The Impact of Cost Rolls on ST/OT Transfers Orders

      The Impact of Cost Rolls on ST/OT Transfers Orders

      Edward Gutkowski, Chief Architect - RapidReconciler

      Organizations that use standard costing may also have the need to move inventory between facilities using the ST/OT transfer methodology. Since this process at its core is a sales order shipment and purchase order receipt, we must be aware of the impact a cost roll may have on the general ledger. Let’s use the following business scenario:

      • We are moving 100 units of item 123 from branch ‘A’ to branch ‘B’, standard cost = $1 each
      • Inventory is transferred at cost, no markup
      • An ST/OT order is entered prior to a cost roll:
        • ST 100 – Cost = $100, Price = $100
        • OT 100 – Cost = $100

      If the entire process was completed before the cost roll is performed, the journal entries would be:

      In terms of the In Transit account, we have the perfect scenario to clear the amounts properly, without generating any variance.

      Now let’s look at what happens when a cost roll is done after the orders are created, but before the shipment occurs:

      • A standard cost roll is performed that changes the cost of item 123 to $1.25 each
      • The standard cost is changed in both branch ‘A’ and branch ‘B’
      • As part of the process, the sales cost update program is run
      • The ST order is updated, the OT order is not:
        • ST 100 – Cost = $125, Price = $100
        • OT 100 – Cost = $100

      And the corresponding entries:

      Notice in this case the In Transit account does not clear properly! We now have a $25 debit remaining, offset by the variance expense! In a perfect world, since our intention was to transfer the item without a markup, we would have also updated the price on the ST order, and the cost on the OT purchase order.

      In order to resolve this here are some recommendations:

      • Change your cost roll process to add the steps listed above
      • For the OT order only, change DMAAI 4335 to the In Transit Account
      • Apply a more advanced DMAAI configuration:

      So we have reviewed the impact a cost roll can have on the ST/OT transfer process. I hope this helps explaining potential discrepancies, and tightens up the reconciliation process.

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      Meet the Author

      Edward Gutkowski
      ,