The sales order is commonly used in non-WIP systems to collect income and associated costs, often with the aid of non-inventory parts, to simulate a profit margin for each order. To assist this process multi-level job chains are created in a one-to-one relationship with the sales order to isolate costs to each order.
With DBA you should never use the sales order for costing or planning purposes. This yields false numbers, promotes inefficient job planning, and compromises the integrity and effectiveness of WIP accounting.
Absorption costing liberates you from reliance on the sales order for costing and planning. The majority of manufacturing costs are shared or variable costs such as manufacturing overhead, non-job downtime, overtime, and varying wage rates within work centers that are impossible in any practical sense to directly charge to specific sales orders. Instead, DBA uses hourly shop rates to apportion these shared and variable costs to jobs. This happens naturally as transactions are made and requires no special effort or intervention to achieve sophisticated and accurate costing.
Furthermore, the costs incurred by sales orders come from myriad sources, including make to order jobs, stock on hand, and multi-level subassemblies and purchased components that are interdependent across multiple product structures. In a non-WIP system it is not possible to apportion all these costs to one sales order unless jobs and subassemblies are made in a single job chain for each order. In DBA all these costs have been absorbed into each item’s inventory cost, which means that each sales order has an accurate cost of goods sold regardless how and when items were made or sourced or whether subassembly costs were shared among multiple items.
Being liberated from sales order based costing and planning also gives you the option of making items to stock using a “forecast” order policy and Supply Days setting. When an item is standard and interchangeable from one order to another, it is capable of being stocked and freely shipped to any customer, in which case sales order restrictions are inefficient and unnecessary. Instead of generating numerous jobs, each made to order, it is more efficient to generate fewer and larger jobs at regular intervals and to fulfill sales orders immediately from stock. Fewer jobs simplify the master schedule and immediate shipments increase customer satisfaction and boost cash flow.
Absorption costing and net demand planning for standard items are the proper and time-tested means for performing manufacturing costing and planning and are used by virtually all WIP accounting and MRP planning systems.