Cost Accounting Solution for Multiple Purchase UOMs

Recently, a Sage X3 customer presented the following cost accounting challenge to our Sage X3 consulting experts. The scenario is actually quite common especially in process manufacturing environments. Sage X3 offers a more common approach (solution #1) and a more progressive approach (solution #2) based on a combination of standard Sage X3 unit of measure (UOM) conversion capabilities along with the ability to apply a unique business rule factor.

The Scenario

Company A can purchase the same ingredient from SupplierB in multiple units of measure (UOM). The ingredient is FIFO tracked, stocked in a single UOM and consumed in production.

Company A buys 200 – 55lb bags of ingredient at .80 lb (stocked as LB) and

Company A buys 5 – 2000lb totes of ingredient at .59 lb (stocked as LB)

The challenge

How can Company A most accurately account for the cost of the differing ingredients purchased at different units of measure?

Solution #1: Define the ingredient as lot tracked and set the valuation method to Average Lot Cost (ALC)

Inventory availability appears as:

10,000 lbs lot#T020416 @ .59 = $ 5,900

11,000 lbs lot#B020416 @ .80 = $ 8,800

Valued at:

21000 lbs = $ 14,700 (.70 average lot cost)

As you consume the ingredient based on the lot number, the valuation carries through to production (Work in Process) based on the lot you depleted and an average lot cost, a blended rate of multiple cost layers. This solution reduces the extreme high and low costs across for more even cost accumulation through production and minimizes cost variances.

Solution #2: Adjustable package UOMs and coefficient values driving the FIFO cost layers.

Using Sage X3, a user can create package UOMs that are ‘changeable’ along with an adjustment coefficient business rule.

CompanyA then creates the Purchase Order to Supplier A in one UOM (BAG) but cross references the transaction in inventory and cost tables using the stock UOM (LB) defined for the ingredient.

In summary, let the Purchase Order Receipt drive the FIFO cost layer while the UOM conversion at the time of purchase records the associated price per pound. Because the cost is precisely recorded in the cost tier, production will consume the FIFO ingredient at the lot and cost recorded on the actual purchase transaction.

Our recommendation            

Solution #2 is the preferred method because it most accurately reflects the actual cost of ingredients that are purchased in different units of measure. From a GAAP perspective, this solution is more widely accepted than having multiple cost methods for varying ingredients and items across the business as defined in Solution #1.

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