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GOAL

On Average/FIFO costing, why WIP Completion is costed at unit cost 0 and final completion variance is generated?

SOLUTION

This occurs often when completion transactions was executed with final completion flag before all units are completed.

See example and explanation below;

Example:

1. Define bom as below;
   FG_001
   +-- Operation10: COMP_1 (Supply Type: Operation Pull/ Quantity:1/ Unit Cost:200 )
2. Release a discrete Job for FG_001 for 100 units.
3. Move all assemblies to Operation 10, then 100 units of COMP_1 are issued.
4. Complete 10 assemblies (without Final Completion flag.)
5. Complete 10 assemblies (with Final Completion flag.)
6. Complete 70 assemblies (without Final Completion flag.)
7. Complete 10 assemblies (with Final Completion flag.) -- This transaction is costed at unit cost 0. And final completion variance is generated.

On this case, cost is incurred and relieved as below;

On step3, cost is incurred with amount:20000 (Unit cost:200 x Quantity:100)
On step4, cost is relieved with amount:2000. (Unit cost:200 x Quantity:10)
On step5, cost is relieved with amount:18000.(All Incurred Cost:20000 - Already Relieved Cost:2000)
On step6, cost is relieved with amount:14000.(Unit cost:200 x Quantity:70)
On step7, cost is relieved with amount:0 and final completion variance with amount:14000.

Explanation:

If final completion is enabled on completion transaction, all the incurred cost for requirement and resource is relieved on that transaction.

On above case, requirement is issued for all units on step3. Then Completion transactions was executed with final_completion_flag = Y (step 5) before all units are completed.
So all the requirement cost is relieved on this transaction.

Followed normal completion transaction (step 6) is costed with current component cost at the time of completion transaction (unit cost 200) even though any new cost is not charged to a job. (*1)
On second final completion (step 7), there are no cost to relieve, so it is costed at 0. And also final completion variance hits because there is variance between incurred cost and relieved cost. (Relieved cost is bigger than incurred cost because of (*1)).  

This is expected behavior on WIP costing.

REFERENCES