Actual costs are captured in your accounting system
Actual labor and manufacturing overhead costs are captured in your accounting system’s general ledger.
Actual labor costs are captured through payroll transactions and bills for contract labor. Payroll costs for production employees should be posted to their own accounts so that they can be isolated from payroll costs for other worker types.
Actual manufacturing overhead costs are captured through bills related to all indirect production costs, including the factory’s share of rent, utilities, maintenance, supplies, taxes, insurance, and depreciation, as well as payroll costs for indirect labor such as shop manager, supervisor, shipping, receiving, warehouse, inspection, and maintenance employees.
Actual costs are translated into hourly shop rates
Total actual labor cost and total actual manufacturing overhead cost for a specified date range, typically the past three full months, are gathered from your accounting system’s general ledger and are entered in the Shop Rates screen.
The program divides these actual costs by reported job hours for the same date range to calculate an hourly shop rate for labor and an hourly shop rate for overhead.
Shop rates are applied to work center hourly rates
The hourly labor shop rate and hourly overhead shop rate are applied to each of your work centers where they can be factored up or down for exceptions to the shop average.
For example, you may wish to reduce the labor factor against a machine-based work center that is only partially attended. As another example, you may wish to increase the manufacturing overhead factor against a machine that consumes a disproportionate share of utilities and maintenance.
Work center rates calculate estimated costs
Work center hourly rates are applied to routing sequence cycle times to calculate estimated costs for labor and overhead in BOM cost rollups and estimated job costs.
Work center rates are applied to job labor transactions
Work center hourly rates are applied to job labor transactions to calculate job costs for labor and overhead.
Labor and overhead are absorbed into job receipt costs
Labor and overhead job costs are included in the total cost of job receipt transactions. Job receipt costs are averaged into the cost of stock on hand to update the item’s inventory cost.
Job receipts complete the absorption costing cycle
Job receipt transactions complete the absorption costing cycle by updating item inventory costs, which are the basis for cost of goods sold when items are invoiced.