Costing of In-house produced Utilities like Power, Steam, DEMN Water.
My client is a chemical manufacturing company. As the production of chemical requires huge quantities of utilities (Power, Steam, Gas etc.), the client has his own production facilities for the production of utilities. For example:
1. The client has its own power plant for electricity generation.
2. A plant for the production of Steam (Steam Generation Plant). For production of steam natural air, water and power are considered as raw materials.
3. Another plant for the production of DEMIN (De-mineralized) water. Raw water and some chemicals are considered as raw materials for the production of DEMIN Water.
The production cost of these utilities is ultimately charged to the finished goods (chemicals). Now for the costing of these utilities we have two options:
*Option No. 1. *To treat these utilities as Activity Types and allocate their cost to the Process order of Chemicals (FERT).
This option eliminates the process of QM (Quality Management), as QM users can not perform their tests on Activity Types.
Option No. 2. To treat these utilities as Semi-Finished Material and create process order for each one.
In this case huge number of accounting documents will be generated as a result of goods issuance and goods receipts in PP / MM. Gas, Power, steam will become Materials (Stock items) and their inventory value may arise in the balance sheet, which is not logical.
In light of above scenario you are requested to offer your comments for best possible solution, As should we treat these utilities as Activity Types or Materials?
Haroon Arshad replied
We had the same scenario with a chemical industry client and I must say Treatment of electricity, gas, steam and even DEMIN Water should be activity types only, and that sounds really logical too.
1. You collect all the costs related to Electricity, Gas, Steam, RO Units on their respective cost center.
2. If you have meters available you can always calculate the Per Unity cost of each activity type for that period.
3. You can use these activity types in BOM's more effectively (that's more realistic as well, like in our case the client was alternatively purchasing electricity and steam from external vendors).
4. Variances will be appx less then 2% with in 6 months of time with more mature costing results.
5. Less complexity in System. Reconciliation and Analysis of costs is easy.
6. Will help you a gr8 deal to analysis this cost in other modules like COPA.
If you would use it as materials or SFG I can bet you will be having a heck of time to close your monthly processes and the calculation of production cost for the month will be come after so many days, which I think was the foremost reason for us not to treat them as materials.
Regarding using RO water or DEMIN water in your case use it as activity friend.
Tell me how much it is the cost of raw water for you? I believe its close to nothing. So better to collect the RO (de-mineralization) process cost on a cost center and use it as an Activity Type.
You should only use water as Material if you have very critical QM activities to be performed on water be4 using it into your production process. for us water was only used in the chillers and at some places to generate steam so just used it as activity type.
I would suggest from my experience, in such high tech complex process oriented industries we should try to use production/process orders for the FERT or the Important materials only.
Hope this helps.
To go simple in Product costing
Edited by: Haroon Arshad on Jul 10, 2009 4:41 PM