USA Inventory processing cost in SAP with JIT considerations

Oct 13, 2021
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United States
Hello, our company is buying raw material (pipes) and holding it in storage for a brief period before pulling the materials for processing (pipe bending, welding, etc.) and subsequent installation in a crude processing facility. We initially wanted to treat the cost of processing as part of inventory by adding it to the cost of the specific batch of pipes that was processed. This means tracking each batch of processed pipes separately with a distinct weighted average cost that includes processing cost. Once the pipes are installed, we credit inventory for each piece (at its weighted average cost) and debit installation costs. In SAP, this entails charging a project WBS which will settle to an asset (capitalized) at month-end.

After discussing the process with our Supply Chain team in more detail, we noted that pipe processing and installation will be done following just-in-time principles. This means pulling, processing and laying pipe in small batches on a weekly and even daily basis. As this makes batch tracking more complex, I am now thinking of charging processing cost directly to the project WBS, which will settle (be capitalized) at month-end. This means no processing cost will be added to Inventory and the credit to Inventory will happen once the raw material is pulled from the warehouse. The credit will be at original cost of the material, while the debit is to the project WBS.

Does anyone have any thoughts?


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