How to set up cost for kits and in-house production

Why the «Last Purchase Price» method is not suitable for kits and production

In Torgsoft, the cost of kits and in-house manufactured products depends not only on goods receipt invoices, but also on which cost calculation method is used in the program. If the «Last Purchase Price» method is selected for accounting, errors may occur in scenarios with assembly, disassembly, and internal transfers: the cost of a kit or its components may become zero or understated. The reason is that this method does not always correctly preserve the link between the product, its components, and the actual purchase price after internal movements between warehouses or stores.

For example, a store purchased separate components for a kit for the central warehouse and then transferred them to a retail outlet where the kit is assembled or sold. If the «Last Purchase Price» method is used at this point, the program may fail to determine the correct purchase cost for a product that arrived not directly from the supplier, but through an internal transfer. As a result, the cost of the kit or its components in the sale may not be filled in, may become zero, or may be lower than the actual cost. Because of this, profit in reports will be calculated incorrectly.

Which cost calculation method to use for kits and production

For correct accounting of production and auto-assembly, developers strongly recommend using the «By delivery batches with internal transfers» method.

How it works:

1. FIFO principle (First In, First Out). Cost is calculated according to the «first in — first out» principle. The program clearly knows from which goods receipt invoice (batch) the material was taken for assembling the kit or producing the item, and uses exactly that price.

2. Internal transfers as cost carriers. Internal movements between warehouses become "carriers" of cost. Each accounting center has its own accurate cost of remaining stock, which is critically important when materials are issued from the warehouse to the production workshop or to another retail outlet for assembling an auto-kit.

  3. Solving the return problem. This method eliminates the so-called "return problem" and ensures that a returned product or disassembled kit is returned to the warehouse at an adequate price.

After switching to this method (through Settings — Parameters — Accounting), it is mandatory to run a full cost recalculation for all products across all periods (months).

How the cost of finished products is formed in production

If a company uses full-scale «Production» functionality (Technological Cards and Production Acts / Route Sheets), calculating the cost of finished products becomes even more complex.

The cost of manufactured products consists of two main components: Cost of finished product = Cost of used materials + Cost of performed work (operations).

1. Cost of materials 

Materials are written off from the warehouse according to the norms specified in the Technological Card (TC) and with regard to the batch volume. These materials are valued specifically by delivery batches (FIFO).

2. Cost of work (operations) 

Operations are specified in the Technological Card. They can be measured in two equivalents:

• Money. Cost of work = Operation price × Number of completed operations.

• Time. Cost of work = Operation duration × Number of operations × Cost per second of work.

• Coefficients. Salary coefficients of the specific employee who performed the operation may also be applied to the cost of operations, if there is no ban on ignoring the coefficient, as well as «Operation grade» coefficients, which increase the cost per second of work by a certain percentage.

3. Calculation algorithm during product release 

The algorithm for calculating the cost per product unit depends on how exactly the batch is released:

• Release of the entire batch at once. If the route sheet is closed completely, the cost per unit is calculated based on the actually completed operations and actually used materials.

• Partial release. If only part of the batch is released, the program takes the planned cost directly from the Technological Card data.

Possible anomalies in calculation. The production manager should understand that cost may deviate from the plan:

• Understated cost. This may occur if the batch has been released and closed, but not all actually completed operations were entered into the route sheet or not all materials were written off. In critical cases, it may drop to 0.

• Overstated cost. This occurs when part of the products was written off, for example as defects, but the cost of work and materials spent on these defects is distributed across the remaining usable products being released, which artificially increases their cost.

Practical recommendations for configuring and maintaining calculation

1. Regular period closing. To fix the average cost and make calculations faster, especially for assembly and batch accounting, the period must be closed every month (Analysis — Period — Change status — Close period). This creates a checkpoint in the database.

2. Automatic calculation at night. Since batch-based cost calculation, especially with production, is a very resource-intensive task for the SQL server of the database, it must be configured through «Scheduled Tasks» for nighttime, for example at 01:00.

3. Problem of the first day of the month. According to Torgsoft logic, on the 1st day of a new month, the "Cost" column in the "Inventory Status" form remains empty until the first cost calculation of that month is performed. A configured nighttime task fully solves this problem.

4. Fixing failures. If the cost of a kit or material has «frozen» because of user errors, for example, adding a barcode instead of a price to an invoice, which causes an overflow error Arithmetic overflow error, the most effective method is to run the service operation: Settings — Parameters — Service - «Clear product movement information and recalculate cost». This will force the system to rebuild all FIFO chains.