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COSTING SYSTEM AS PER IFS

Definition of a job: A job is each line of customer order (RMS order). In the case for order for
aircraft/ helicopter/ major assemblies and repair & overhaul jobs each order line will be for
unit quantity. But in case of spares each order line may be for multiple quantities. Order line
in a customer order relates to one date of delivery.
Scenario 1 Job is shipped in one Lot
1. A purchase of standard parts for a total PO cost of 30. The purchase is received into
inventory and then invoiced but now at a total cost of 35.
Job wise cost accumulation: 0
2. A purchase of Job specific parts at a total PO cost of 20. The purchase is received into
inventory and then invoiced and matched but now at a total cost of 26.
Job wise cost accumulation: 6 (PPV = 26-20)
3. Standard parts are issued to the shop order for a total weighted average of 12.
Job wise cost accumulation: 12+6=18
4. Job specific parts are issued to the shop order for a total weighted average cost of 22
(i.e. all of the purchased articles purchased in event 2).
Job wise cost accumulation: 18+22=40
5. Labor booking at a cost of 20.
Job wise cost accumulation: 40+20=60
6. DRE amortization in GL at value of 10.
Job wise cost accumulation: 60+10=70
7. The customer order is shipped.
Cost of Sales: 70

Cost accumulation and cost of sales in IFS


1. A purchase of standard parts for a total PO cost of 30. The purchase is received into
inventory and then invoiced but now at a total cost of 35.
Dr
Event
Purchase of standard part
Creation of Supplier Invoice

Inventory

30

Purchase
Liability
Purchase
Price
Variance

30

Cr
Purchase
Liability
Supplier

30
35

Trial Balance
Account
Dr
Cr
Inventory
30
Purchase Price Variance
5
Supplier
35
2. A purchase of Job specific parts at a total PO cost of 20. The purchase is received into
inventory and then invoiced and matched but now at a total cost of 26. The price variance
is capitalized.
Dr
Event
Purchase of job specific part
Creation of Supplier Invoice

Capture of job specific


Purchase Price Variance into
job specific WIP

Inventory

20

Purchase
Liability
Purchase
Price
Variance (JC)
WIP (JC)

20

Cr
Purchase
Liability
Supplier

20

Purchase
Price
Variance (JC)

26

6
6

Trial Balance
Account
Inventory
Purchase Price Variance
WIP (JC) Cost Accumulation
Supplier

Dr

Cr

50
5
6
61

3. Standard parts are issued to the shop order for a total weighted average of 12.

Dr
Event
Issue of standard part

WIP (JC)

12

Cr
Inventory

12

Trial Balance
Account
Dr
Cr
Inventory
38
Purchase Price Variance
5
WIP (JC) Cost Accumulation
18
Supplier
61
4. Job specific parts (DOP-parts) are issued to the shop order for a total weighted average
cost of 22 (i.e. all of the purchased articles purchased in event 2).
Dr
Event
Issue of standard part

WIP (JC)

22

Cr
Inventory

22

Trial Balance
Account
Inventory
16
Purchase Price Variance
5
WIP (JC) Cost Accumulation
40
Supplier
5. Labor booking at a cost of 20.

Dr

Cr

61

Dr
Event
Labor reporting

WIP (JC)

20

Cr
Labor
Absorption

20

Trial Balance
Account
Inventory
Purchase Price Variance
WIP (JC) Cost Accumulation
Supplier
Labor Absorption

Dr

Cr

16
5
60
61
20

6. The shop order is received at a standard cost of 45 (Material 30; Labor 15). This
gives a total labor variance of 5 and material variance of 4.
Dr
Event
Store Credit of manufactured
part

WIP at stores
(JC)

45

Cr
WIP (JC)

45

Trial Balance
Account
Inventory (RM)
WIP at Stores (JC)
Purchase Price Variance
WIP (JC)
Supplier
Labor Absorption

Dr

Cr

16
45
5
15
61
20

Cost Accumulation: WIP at stores (JC) + WIP (JC) = 45+15 = 60


7. DRE amortization in GL
Dr
Event
DRE amortization
Capitalize DRE amortization

DRE
Amortization
(JC)
WIP (JC)

Cr

10

DRE

10

10

DRE
Amortization
(JC)

10

Trial Balance
Account
Inventory
Purchase Price Variance
WIP at Stores (JC)
WIP (JC)
Supplier
Labor Absorption
DRE

Dr

Cr

16
5
45
25
61
20
10

Cost Accumulation: WIP at stores (JC) + WIP (JC) = 45+25 = 70

8. The customer order is shipped.


Dr
Event
Shipping of the part

WIP (JC)

45

Cr
WIP at Stores
(JC)

45

Trial Balance
Account
Inventory
Purchase Price Variance
WIP (JC) Cost Accumulation
Supplier
Labor Absorption
DRE
9. The Job is closed

Dr

Cr

16
5
70
61
20
10

Dr
Event
Job is closed

Cost of Sales
(JC)

70

Cr
WIP (JC)

70

Trial Balance
Account
Inventory
Purchase Price Variance
WIP (JC)
Supplier
Labor Absorption
DRE
Cost of Sales

Dr

Cr

16
5
0
61
20
10
70

Cost of Sales = 70 as per actual cost

Comparison of Existing system with IFS system


1. Difference between invoice price and inventory value (PPV) is captured in both the
systems.
2. Existing system treats PPV as an expense. In IFS PPV for items purchased specific for
the job are accumulated in job wise cost and released to cost of sales. PPV for standard
parts is charged to expense.
3. In the existing system of integrated accounting separate General Ledger and cost ledger
are maintained. In IFS its a unified system. However, in IFS detail of WIP and cost of
sales work order wise and job wise is available.
4. In current system there is no store credit accounting for in-house fabricated parts. In IFS
on store crediting item comes into inventory, which at GL level can be mapped to WIP GL
account itself.
5. In current system DRE, SDC, under absorption/ over absorption, ATF etc. is routed
through work order. In IFS these expenses are captured in GL against the job and
become part of the WIP and ultimately released as cost of sales.
6. In existing system GL does not have any account for labor absorption. In IFS labor
absorption will appear as a credit in GL and can be netted off against cost of sales by
grouping together to get material consumption. This net figure will be equivalent to net
material consumption after adjustment of increase/ decrease in WIP as per current
system.
7. Information regarding MOU i.e. value addition and value of production can be obtained
from IFS costing system.
8. In existing system costs are accumulated work order wise and released to cost of sales
from each work order. Thus releasing of cost of sales involves lot of manual effort. In IFS
costs are available work order wise but cost of sales is released in one shot automatically
without any manual effort on completion of the job as costs are accumulated in WIP
against the job.
9. In the current system in the above scenario the cost of sales would be Rs.64 while in IFS
the cost of sales would be Rs. 70. The difference of Rs. 6 is on account of PPV on items
purchased for the specific job, which is expensed out in existing system but in IFS it is
carried to WIP against the job and released to cost of sales.
10. In the current system over/ under absorption is computed manually and allocated to a
project (only major projects). In IFS system over/ under absorption will be automatically
allocated to various jobs on which work has been done during the year. If the job is
closed the over/ under absorption would go to cost of sales otherwise the same would
remain in WIP.
11. Current work order numbering scheme is not required in IFS as connection through job
code is maintained for multi level work orders.
12. Transfer of cost from one work order to another work order In IFS it would be done at
the standard cost which should be very close to the actual cost. In the current system it
has to be estimated which is a tedious process.

13. Merging of work orders is catered to in IFS system by first combining multiple shop
orders into one & on completion, allocating actual costs to individual work orders in the
ratio of quantities.

Scenario 2 (partial shipment)


1. This situation will arise only in the case of spares customer order where the quantity per
order line is more than one and full quantity is not shipped in one lot.
2. In existing system cost of sales is released based on equivalent complete units. This
requires technical estimation of WIP, which may result in over/ under estimation. In IFS
cost of sales in such cases would be released based on the standard cost, which ideally
should be very close to the actual cost.
3. Once the entire quantity is sold per job, balance lying in WIP is fully released to cost of
sales both in existing and IFS system.