When a portion of the goods is produced, the finished goods can be delivered to stock through a (partial) goods receipt.
This process increases the inventory and triggers an inventory posting in financial accounting, which credits the production order with the delivery value. The delivery value is calculated by valuating the quantities delivered to stock, typically at the standard price obtained from the material master. The goods receipt decreases the actual balance of the production order as well as the WIP costs which represent the actual balance.
In parallel, target costs are calculated on the fly, valuating all actual quantities at planned prices. These target costs represent the expected costs of the quantities delivered, assuming production proceeded exactly as planned. They serve as a benchmark for comparing actual values, analyzing production efficiency, and identifying production variances.
Upon partial goods receipt, the order status is updated to Partially Delivered (PDLV).
Target Costs
Target costing is a method that evaluates the performance of a production order by comparing planned costs with actual costs and determining whether the actual costs are justified based on the resources used. Target costs consist of two components: fixed costs, which remain constant regardless of production quantity (lot-size independent), and variable costs, which change in proportion to the production quantity (lot-size dependent).
To calculate target costs, planned costs are adjusted for the actual lot-size (which is the delivered quantity, excluding scrap). This adjustment considers the proportional change in variable costs while keeping fixed costs constant.
In the exercise scenario, setup costs are incurred, which remain constant regardless of production quantity (lot-size independent). In contrast, direct material costs vary with production quantity, making them lot-size dependent. For instance, the work center requires only a one-time setup, regardless of the production volume, but each additional bike manufactured requires two extra wheels, illustrating the lot-size dependent nature of material costs.
The difference between target costs and actual costs is known as variance. This variance can be broken down into categories, such as quantity variance and price variance, to help identify the root causes of cost deviations.
Cost Analysis
Let's revisit our bike example. The partial goods receipt of 6 bikes results in the following costs:
- Target costs were calculated based on the quantity of 6 bikes delivered to stock, valuated at the bike’s standard price of 1.650 EUR. This results in a delivery value of 9.900 EUR, which was credited to the production order.
- On the actual costs side, the production order was credited with the delivery value as well, decreasing the actual balance. Since production had proceeded exactly as planned up to this point, the actual costs are identical to the target costs.
- As a result of the decreased actual balance, event-based WIP was decreased as well.