Distribution, Manufacturing, and Internet Modules

[Lyon1690]

We are a manufacturer of various products.  Sometimes our machines (or employees) mess up a manufacturing run and the items need to be reworked/or done over completely.  We want to be able to record and track the rework materials and labor by Work Order #.  However, we do not want to overly burden the inventory average cost with the rework.  How can we record rework costs by work order without increasing the inventory item costs?

[BigLouie]

I do not believe you can in Work Order since the whole purpose of Work Order is to roll up cost into inventory.  Your option would be a service package such as ASI Service Center which has a refurbish feature which allows you to issue rework materials and labor with the option to roll up cost or not.  I forgot, is this for lot, serial, FIFO or average cost items?

[Lyon1690]

We do have the SAGE RMA module but we use that for customer returned items that need warranty and non-warranty repairs. 

What I would like to do is record the costs of reworked items that were damaged or improperly made midway through the manufacturing process steps.  For example, I am making a steel widget that goes through a turret press, is grinded/deburred, and then goes to painting before being sent along to assembly.  If the painter paints the wrong side and we have to sandblast off the paint and send it back to the paint booth for rework, I want to capture the rework labor and materials without burdening the inventory item with the additional costs.  Currently, we do not record any rework.  It just goes into Overhead and gets picked up that way.

I suppose that if I knew what the Standard Costs were to produce the item, then I could compare that to the Actual Cost to see what the variance is.  Unfortunately, we have thousands of inventory items and none of the Standard Costs exist in MAS.  We are hoping to use a year's worth of Average Costs to determine what the Standard Cost should be.

[ssi]

You can add the rework labor as a Miscellaneous Labor charge (posted as a Work Order Transaction Entry) and it will show up as a Labor Variance.  When the work order is completed, the item will close to Finished Goods at Standard Cost, and the labor variance will be posted to the account that is set up in Work Order Options as Work Order Scrap (the first line in the Integrate tab).  That Work Order Variance Account includes the combined material and labor variances, but the Work Order History Report shows the two variance costs separately.

[jcl]

Create a "dummy" item number in inventory called "REWORK", set to any valuation method you want other than Standard Cost.  Each time you have to do rework, open a work order for the REWORK item number and record all necessary parts and labor to rework the item.  Complete it to inventory as usual.  Then daily, weekly, or once per month as part of your month end close procedure (this is what I would do makes it easier!), do an inventory issue transaction to issue the total on hand quantity of that REWORK item to whatever GL account you use to track rework costs. 

If you use the overhead features of work order, you should discuss it first within management to determine if charging overhead to the rework work orders makes sense or not.  I have heard both sides of that argument, and both sides make sense, so it comes down to company preference.  If yes, then use the same op codes you use for everything else when recording the labor costs.  If no, then you will need to setup an alternate set of op codes that are used exclusively for rework so they have a labor rate, but no overhead rate. 

This will provide the following benefits:

1.  Doesn't pollute Average Cost (or any other costs maintained in the item master for the item being reworked).

2.  Labor used for rework no longer appears on the income statement as "unapplied" labor costs.  

3.  Gives you detailed tracking of all costs associated with rework, whether its parts, labor or outside processing costs.

4.  Provides a detailed "rework" cost input into your overhead rate calculation to make it more accurate and ensure it covers these kinds of costs, because if you build stuff, it will get messed up sometimes, and OH is where you recover it. 

If you wanted to get really detailed with it, make the valuation method for the REWORK item number LOT or SERIAL, and when you complete the item to inventory, assign the work order number that the rework item was manufactured on originally as the Lot/Serial Number.  This way you create a direct link between the rework work order and the original work order that was messed up.  This would allow you to do analysis to see if there are any patterns or commonalities emerging for process improvement (i.e. the same family of items or the same process often comprises a majority of the rework). 

I've done this successfully with multiple manufacturing clients without much of a down-side, other than the added data entry and paperwork associated with creating and transacting on the additonal work orders for rework.  But the benefit outweighs the cost.