inventory 700 18,200 26.50 350
Receipts
Consumption
Preliminary Preliminary valuationvaluation
Preliminary Preliminary valuationvaluationQuantityQuantityQuantityQuantity
Beginning inventory 700 18,200 26.50 350
PricePricedifferencedifference PricePrice
PERIOD 2 – Day 4 PERIOD 2 – Day 4 – Period 1 closing posted – Period 1 closing postedML STATUS – Quantities and Values entered
ML Closing
350
Financial Postings –Period 2 (no change in standard price)
Procedure InventoryInventory value$ Standard Begin. inventory: 700 EA at 25$ 700 17,500 25
ML Closing (per1) : 700 EA at 1.5 $ 700 17,500 25 (PUP 26.5)
Procedure InventoryInventory value$ Standard Begin. inventory: 700 EA at 25$ 700 17,500 25
ML Closing (per1) : 700 EA at 1.5 $ 700 17,500 25 (PUP 26.5)
BIBI
BIBI 17,500
+ 1050
17,500
+ 1050
RevaluationRevaluation
CLCL
Inventory
Price differencePrice difference
CLCL 10501050
CLCL
10501050Capitalization auto reverses in next period
Financial Postings –Period 2 Procedure InventoryInventory value$ Standard P 1 Begin. inventory: 700 EA at $25 700 17,500 $25
Change Std to PUP: 700 EA at $26 700 18,200 $26
ML Closing (per1) : 700 EA at $1.5 700 18,200 $26 (PUP 26.5)
Procedure InventoryInventory value$ Standard P 1 Begin. inventory: 700 EA at $25 700 17,500 $25
Change Std to PUP: 700 EA at $26 700 18,200 $26
ML Closing (per1) : 700 EA at $1.5 700 18,200 $26 (PUP 26.5)
BIBI
BIBI 17,500
+ 1050
17,500
+ 1050
RevaluationRevaluation
CL1CL1
RVRV
Inventory
Price difference *Price difference *
CL1CL1 10501050
CLCL
RVRV
10501050
RVRV 700700
700700
700700 CL2CL2
CL2CL2 700700
Capitalization auto reverses in next period
Material Ledger Costing Run Summary
Actual Costing Run: Process StepsActual Costing Run: Process Steps
Selection: Selects all Materials with Price Determination 3
Determine sequence: Determines the sequence in which Materials are costed andassigns all Materials to a Costing Level
Single-Level Calculates Actual Prices based on Single-level Price Determination: Price Differences
Multi-Level Calculates Multi-Level Actual Prices, including roll-up of PriceDetermination: Price Differences
Post closing: Closes Period (Material Ledger) and Revaluates Inventory with Periodic Unit Price
Mark material prices: Marks Periodic Unit Price for usage as Standard Price in aFuture Period
Release Future price : Releases the price marked above as the new standard at the start of the new period- Inventory revaluation takes place.Done at the start of the new period.
Proprietary & Confidential - 49 -McCormick & Company Inc. - Confidential
Lessons Learned
Invalid MM transactions and PO price errors will create issues with Periodic Unit Price
Similar to issues experienced with Moving Average Cost
MR22 and MR11 corrections do not always pass thru Material Ledger Settlement as expected due to Price Limiter function
Multiple valuations require postings in both values
Learning curve is significant. Incorrect postings to one valuation can be difficult to correct if not detected before closing of Material Ledger
Currently, business is taking extra time to review single level and multilevel price differences during month end
At Go-live significant PPV and PPV correction errors occurred
Reliability of data has increased due to up front controls implemented in Purchasing
Anticipate eliminating extra time in closing after Industrial Implementation
Proprietary & Confidential - 50 -McCormick & Company Inc. - Confidential
Lessons Learned
When analyzing variance for profit centers/materials, need to consider all variance cost elements.
Look at total impact – incurred PPV,TPV, Process order variances, revaluation and capitalization
It is helpful to assign a separate cost element to Material Ledger settlement postings
Co-products required user exit for variance distribution
Variance analysis is complicated when Fixed Price Co-Products are used.
Standard Cost/Material Price updates should be analyzed prior to release
Standard cannot be updated after material movements or ML Closing entries have been performed.
Proprietary & Confidential - 51 -McCormick & Company Inc. - Confidential
Lessons Learned
Moving from Traditional Standard Cost to “Actual” Costing requires change in mindset for Plant & Operations Controllers:
Focus shifts from variance analysis to total cost analysis
Learning curve can be significant for businesses accustomed to Once a Year standard cost updates
Monthly Forecasting process may change
Business may desire to post manual adjustments – this should be avoided except in case of clear error
Complex process – yet it works!!!
Need to develop analytical reporting in BW to increase understanding of results
QUESTIONS?
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Session Code: 1706