DEAR allows you to define manufacturing processes for a single finished product or for multiple finished products at a time.
Some products are produced together: two or more products that are generated within a single production process; they cannot be produced separately and incur undifferentiated joint costs. For example: dairy production: butter, cream, cheese.
Finished products are any desirable secondary goods that are generated during the manufacturing process that can be sold or reused profitably. In DEAR, the primary product of a production process is a finished product, but so are coproducts, byproducts, and joint production products etc.
They might also be products that are usually manufactured together or sequentially because of product or process similarities. Although Finished products are usually planned, desirable outputs from the manufacturing process, they can also be used as ingredients in other production processes.
DEAR also supports defining virtual intermediate products of production operations for use in later operations. Such intermediate products can be reflected in the Production BOM to increase accuracy in production reporting and transparency for the production process. See Using Inputs and Outputs - Intermediate or semi-finished products. It is recommended to understand how finished products are used before moving on to intermediate products.
- Getting Started with Production Module (required)
- Product and Service Management (required)
- Production BOM (required)
- Managing Production Orders (required)
- Implement parallel and non-parallel operations in a production BOM (recommended)
Table of Contents:
- What is a finished product in DEAR?
- Cost calculations for finished products
- Example Production BOM with finished products
What is a finished product in DEAR?
Finished products in DEAR are any product that is generated during the production process which is then added to the inventory to be sold or used in other operations. For example, a cheesemaking production process not only produces ripened cheese, but also produces fresh cheese and whey.
Finished products are added to a Production BOM as an output of a production operation. A Production BOM can be for a single finished product or include multiple finished products.
In DEAR, the primary product of a production process is a finished product, but coproducts, byproducts, and joint production products etc. are also classed as finished products.
Finished products can be stocked separately and are allocated costs.
Adding a finished product to your inventory
Finished products must have an entry in your inventory before they can be added to a Production BOM. Only Type:Stock products can be finished products. Add finished products to your inventory like any other stock product – see Product and Service Management for more information.
Finished product characteristics
Finished products are like stock items in that they have an inventory card, stock level, costs, and stock movements. The inventory card is not unique: this can be an inventory card for a product that already exists in the inventory. Finished products can be bought and sold as any other product.
- E.g. Product Fresh cheese” which the organisation buys and sells is listed in the inventory. The organisation starts to produce Fresh Cheese, adding it as a finished product to a Production BOM. The same Fresh Cheese inventory card will be used.
Finished products take part in replenishment planning: MRP (Material Requirements Planning, Inventory Velocity report.
- Finished products can be reordered via Reorder page. Inventory Velocity Report is generated based on the velocity for the component and provides the reorder suggestions. Finished products can be:
- Produced if a finished product has its own Bill of Material.
- Example: A company sells butter and raw cream and produces butter and raw cream together. Both finished products (butter and raw cream) have an identical production BOM.
- When there is a demand for raw cream, a production order for raw cream is generated, producing raw cream and butter.
- When there is a demand for butter, a production order for butter is generated, producing butter and raw cream.
- If raw cream is not a "company" product, and it is produced only because the company produces butter, there is no need for raw cream to have a production BOM. The company only sells the raw cream in stock after production of butter.
Finished products are listed as On Order in inventory availability when a production run with finished products has been started. The Planned Quantity in the production run is the On Order quantity.
Finished products can have a separate Bill of Materials. It is possible to have finished products with their own production BOM as well being produced during production of another product.
- E.g. Fresh Cheese has a Production BOM. Production orders can be created just for Fresh Cheese. Fresh Cheese is also produced during production of Ripened Cheese.
Finished products can be used as a component in other production orders and assembly orders.
- When used as a component in other production orders, On Order quantity is taken into account in calculations for quantity to produce set up in General Settings (see Production Process Customisation).
- E.g. "Fresh Cheese" is used by the organisation to produce other finished products.
Finished products cannot be used as a component in the same Production BOM. Finished products can be used a component in another product's Production BOM.
Entering finished products into a Production BOM
All operation sequences in a Production BOM must end with a finished product. If the production BOM is for a single product (has a single operation sequence), it is not required to include a finished product in the final production operation in the sequence, as the system will assume the single product is the finished product. Finished product can be added to the operations of the types:
- Quality Control
- Co-manufacturing (outsourcing part of the production process)
A finished product is not consumed in the operation, it appears as a result/output of this operation. The finished product output quantity is per Quantity to Produce of the final product.
Finished products which appear in a Production BOM (including the top-level product) appear in the Output section. Once a Production Run has been completed, the final quantity of the finished products produced is defined manually in Output screen.
Single-product Production BOM
Let's take the Production BOM for Pasteurised milk. It has a single operation sequence and produces a single product, Pasteurised milk.
It is not necessary to add Finished product: pasteurised milk to the final operation in the sequence, the system will assume that the top-level product is the finished product. In the course of production the final quantity of the Finished products produced is defined manually, after the final operation in the sequence has been completed.
Multi-product Production BOM
Production BOM for Fresh Cheese contains two finished products, Fresh Cheese and Powdered whey. The production process forks into two operation sequences. (See Implement parallel and non-parallel operations in a production BOM for more information about setting up more complex operation sequences.)
When multiple finished products are produced from a production process, all finished products must be explicitly named in the Production BOM, and all operation sequences within the Production BOM must end with a finished product.
In this example, a Production BOM is prepared for 20 kg of Fresh Cheese. After Step #1, the production process splits into two operation sequences.
One operation sequence has result Finished Product: Fresh Cheese, the primary product. The planned output quantity must match the quantity specified in the Quantity to Produce field of the Production BOM. Actual output quantity can be edited manually during production.
The other operation sequence has result Finished Product: Powdered Whey. The output quantity should be the output quantity of Powdered Whey per 20 units of Fresh Cheese. Actual output quantity can be edited manually during production.
Both finished products are added to the Finished Products Output section of the Production BOM.
Cost calculations for finished products
When several products are produced as a result of one production process, the costs spent on the production should be allocated to all produced products.
Different products may go through the same production process, making it difficult to differentiate costs among products early in production. During this stage, your organisation is incurring joint costs. At some points the products in production go through split-off points to become separate and distinct from one another. After split-off, each products incurs separable costs.
The DEAR production process allows for two types of costs allocation for products:
- Sales Value method: Best applied when separable costs do not exist, can be ignored, or are equivalent.
- Net Realisable Value method: Best applied when separable costs are significant.
The costs are allocated to products at the moment when Output is completed. However, this means that until a Production Run is completed, it is not known how much each unit of a Finished product costs to product. The effective date of cost allocation in DEAR is set to the date of Production Run completion.
Sales value method
The sales value method is a technique used to allocate costs based on the prices at which products will be sold. It is best applied when separable costs do not exist, can be ignored, or are equivalent. In this example, there are no separable costs applied after the split-off point.
In the case of a single-product Production BOM, actual costs will be used to determine finished product cost.
Total sales value for this production process is $810 + $900 + $550 = $2260.
Total cost for the production process is $1000 + $500 = $1500
The sales value ratios are:
- Skim milk: $810/$2260 = 36%
- Whole milk: $900/$2260 = 40%
- Heavy cream: $550/$2260 = 24%
Joint cost allocation for the finished products is:
- Skim milk: $1500 x 36% / (900 units) = $0.60
- Whole milk: $1500 x 40% / (1000 units) = $0.60
- Heavy cream: $1500 x 24% / (550 units) = $0.65
The Sales Value Price Tier can be selected in the Finished Product Output section of the production BOM.
Net realisable value method
Net realisable value method is a more appropriate method when separable costs occur after manufacturing split-off points. If an operation has two or more consequent operations which end in a finished product, this operation is considered to be a split-off point.
Joint cost of a finished product is the sum of all operation costs between initial operation and split-off point or between two split-off points, until the final split-off point for that product is reached. Joint costs are allocated to two or more finished products according to a ratio calculated by the system. The ratio is determined by the sale price of the finished product and the produced quantity (planned produced quantity is used for estimating costs before production occurs, actual produced quantity is used to calculate actual costs after production is complete).
Separable cost is the sum of all operation costs between split-off point and operation where finished product is completed. Separable costs are assigned to just one finished product.
In the case of a single-product Production BOM, Net realisable value method doesn't make sense, and actual costs will be used to determine finished product cost.
Prerequisites for this cost allocation method:
- All finished products must have a sale price
- Every operation has a cost (components and/or resources)
Take this simplified example of a production process which produces butter, buttermilk and milk.
- DEAR calculates that there are two split-off points, and therefore two joint costs.
- Joint Cost 1 = Operations #1 + #2 (split between butter, buttermilk and milk)
- Joint Cost 2 = Operations #4 + #5 + #6 (split between butter and buttermilk)
- For every split-off point, the system will create coefficients regulating the rule of splitting the joint costs between finished products. The coefficients can only be estimated when configuring the Production BOM, the true values can only be known once the production run is complete. However we can build a formula for the cost calculation using the coefficients.
- Split-off A has two coefficients, A1 and A2. A1 will apply to milk, A2 will apply to cream (butter and buttermilk).
- Split-off B has two coefficients, B1 and B2. B1 will apply to buttermilk, B2 will apply to butter.
- Since we have three finished products – three separable costs formulas will be calculated.
- Separable Cost 1 = Operation #3 (applies to milk only)
- Separable Cost 2 = Operation #7 (applies to buttermilk only)
- Separable Cost 3 = Operations #8 + #9 (applies to butter only)
- Next, DEAR will create formulas to determine the costs of finished products. Traversing from the ‘finished product’ node up to the split-off point:
- Packaged Milk = Separable Cost 1 + Joint Cost 1 * A1
- Finished Buttermilk = Separable Cost 2 + Joint Cost 2 * B1 + Joint Cost 1 * B1 * A2
- Finished Butter = Separable Cost 3 + Joint Cost 2 * B2 + Joint Cost 1 * B2 * A2
- DEAR calculates the potential sales value of the three finished products, sales price * planned quantity to produce. This will be replaced by actual quantities produced once production has been completed. The sales price tier can be selected in the Production BOM.
- P1, Potential sales value of milk
- P2, Potential sales value of buttermilk
- P3, Potential sales value of butter
- The variables can be rearranged to give us the coefficient values:
- B1 = (P2 - Separable Cost 2) /(P2 - Separable Cost 2 + P3 - Separable Cost 3)
- B2 = (P3 - Separable Cost 3)/(P2 - Separable Cost 2 + P3 - Separable Cost 3)
- A1 = (P1 - Separable Cost 1)/( P1+P2+P3 - Separable Cost 1 - Separable Cost 2 - Separable Cost 3 – Joint Cost 2)
- A2 = (P2+P3 - Separable Cost 2 - Separable Cost 3 – Joint Cost 2)/( P1+P2+P3 - Separable Cost 1 - - Separable Cost 2 - Separable Cost 3 – Joint Cost 2)
Formulas are kept in the BOM and rebuilt all the time. Upon completion of the production run, DEAR calculates actual costs of production operations and the user inputs actual quantities of finished products. DEAR then calculates coefficients A1, A2, B1, B2, separable and joint costs, and the final cost pre unit of the finished products.
NOTE: Effective date for accounting transactions is when the cost occurs.
- First effective date: when Complete for output for an operation with a finished product is input.
- All other effective dates: When some change of cost occurs in the operations for the finished product's production.
Making an example Production BOM with finished products
Consider a simplified production BOM to depict the cheesemaking process:
The product for which we are making the production BOM is the final product: Ripened cheese. The Production BOM specifies the process for 10kg of Ripened cheese.
We will need to create the following product entries:
- Raw milk (component)
- Mesophilic starter culture (component)
- Rennet (component)
- Powdered whey (finished product)
- Fresh cheese (finished product)
- Ripened cheese (finished product)
We have the following work centres set up:
- Cheese processing station
- Aging rooms
And the following resources set up:
- Curd tank
- Labour: Dairy
- Labour: Quality Inspector
- Cheese press
- Storage Shelves
The first step is represented as so:
- Note that Finished product: Whey is not consumed in the operation, it appears as a result of this operation. The finished product output quantity is per Quantity to Produce of the final product.
- In this example, the Production BOM is for 10 kg of Ripened cheese. 85 units of Whey are produced per 10kg of Ripened cheese.
Our next steps involve a quality control operation and the next manufacturing operation, Salting. This operation results in our second finished product, Fresh Cheese.
- 5 kg of Fresh Cheese are produced per 10 kg of Ripened Cheese.
Our final steps involve more quality control and manufacturing operations, resulting in our final finished product, Ripened cheese. 10kg of Ripened cheese is produced.
In the Finished Product Output section, we can see how the costs are calculated differently depending on the cost allocation method.
Sales value method:
Net realisable value method: