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RE: Production Costing

by
Fakrudeen Abbaz
- 08/29/2014 05:20:29

Hi all.

Different opinions means not issues between us, it's a outcome of healthy communication process. In India scholars says communications are two types.
1. Samvadha - Trying to find facts
2. Vikhandavadha - Trying to establish their own views.

I think ours is a Samvadha and I am sending this mail to avoid any confusion happened because of any mails of any one including mine.

I am trying to understand the suggestions of Ray, David , Ann and others. Let's hope we will reach to one solution soon.

Fakrudeen

Ps.: See the summary on the pad: https://pad.odoo.com/p/Production_Costing

_______________________________________________

David,

 

+ 100

 

My idea actually came from a customer after they asked a bunch of CPA’s for large American companies - none of them used Odoo at all. These were from the CFO’s of companies that have spent HUNDREDS OF MILLIONS on enterprise automation (per company).

 

They all told my customer many stories of the efforts to create and implement systems (and processes) to collect the information required to do accurate costing.  They all explained that even when this information was collected in real-time, and even when the processes were adhered to (not a small feat by the way) it was ALWAYS subject to (best case) an audit or (worst case) a complete adjustment/correction.  The algorithms could never account for EVERYTHING that would change costs – they could only ever account for MOST THINGS that would change costs.  They all modelled the production floor, but never reflected it with 100% accuracy 100% of the time.

 

If you have to spend money customizing Odoo to collect real-time costs AND make it smart enough to react to changes in how these costs vary AND increase the work a user has to do to keep tracking of everything AND adjust it anyway because the algorithm can’t react to the real world, then why not just save everyone the trouble (developers, users, accountants, auditors) and do a journal entry once a month!    

 

The term often used by another one of my customers is “Is the juice worth the squeeze - would you spend $100 in time and materials to get a single glass of orange juice??

 

(I was VERY disappointed by this answer because I was looking forward to the project and the money it would bring it, but I couldn’t disagree it was the right answer).

 

I’m not saying there aren’t cases where it is worthwhile, I’m just saying I don’t know of ANY.


Ray.

 

From: David Arnold [mailto:dar@devco.co]
Sent: Thursday, August 28, 2014 9:58 AM
To: Community
Subject: Re: Production Costing

 

Hi

 

Using analytical accounts would be a "media break" in terms of concepts.

Standard costing (estimated) does not need any temporal accounts, nor does actual costing.

 

When we talk about this distincion (standard /actual) we only talk about direct labor costs and machinery depreciation, right? (Because raw materials already have built in actual costing in the Wharehous Application at very low marginal cost) All other overhead costs are also not of direct concern, as they probably are not a linear function of the cost driver (e.g. time), so they need some more advanced allocation. The most feasible way so far seems to me, what Ray suggested: individually on every BOM with phantom products.

 

So the (my) question simply is, how to allocate ressource consumption into the valuation account, right? Of course you then might need advanced and statistical reporting on that to gain some interesting information, but the basic remains: how to allocate ressource consumption to the product or how to transfer P&L values (wages, depreciation) onto the Balance Sheet (inventory).

 

Because the scope of cost (like defined above) does usually not have great volatility and the cost of data collection when doing actual costing is high, I challenge the idea that there are many use cases where you need online-accuracy (by live measurement) - we are not talking about raw materials, where this can already by now (V8) be achieved, right?  If you need that accuracy, this is IMO very fine for a very custom development, not a general module.

 

So remains the case where you regularly check ex post your estimates (values that you find on your P&L and have to distribute on resources available time units). First the question is: of what consists this case? At the end, this consists in variance of efficiency which reflects the various time consumptions of specific resources for the same task. This actual (!) time registration, I've seen on V8 (although it was buggy). What I've not seen is the bridging concept which simply allocates to any unit of time (machinery/labor hour, or minute, or second) per resource a monetary unit out of the depreciation account.

 

Under consumption just remains on the P&L, this is fine as it is not a real attributable direct cost when a worker does a nap in the sun. You don't want to have that included into your production cost's on this first level when you want to know your costs at efficient production, you want to include maybe later. See Ray's approach for allocation of those overheads. 

 

Over consumption only can occur if it is unexpected, right? If it is expected you will have it included on the period's cost beforehand with high confidentiality (as there is little to no variance to planned values). It remains an issue only when the debiting of the P&L account does not proportionally or over proportionally grow with the credited consumed values. For wages this is not the case, as you will pay extra hours or the same or higher than normal hours. If it's expected it just enters the average labour unit cost. In some countries the depreciation unit of time of machinery is in such detail as hours or minutes for example, in others it's monthly. So there, indeed you can overuse, so you will have a debit Salado on your P&L expense account. that's not sane, right? So this is basically the only case where readjustment is needed. and it is no due to false registration of actual consumption but it is an error in the available units to consume. Your products are valuated right, because you normally applied an average depreciation value per time unit, what is not right is the depreciation value. You can no adjust for this by increasing the depreciation of this period or by reducing the inventory valuation (you probably would not do that on the product, because the product is right!) so you rather would do that in a summary way.

 

To conclude, I think it is obvious that this corrections can be periodically done by an accountant and in a summary way (no real pain-need for automation).

 

So I suggest, we CoA enable the resource concept, and that's it. There is no need for temporary calculation or storing or anything. If you have it estimated, your just living with an error, you'll probably comment on in your financial statement. If you use actual and have the data collection capabilities, then you might just register the times automatically instead of manually (as it is possible right now). If you need to adjust, for unexpected extra production, your accounting department is probably aware of, and can make the summary adjustments.

 

Maybe someone can explain to me, the reason why to play this simple accounting entries on analytical accounts?

 

So, now if you really need a second perspective of this processes, in other words an alternative view, we can parallel the structure on analytic accounts and there you can define different aggregation, different levels of detail, etc. This is what analytics are for.

 

It seems so obvious and logic to me, that I start do doubt my paradigms, because I do not understand, why it should be done more complicated on analytics.

 

So I repeat: Maybe someone can explain to me, the reason why to play these simple accounting entries on analytical accounts? Or did I badly missed something? (Like the "outch" kind of things?) Feel free to comment in line, thanks :)


Saludos Cordiales

David Arnold

David Arnold BA HSG / Analista
315 304 13 68/ dar@devco.co

devCO - empresa de consultoría de sistemas (en fundación)
http://www.devco.co

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2014-08-27 1:02 GMT-05:00 Fakrudeen Abbaz <fakrudeenabbaz@gmail.com>:

David,

I am really sorry and confused with your mail and loss the focus.

I was not ready to accept the concept Analytic before.  After consider many options I derived the conclusion that it's an a easy way to address simple and complicated production using analytic.

With minimal modification we can achieve this and analytic will be zero after the production.  It's acting like a temporary control account.

The best is even expenses for Production can be booked from journals or supplier invoice (cost of sub contract, Utility bills)

Actual material cost will book from stock transfer (consumption).
Overheads can be booked many  ways using Analytic.

I strongly recommend to think to use analytic in production.

Fakrudeen
pad: https://pad.odoo.com/p/Production_Costing

On Aug 27, 2014 8:06 AM, "David Arnold" <dar@devco.co> wrote:

Ps.: See the summary on the pad: https://pad.odoo.com/p/Production_Costing

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