{"id":56928,"date":"2019-07-20T22:54:55","date_gmt":"2019-07-20T15:54:55","guid":{"rendered":"https:\/\/bahtera.jp\/cost-calculation\/"},"modified":"2025-03-20T13:07:11","modified_gmt":"2025-03-20T06:07:11","slug":"cost-calculation","status":"publish","type":"post","link":"https:\/\/bahtera.jp\/en\/cost-calculation\/","title":{"rendered":"Differences in Cost Calculation Methods Adopted by Production Management Systems"},"content":{"rendered":"

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.
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Cost Management in Indonesia<\/p>\r\n\t\t\t\t\t\t\t\r\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t

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Mass production factories, such as two- and four-wheeler parts manufacturers common in Indonesia, have multiple manufacturing processes. In such cases, processing costs are calculated for each process, and the method of aggregating these costs into the product is called process costing. In this approach, labor costs and manufacturing overheads are recorded at the end of the month by the accounting department, transferred to inventory assets, and then allocated accordingly. On the other hand, in factories producing custom-made items under individual order production, job order costing is used, where costs are aggregated by order number or project number. In this case, … <\/p>\n\t\t\t\t\t\t\t\t<\/div>\r\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t

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About the Cost Calculation Function of Business Systems<\/h2>\n

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.
\nIn 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.
\nFixed 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.
\nThe 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.
\nThis 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.
\nOn 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.<\/p>\n

\n
\n
    \n
  • Actual direct labor cost per unit = Actual allocation rate (actual wage rate) \u00d7 efficiency (actual labor hours)<\/li>\n
  • Actual manufacturing overhead cost per unit = Actual allocation rate<\/li>\n<\/ul>\n<\/div>\n<\/div>\n

    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.
    \nThe 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).<\/p>\n

    \n
    \n
      \n
    • Standard direct labor cost per unit = Standard allocation rate (standard wage rate) \u00d7 efficiency (standard labor hours)<\/li>\n
    • Standard manufacturing overhead cost per unit = Standard allocation rate<\/li>\n<\/ul>\n<\/div>\n<\/div>\n

      Methods for Calculating Product Costs by Cost Element<\/h2>\n

      This summarizes how the manufacturing costs of a product produced through three manufacturing processes\u2014first process, second process, and third process\u2014are accumulated by cost element according to each cost calculation method.
      \nIn a perpetual inventory method system, actual cost calculation is performed in real-time,<\/span> 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.<\/span><\/p>\n\n\n\n\n\n\n\n
      Cost Element<\/span><\/td>\nCalculation Method<\/span><\/td>\nCalculation Steps<\/span><\/td>\nBreakdown<\/span><\/td>\n<\/tr>\n
      Direct Labor Costs<\/td>\nPerpetual Inventory Method<\/strong>
      \nWage rate per BOM item \u00d7 actual labor hours
      \nPeriodic Inventory Method (Actual & Standard)<\/strong>
      \nAccounting journal amounts or budget amounts are allocated to direct processes<\/td>\n      		Actual<\/strong>
      \nThe wage rate is calculated by dividing the direct labor costs aggregated by process by the actual direct working hours.
      \nStandard<\/strong>
      \nThe planned production quantity is calculated from the BOM expansion based on the planned product production, multiplied by efficiency (time expansion calculation) to determine the planned direct working hours.The direct labor cost budget aggregated by process (cost center) is divided by the planned direct working hours to calculate the wage rate.<\/td>\n      		Third Process Direct Labor Costs<\/p>\n

      Second Process Direct Labor Costs
      \nFirst Process Direct Labor Costs<\/td>\n<\/tr>\n

      Manufacturing Overhead Costs<\/td>\nPerpetual Inventory Method<\/strong>
      \nAllocation rate per BOM item \u00d7 actual labor hours
      \nPeriodic Inventory Method (Actual & Standard)<\/strong>
      \nAccounting journal amounts or budget amounts are first allocated to cost centers (departments, lines, product groups), then calculated from the cost centers<\/td>\n      		Actual<\/strong>
      \nThe total actual direct working hours aggregated by cost center is used as the primary allocation ratio.The manufacturing overhead costs of the cost center are divided by the direct working hours or production quantity to calculate the allocation rate.<\/p>\n

      Standard<\/strong>
      \nThe planned production quantity is calculated from the BOM expansion based on the planned product production, multiplied by efficiency (time expansion calculation) to determine the planned direct working hours.<\/p>\n

      The total planned direct working hours aggregated by cost center is used as the primary allocation ratio.<\/p>\n

      The manufacturing overhead cost budget of the cost center is divided by the planned direct working hours or planned production quantity to calculate the allocation rate.<\/td>\n

      		Third Process Manufacturing Overhead Costs<\/p>\n

      Second Process Manufacturing Overhead Costs
      \nFirst Process Manufacturing Overhead Costs<\/td>\n<\/tr>\n

      Depreciation Costs<\/td>\nPerpetual Inventory Method<\/strong>
      \nAllocation rate per BOM item \u00d7 actual operating time
      \nPeriodic Inventory Method (Actual & Standard)<\/strong>
      \nAccounting journal amounts or budget amounts are allocated to direct lines<\/td>\n      		Actual<\/strong>
      \nThe allocation rate is calculated by dividing the manufacturing overhead costs aggregated by line by the actual machine operating time.
      \nStandard<\/strong>
      \nThe planned production quantity is calculated from the BOM expansion based on the planned product production, multiplied by efficiency (time expansion calculation) to determine the planned direct working hours.The manufacturing overhead costs aggregated by line (cost center) are divided by the planned operating time to calculate the allocation rate.<\/td>\n      		Third Process Machine Depreciation Costs<\/p>\n

      Second Process Machine Depreciation Costs
      \nFirst Process Machine Depreciation Costs<\/td>\n<\/tr>\n

      Direct Material Costs<\/td>\nPerpetual Inventory Method<\/strong>
      \nLatest material unit price calculated by the moving average method \u00d7 actual input
      \nPeriodic Inventory Method (Actual & Standard)<\/strong>
      \nCalculated by multiplying the total average unit price calculated at the end of the month or the usage per product from BOM expansion by the standard material unit price<\/td>\n      		Actual<\/strong>
      \nThe required quantity is obtained from the parent-child relationship between actual input and production performance.
      \nStandard<\/strong>
      \nThe required quantity is obtained from the child requirement within the parent-child relationship in the BOM.<\/td>\n      		First Process Direct Material Costs<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      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.
      \nSpecifically, the allocation rate refers to the direct labor cost per minute or the manufacturing overhead cost and depreciation cost per product unit.<\/p>\n

      Journal Entries Related to Inventory Receipts and Issuances<\/h2>\n

      The cost management system can be used for both management accounting and financial accounting. However, the COGS calculation journal entries in \u201caccounting journal generation by business systems\u201d 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.
      \nOn the other hand, \u201cusing the cost management system for financial accounting\u201d 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.
      \nIn other words, journal entries for the series of receipt and issuance processes\u2014material receipt, material consumption, product completion, product sales, and conversion to cost of sales\u2014are generated sequentially, so there is no need to transfer the beginning and ending inventory as in the periodic inventory method.
      \n\"Journal<\/p>\n

      <\/div>\n

      Material Purchase<\/h3>\n

      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.<\/p>\n

      \n
      \n
        \n
      • (Dr) RAW MATERIAL\u3000\u3000\u3000\u3000<\/strong>(Cr) ACCOUNTS PAYABLE (R) – IDR<\/li>\n<\/ul>\n<\/div>\n<\/div>\n

        Material Consumption<\/h3>\n

        The total amount of actual material input from the receipt and issuance table from the cost calculation results.<\/p>\n

        \n
        \n
          \n
        • (Dr) MATERIAL COST (MF)\u3000\u3000\u3000\u3000<\/strong>(Cr) RAW MATERIAL<\/li>\n<\/ul>\n<\/div>\n<\/div>\n

          Product Completion<\/h3>\n

          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).<\/p>\n

          \n
          \n
            \n
          • (Dr) FINISHED GOODS\u3000\u3000\u3000\u3000<\/strong>(Cr) Material Cost (MF) – Offset<\/li>\n
          • \u3000\u3000\u3000\u3000\u3000\u3000\u3000\u3000\u3000\u3000\u3000\u3000\u3000\u3000 <\/strong>(Cr) Labor Cost (MF) – Offset<\/li>\n
          • \u3000\u3000\u3000\u3000\u3000\u3000\u3000\u3000\u3000\u3000\u3000\u3000\u3000\u3000 <\/strong>(Cr) FOH (MF) – Offset<\/li>\n<\/ul>\n<\/div>\n<\/div>\n

            Sales<\/h3>\n

            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.<\/p>\n

            \n
            \n
              \n
            • (Dr) ACCOUNT RECEIVABLE – IDR\u3000\u3000\u3000\u3000<\/strong>(Cr) SALES<\/li>\n<\/ul>\n<\/div>\n<\/div>\n

              Cost of Sales<\/h3>\n

              The total cost amount from the sales inquiry from the cost calculation results.<\/p>\n

              \n
              \n
                \n
              • (Dr) COGS from F\/G\u3000\u3000\u3000\u3000<\/strong>(Cr) F\/G<\/li>\n<\/ul>\n<\/div>\n<\/div>\n

                Month-End Adjustment Entries<\/h2>\n

                Transfer to Other Accounts Journal Entries<\/h3>\n
                  \n
                1. Deduction from Manufacturing Costs (Transfer Within Manufacturing Costs)
                  \nDefects 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)<\/p>\n
                  \n
                  \n
                    \n
                  • (Dr) Loss due to spoiled work\u30002\u3000\u3000\u3000\u3000<\/strong>(Cr) Transfer to other account\u30002<\/li>\n<\/ul>\n<\/div>\n<\/div>\n<\/li>\n
                  • Deduction from Cost of Sales
                    \nDefects 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)<\/p>\n
                    \n
                    \n
                      \n
                    • (Dr) Stock losses and shrinkage\u30002\u3000\u3000\u3000\u3000<\/strong>(Cr) Transfer to other account\u30002<\/li>\n<\/ul>\n<\/div>\n<\/div>\n<\/li>\n<\/ol>\n

                      Interdepartmental Allocation Transfer Journal Entries for Direct Labor Costs and Manufacturing Overhead Costs<\/h3>\n

                      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.<\/p>\n

                      \n
                      \n
                        \n
                      • (Dr) Direct labor-Press Dept\u30005\u3000\u3000\u3000\u3000<\/strong>(Cr) Direct labor\u30001<\/li>\n
                      • (Dr) Direct labor-Assy Dept\u30005\u3000\u3000\u3000\u3000<\/strong>(Cr) Direct labor\u30001<\/li>\n
                      • (Dr) FOH-Press\u30004\u3000\u3000\u3000\u3000<\/strong>(Cr) FOH\u30004<\/li>\n
                      • (Dr) FOH-Assy\u30003\u3000\u3000\u3000\u3000<\/strong>(Cr) FOH\u30003<\/li>\n<\/ul>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

                        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.<\/p>\n","protected":false},"author":2,"featured_media":81315,"parent":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[624],"tags":[],"class_list":["post-56928","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-cost-management"],"_links":{"self":[{"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/posts\/56928","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/comments?post=56928"}],"version-history":[{"count":0,"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/posts\/56928\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/media\/81315"}],"wp:attachment":[{"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/media?parent=56928"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/categories?post=56928"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/tags?post=56928"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}