Periodic Weighted Average

General Information

The concept of periodic weighted average (periodic WA) rests on the premise that costs for material and time used in the process to purchase and manufacture parts should be the costs that actually are accounted for in deliveries to the customer. The calculation principle is:
Ending stock value = Beginning inventory value + Invoiced costs + Processing costs - Cost of sold goods.

Compared to the inventory valuation methods of standard cost, weighted average, FIFO, and LIFO, the periodic weighted average posts no price differences or cost variances. Periodic WA, in other words, is a method to consider actual costs. The goal for periodic WA is to post actual costs, thus eliminating all purchase price differences and shop order cost variances.

The periodic WA functionality in IFS Applications is mainly focused on high-volume, make-to-stock solutions. This means that a fixed cost (i.e., the weighted average value of the previous period) in the application is used during the period. At period close, a new weighted average is calculated and applied to all transactions that are created during the period to be closed.

For the inventory part, there is functionality that allows you to limit the percentage with which the cost is to be updated with during a periodic WA update. If you have few parts in stock and few inventory transactions you might want to consider using this functionality to reduce the impact on the cost change of high cumulative differences. Any remaining difference (compared to the update given by the periodic WA calculation) is saved for later updates. The periodic WA update is explained in detail below.

When periodic WA is used, postings are handled differently compared to how they are posted when you use the inventory valuation methods of standard cost, weighted average, FIFO, and LIFO:

• Supplier invoice matching: Price differences are cumulated per part instead of being posted on price difference account.
• Shop order close: Cost variance is left on the work in process (WIP) account instead of being posted on cost variance accounts.

Periodic Weighted Average Update

The periodic WA background job is divided into two parts, which are described further below:

• Single-level periodic WA update, i.e., periodic WA for purchased parts, based on the cumulated price difference per part.
• Multi-level periodic WA update, i.e., periodic WA for multi-level manufactured parts, based on the remaining WIP value on all shop orders that are closed during the period.

In a periodic WA update, all transactions are updated with a correct periodic weighted average, i.e., postings for transactions are re-created using the new cost, and the beginning inventory is re-evaluated.

Note that parts not handled by periodic WA can also be affected (i.e., new cost variances can be created) by the update. This is the case when, for instance, the top part in a structure is not handled by periodic WA, while other parts in the structure are. A new cost variance transaction will then be created for the top part.

Single-Level Periodic WA

Single-level periodic WA is the first step in the multi-level periodic WA process due to the fact that purchased parts are always at the lowest level in a manufacturing structure. For non-manufactured parts, it is the only step performed in order to achieve actual cost.

Prior to the update, the cumulated price difference per part is summarized. When the inventory valuation methods of standard cost, weighted average, FIFO, and LIFO are used, price differences occur when you match supplier invoices against receipts for inventory parts. The cost of the receipt transaction is then compared to the invoiced price, and the difference is considered as a price difference.

During the update, a new periodic weighted average is calculated, beginning inventory is revalued, and costs on historic transactions for the affected parts are changed. The calculation of the periodic weighted average per part is as follows:
New periodic weighted average = ((ABS (Beginning Inventory + Qty of Real Deliveries Into Stock) * Old Std Cost) + Sum of Difference) / (ABS (Beginning Inventory + Qty of Real Deliveries Into Stock))

At re-valuation of the beginning inventory, and depending on where the affected parts are located, one or more of the following system events might occur at a single-level update:

Multi-Level Periodic WA

A cost variance is the difference between actual costs (i.e., true outcome from a shop order) and standard costs (i.e., budgeted costs). For manufactured part, it is the cost variances that appear when comparing standard costs with actual costs (i.e., true outcome from a shop order) that should be used in order to achieve a correct periodic WA. This differs from when you are using inventory valuation methods standard cost, weighted average, FIFO, and LIFO. Then a cost variance posting is created when a shop order is closed.

The multi-level update almost works in the same way as the single-level update. However, to achieve correct periodic WA for a manufactured part you have to consider that there can be a part structure in which some components are purchased and others are manufactured. Therefore, an update in a part structure is performed from the lowest level up. Since purchased parts are at the lowest level in a multi-level structure, the single level update is always performed first. The cumulated cost variance for all parts is then acquired, a new periodic weighted average is calculated, beginning inventory is revalued, and costs on historic transactions for the affected parts are changed.

At revaluation of the beginning inventory, and depending on where the affected parts are located, one or more of the following system events might occur at a multi- level update:

Removal of Price Difference and Cost Variance

If you decide to inactivate the periodic weighted average feature for a part, you are not allowed to have any remaining cumulated price difference or cost variance for that part. To remove any differences before inactivating the periodic weighted average feature, choose Remove Periodic WA Difference in the Operations menu, which books these amounts as price differences or cost variances. The same menu option can also be used if you want to manually remove cumulated differences, for instance at a period end. Price differences and cost variances occur when supplier invoices are matched and when you close shop orders.

When you remove the periodic WA differences and cost variances, one or more of the following system events might occur:

Other Considerations

Note that the start date of a periodic WA update will be the same for subsequent periodic WA updates as long as an update of inventory statistics has not been performed or transactions has not been transferred to IFS Financials. This means that it is possible to update the same transactions several times. You can set a new start date in Aggregate Inventory Transactions per Period or Transfer Inventory Transactions.

The fact that all transactions are updated with correct costs when a periodic WA update is performed (and not before) means that it is highly recommended not to transfer the transactions affected by the periodic WA update to IFS Financials between the periodic WA updates. Transactions have to be transferred immediately after the periodic WA calculation has been performed. If you transfer transactions to IFS Financials between periodic WA updates, not all transactions will be considered in the update.

If you want to log changes that are made when you run a periodic WA update, you can use the feature in Foundation to track the history of database columns. This feature allows you to determine which parts of the application are to be logged. You can, for instance, set up the system to log all changes in cost amount for an inventory transaction or for cost per configuration. You can also track the columns for cumulated price difference and cost variance. Using the values in the log, you will then be able to verify that the correct calculations has been performed.

So-called slow updated parts can be identified by looking for the latest date in the periodic WA re-valuation in the transaction history. A slow updated part is a part for which the cost has not been updated for a long time while, in the meantime, several periodic WA updates might have been performed.

Periodic weighted average has the following limitations:

• Movements between sites are not allowed for a part handled by periodic WA.
• Parts handled by periodic WA are not allowed to be entered as components in purchase component methods supplier material, and customer order for material to supplier.
• Production schedules will not be included in a periodic WA update.
• Cost bucket history on shop orders is not affected by a periodic WA update.
• The selection Zero Cost Only on the inventory part is not allowed for a part handled by periodic WA.
• The configuration cost method Cost per Base Part is not allowed for a part handled by periodic WA.