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Re: Production Costing

El Aleman, David Arnold
- 09/02/2014 03:43:49
Hi all,

I was inspired by a chat with Fakrudeen about the topic and want to deliver the structured overview myself. Find on the link an overview of the accounting entries of the operation I have in mind.

I tried to formulate conclusions that I ask you to falsify, in oder to advance the discussion...

Please falsify, 
  • that we are talking about the same type of operation - with continous inventory (!)
  • that we have an issue only with direct costs ("10b" in the spreadsheet)
  • that we can obtain with very little code the calculus of 10b 1.)
  • that we do still not know how to treat the difference between EX ANTE and EX POST values in 10b 2.) - this is maybe the connection to analytics, however, falsify
    • that ex ante values are available at moment of production when meaningful and validated (!) account moves are generated
    • that ex post values are NOT available at moment of production where meaningful and validated (!) account moves are generated, thus always the theoretical need for rectifiying account moves ("porpagate backwards"). - indepentently of using analytics or not.
    • that you're faceing trade-offs when allocating this rectification to your product direct costs, versus accepting them as overhead. Questions to ask
      • Is the difference significant to my inventory?
      • Is the difference significant on the product level? Or at all directly attributable?
    • that you face a trade off of automatizing this rectification of difference given the expected variance of this difference over time. ("Volatility of difference") - remember the type of operation (point one)
  • that we can accept direct costs to be based on ex ante available information
  • that we can accept that this ex ante information represents an *estimate* in case of non-linearity *within* the period (not extraperiodical non-linearity, such as wage increase)
  • that labeling those differences as "overhead" follows business logic, as those are causal to the point in time of production, but not to the charactersitics of the product itself (thus not a direct cost) - eg. overtime, interperiodical wage increase (?), etc.
Can anyone who understood fully the concept of analytical accounts do us the favor and copy the above spreadsheet and visualize the (additional) analytical moves. remark: If they are not additional but replacing, I'm afraid we could break with many hard and soft laws around the world, including IFRS. Note, that it is a continous inventory scenario.

If you have "building a bridge" type of operations in mind, then you might set up a project, rather than production operations, this is completely analytical world, because the roules to activate project costs are different, thus touching the CoA in a different way than operations with continous inventory.

Please, help me advancing this discussion by falsifying any of the above points or further hidden implications, thanks.

Saludos Cordiales
David Arnold