04 — Costing Layer

Money. Translates all operations into financial figures and reveals problems. Inherits all rules from 00. Four components. The most valuable output is Variance Analysis.

4.1 Component: Costing Method

Purpose: Strategic decision on how inventory & production are valued. Set once; hard to change. Configurable per item.

costing_method ∈ { Standard, Actual, Average, FIFO }   (Item.costing_method)

Formulas

Average:  new_avg = (existing_qty×old_cost + new_qty×new_cost) / total_qty
FIFO:     issue at oldest batch prices in order

Standard cost build-up

Standard_Cost: { std_material_cost, std_labor_cost, std_overhead_cost,
                 std_total_cost, last_updated, update_frequency }

Generic-design note

System must support mixed methods: e.g. Standard for finished products (enables variances + stable inventory), Average for volatile raw materials. Per-item costing_method.

Melamine test case

Powder (volatile price) → Average. Dishes → Standard.

4.2 Component: Cost Elements

Purpose: Total product cost = three elements, each with its own source and calculation.

Total Cost = Direct Material + Direct Labor + Manufacturing Overhead

1. Direct Material

= Σ(BOM_qty × material_price)
source: BOM (quantities) + Material Master (price per costing_method)
POST: Debit WIP / Credit Raw Materials

2. Direct Labor — generalized by labor_calc

Hourly:    labor_hours × labor_rate
PieceRate: quantity × piece_rate
POST: Debit WIP / Credit Labor Applied

Critical rule: only labor whose pay varies with output is Direct Labor. Fixed-salary workers (even if on the line) → Overhead. Test: does pay change with production? Yes→Direct, No→Overhead.

3. Manufacturing Overhead

overhead_rate = total_annual_overhead / total_annual_cost_driver
cost_driver ∈ { LaborHours, MachineHours, DirectMaterialCost, UnitsProduced }
POST (at confirmation): Debit WIP / Credit MOH Applied
month-end: applied vs actual → over/under-applied → P&L

Types: Variable OH (electricity, consumables), Fixed OH (rent, depreciation, salaries), Semi-variable (maintenance).

Generic-design notes

• Negligible consumables → overhead pool, not BOM lines (e.g. sprayed glaze, tape).
• Usage-based depreciation for tools (by cycles, not calendar) — only running tools wear. Allocated per piece per its specific tool, so expensive/large items carry more.

Melamine cost model

piece cost = material(powder + decor if printed)   [direct, varies/unit]
           + press labor (piece_rate)              [direct, varies/unit]
           + everything else (overhead rate)       [fixed pool]
           + that shape's mold depreciation
Only material & press-labor vary per piece; all else is overhead.

4.3 Component: Cost Center

Purpose: Accounting unit that accumulates costs for a part of the plant. Enables "pressing cost X, assembly cost Y".

Cost_Center: { cc_id, type∈{Production,Service,Auxiliary}, parent_cc,
               manager_id, budget_amount, actual_amount, status }

Allocation methods (service → production)

Direct:     service → production only
Step-Down:  service → other services + production, sequentially
Reciprocal: all services allocate mutually + to production

Generic-design note

Service costs allocate by cause, not evenly. Maintenance of presses → allocate mainly to the pressing center, not split equally (assembly shouldn't bear press maintenance).

Melamine test case

Maintenance 8000 (Direct method): CC-PRESS 90% → 7200, CC-FINISH 10% → 800,
CC-ASSEMBLY 0% (no presses).

4.4 Component: Variance Analysis

Purpose: THE key output — reveals production problems. Variance = actual − standard. The total is useless alone; value is in decomposition, each type pointing to a problem and an owner.

The seven variances

1. Material Price Variance  MPV = (actual_price − std_price) × actual_qty       → Purchasing
2. Material Usage Variance  MUV = (actual_qty − std_qty) × std_price            → Production (waste)
3. Labor Rate Variance      LRV = (actual_rate − std_rate) × actual_hours       → (n/a if piece-rate)
4. Labor Efficiency Var.    LEV = (actual_hours − std_hours) × std_rate         → Production
5. Variable OH Spending     VOSV = actual_var_OH − (actual_hours × std_VOH_rate)→ Management
6. Variable OH Efficiency   VOEV = (actual_hours − std_hours) × std_VOH_rate
7. Fixed OH Volume Variance FOVV = (actual_production − budgeted) × std_fixed_OH/unit

Generic-design notes

• Under PieceRate, traditional LRV/LEV don't apply (slow worker costs himself); deviation shifts to machine/overhead.
• FOVV is critical when fixed costs are large: lower output spreads fixed cost over fewer units → higher unit cost. Drives the "run at full capacity" insight.

Variance tolerance

< 2%   → Normal, no investigation
2–5%   → Monitor
> 5%   → Investigation Required

Analysis logic

monthly, for each closed order:
  compute the 7 variances
  for each variance > tolerance:
      classify (material/labor/overhead) ; route to owner
  generate Pareto report (biggest causes)

Owner mapping (output)

Material Price ↑    → Purchasing
Material Usage ↑    → Production (waste)
Labor Efficiency ↑  → Production
Overhead ↑          → Management
Volume Variance     → Sales/Management (output dropped)

Joint-products (recap from execution)

total_sale_value = Σ(grade.qty × grade.price)
grade.cost = total_cost × (grade.qty × grade.price) / total_sale_value

Cost follows value, not equal split. Grade A (priciest) absorbs most cost/unit.