The actual cost method tracks the cost ofeach receipt into inventory. When depleting inventory, the processorlogically identifies the receipts that are consumed to satisfy thedepletion, and assigns the associated receipt costs to the depletion.
The actual cost method uses receipt layers for transactioncosting and inventory depletion.
Receipt Layers
A receipt layer is created for each put awayor delivery of an item into a cost organization. The itemis assigned a cost profile that specifies the valuation structure of theitem, and the valuation structure, in turn, specifies the valuation unit ofthe item. The receipt layer falls within the valuation unit. Underthe actual cost method, the cost processor identifies the receiptthat is used to satisfy the depletion, and applies the quantity depletionmethod that is defined in the cost profile. The accounting applicationcurrently uses the first in, first out (FIFO) depletion method.
The FIFO accounting method assumes that the goodsreceived first are consumed first. This logic does not require thatthe inventory be physically moved in FIFO order. In reality, the inventorymay be moving out in an unknown or random fashion, especially whenthe goods are fungible.
Inventory controls the physical flow of inventory,and the actual cost method can be configured to conform to the levelof physical tracking maintained for inventory. For example, if theinventory is tracking at the lot level, the costs can also be trackedat that level. If there is more than one receipt for a given lot,the FIFO accounting method assumes that the receipts in the lot areconsumed in FIFO order.
Receipt layers can be identified by combinations ofany of the following: cost organization, inventory organization, subinventory, locator, lot, serial and grade.
The following table illustrates the process of creatingreceipt layers for an item within a valuation unit.
| Transaction Date | Transaction Type | Quantity | Unit Cost | Receipt Layer Created |
| 01-Jan-2011 | PO Receipt | 100 | 120 USD | Receipt #1 |
| 02-Jan-2011 | PO Receipt | 80 | 100 USD | Receipt #2 |
| 03-Jan-2011 | Miscellaneous Receipt | 20 | 105 USD | Receipt #3 |
Inventory Depletion
This table illustrates the process of depleting theitem inventory based on the created receipt layers using FIFO logic:
| Transaction Date | Transaction Type | Quantity | Unit Cost | Receipt Layer Created | Receipt Layer Used for Depletion |
| 01-Jan-2011 | PO Receipt | 100 | 120 USD | Receipt #1 | Not applicable |
| 02-Jan-2011 | PO Receipt | 80 | 100 USD | Receipt #2 | Not applicable |
| 03-Jan-2011 | Miscellaneous Receipt | 20 | 105 USD | Receipt #3 | Not applicable |
| 04-Jan-2011 | Miscellaneous Issue | -40 | 120 USD | Not applicable | Receipt #1 |
| 05-Jan-2011 | Miscellaneous Issue | -60 | 120 USD | Not applicable | Receipt #1 |
| 06-Jan-2011 | Miscellaneous Issue | -15 | 100 USD | Not applicable | Receipt #2 |
FAQs
At the most fundamental level, supply chain management (SCM) is management of the flow of goods, data, and finances related to a product or service, from the procurement of raw materials to the delivery of the product at its final destination.
What is cost management in supply chain management? ›
Supply chain cost management refers to the process of managing and optimising all costs associated with the movement and storage of goods from the supplier to the end customer. This includes costs related to transportation, inventory, warehousing, customs, and taxes.
What best describes what a supply chain is everfi? ›
The supply chain is a network of businesses and activities involved in the production, distribution, and delivery of products or services from the supplier to the consumer.
How do you manage supply chain costs? ›
Top 10 Tips to Reduce Your Supply Chain Costs
- Focus on the Customer. ...
- Supply Chain Strategy. ...
- Make Better Use of Space. ...
- Sales and Operations Planning. ...
- Supply Chain Network Design. ...
- Move Supplies Faster. ...
- Automation. ...
- Outsourcing Supply Chain Operation/Management.
The Top-level of this model has five different processes which are also known as components of Supply Chain Management – Plan, Source, Make, Deliver and Return.
What is supply chain management quizlet? ›
Supply Chain Management (SCM) involves the management of information flows between and among stages in a supply chain to maximize total supply chain effectiveness and profitability. Operations Management. Forecasting, Capacity Planning, Scheduling, Maintaining inventory, assuring quality, and motivating and training.
How to calculate supply chain cost? ›
How To Calculate Supply Chain Cost. The first step in calculating total supply chain costs is to set up a system for determining all the cost drivers in your organization. Once you have that system in place, you can identify some of your internal issues, like excessive packaging, and translate them into dollar values.
What are examples of cost management? ›
A cost management plan example could be the budget for a home improvement project. Direct costs would include hired labor and building materials. Indirect costs would include equipment rental fees, insurance, and general maintenance.
What is the supply chain _________________? ›
A supply chain is a network of companies and people that are involved in the production and delivery of a product or service. The components of a supply chain include producers, vendors, warehouses, transportation companies, distribution centers, and retailers.
What is supply chain simply? ›
A supply chain includes all the raw materials and parts that are made into a product and distributed up the chain for manufacture and sale. In contrast, a value chain encompasses all the individual steps that are taken to create a marketable product.
Supply chain management is the handling of the entire production flow of goods or services—starting from the raw components to delivering the final product to consumers.
Why is supply chain important in cost management? ›
A supply chain is a network of entities who create a product and deliver it to its consumer. An effective supply chain results in lower costs and faster production. Lead time is the amount of time from the start of a process until its conclusion. Reducing lead time in manufacturing can increase output and revenue.
What is cost control in supply chain management? ›
It involves optimizing operations to deliver maximum value with minimum waste, thereby impacting the total cost of the products or services. Supply chain managers and leaders have a pivotal role in this aspect.
What are handling costs in supply chain management? ›
Handling costs refer to the types of costs associated with preparing and transporting inventory. Mostly, the cost cover expenses related to order fulfilment such as shipment and packaging cost.
What is supply chain management in your own words? ›
Supply chain management is the handling of the entire production flow of goods or services—starting from the raw components to delivering the final product to consumers.
What is the best way to explain the supply chain? ›
A supply chain includes every step that's involved in getting a finished product or service to the customer. The steps may include sourcing raw materials, moving them to production, then transporting the finished products to a distribution center or retail store where they can be delivered to consumers.
What is supply chain in few words? ›
A supply chain is a network of entities who create a product and deliver it to its consumer. An effective supply chain results in lower costs and faster production. Lead time is the amount of time from the start of a process until its conclusion.
