Differences in Cost Calculation Methods Adopted by Production Management Systems

The differences in cost calculation methods between a system adopting the perpetual inventory method, where journal entries are generated with each receipt or issuance, synchronizing the inventory asset valuation between accounting and inventory management, and a system adopting the periodic inventory method (inventory calculation method), which calculates manufacturing costs by subtracting the ending inventory from the beginning inventory and the expenses incurred during the month, will be explained by separating variable costs and fixed costs.

About the Cost Calculation Function of Business Systems

Business systems (ERP) such as Microsoft Dynamics or Sage Accpac, which are commonly implemented in Indonesia, adopt the perpetual inventory method, automatically generating accounting journal entries when production performance or input performance is recorded.
In this case, variable costs such as direct material costs are recorded as direct material costs by multiplying the unit price obtained through the First-In-First-Out (FIFO) method or the moving average method by the actual input quantity.
Fixed costs such as direct labor costs and manufacturing overhead costs are also recorded as direct labor costs or manufacturing overhead costs by setting a standard allocation rate in the Bill of Materials (BOM) and multiplying it by the actual labor hours or actual operating time.
The difference between the actual amount finalized at the end of the month and these costs needs to be manually allocated between the manufacturing costs for the month (direct labor costs and manufacturing overhead costs) and the ending inventory.
This cost calculation method, which emphasizes real-time synchronization between inventory and accounting for quick reporting, is inherently called actual cost calculation, but in operational practice, it is often referred to as adopting standard costs.
On the other hand, in a system adopting the periodic inventory method, where accounting journal entries are not generated when production or input performance is recorded, manufacturing costs are calculated by subtracting the ending inventory from the beginning inventory and the expenses incurred during the month. In this system, the variable cost unit price is calculated using the total average method, while the actual fixed costs are aggregated by cost center. The actual wage rate (or actual allocation rate) is calculated by dividing this by the aggregated actual direct working hours or actual production quantities per cost center, and a buildup calculation is performed.

In the case of standard cost calculation, the material requirements are calculated by expanding the BOM based on the planned product production volume, and the variable cost unit price of the product is determined by multiplying this by the material unit price from the master data.
The fixed cost budget aggregated by cost center is divided by the planned direct working hours or planned production quantities per cost center, calculated through BOM time expansion, to determine the standard wage rate (or standard allocation rate).

Methods for Calculating Product Costs by Cost Element

This summarizes how the manufacturing costs of a product produced through three manufacturing processes—first process, second process, and third process—are accumulated by cost element according to each cost calculation method.
In a perpetual inventory method system, actual cost calculation is performed in real-time, while in a periodic inventory method system, actual cost calculation is executed in a batch after the completion of the monthly accounting close, and standard cost calculation is performed as part of management accounting based on the planned product production and fixed cost budget for the next period.

Primary allocation refers to apportioning the fixed costs of indirect departments or line-shared costs to cost centers such as departments or lines based on direct working hours or personnel numbers. The allocation rate (wage rate) is calculated by dividing the fixed costs aggregated in the cost center by direct working hours or production quantities.
Specifically, the allocation rate refers to the direct labor cost per minute or the manufacturing overhead cost and depreciation cost per product unit.

Journal Entries Related to Inventory Receipts and Issuances

The cost management system can be used for both management accounting and financial accounting. However, the COGS calculation journal entries in “accounting journal generation by business systems” were based on the periodic inventory method, where the beginning inventory, ending inventory, and monthly purchases are manually transferred to the COGS account as a closing adjustment entry.
On the other hand, “using the cost management system for financial accounting” means generating journal entries for the receipt and issuance of inventory assets and interfacing the full set of journal entries that appear in the process up to the calculation of cost of sales to the accounting system.
In other words, journal entries for the series of receipt and issuance processes—material receipt, material consumption, product completion, product sales, and conversion to cost of sales—are generated sequentially, so there is no need to transfer the beginning and ending inventory as in the periodic inventory method.

Material Purchase

It can be obtained from the actual material purchase amount in the receipt and issuance table from the cost calculation results, but it is usually managed in the accounting system.

Material Consumption

The total amount of actual material input from the receipt and issuance table from the cost calculation results.

Product Completion

The sum of the purchased raw material costs from point 2 and the direct labor costs and manufacturing overhead costs interfaced from the accounting system represents the total manufacturing expenses for the month, which are then transferred to the product (assuming no work-in-progress).

Sales

It can be obtained from the actual sales amount in the receipt and issuance table from the cost calculation results, but it is usually managed in the accounting system.

Cost of Sales

The total cost amount from the sales inquiry from the cost calculation results.

Month-End Adjustment Entries

Transfer to Other Accounts Journal Entries

1. Deduction from Manufacturing Costs (Transfer Within Manufacturing Costs)
   Defects occurring in the manufacturing process are deducted from manufacturing costs and transferred to spoilage costs through a transfer to other accounts. This is a transfer within manufacturing costs. Manufacturing costs = Beginning WIP + monthly manufacturing expenses - (transfer to other accounts + ending WIP)
   • (Dr) Loss due to spoiled work　2　　　　(Cr) Transfer to other account　2
2. Deduction from Cost of Sales
   Defects in products after being converted to manufacturing costs are transferred to selling and administrative expenses through a transfer to other accounts and deducted from cost of sales. Cost of sales = Beginning products + monthly manufacturing costs - (transfer to other accounts + ending products)
   • (Dr) Stock losses and shrinkage　2　　　　(Cr) Transfer to other account　2

Interdepartmental Allocation Transfer Journal Entries for Direct Labor Costs and Manufacturing Overhead Costs

Direct labor costs and manufacturing overhead costs interfaced from the accounting system to the cost management system are allocated between departments on the cost management system side. Then, interdepartmental allocation transfer journal entries are interfaced back to the accounting system to view departmental profit and loss.