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Accounting in ERP Systems
given the budgeted number of units. That amount would be Fitter’s standard cost for a bar.
Assume that during a given month, Fitter makes 1 million NRG-A bars. Using the standard
cost, it would increase its balance sheet inventory account by $750,000. Also, assume that
the company sells 800,000 bars in the month. In the income statement, the cost of the
sales would be shown as $600,000 (800,000 × $0.75). The inventory account would be
reduced by $600,000, because the company no longer has those units to sell.
If actual costs in the month equaled standard costs, no balance sheet or income
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statement adjustments would be needed. Actual costs never exactly equal expected costs,
however, so adjustments are almost always needed. The differences between actual costs
and standard costs are called cost variances. Note that cost variances can arise with both
direct and indirect costs. These variances are calculated by comparing actual expenses for
material, labor, utilities, rent, and so on, with predicted standard costs.
If the company keeps records for the various elements separately, compiling variance
adjustments can be difficult. If products are made by assembling parts that are made at
different manufacturing sites, and the sites use different information systems, the
adjustments may be very imprecise.

ERP and Inventory Cost Accounting
Many companies with unintegrated accounting systems analyze their cost variances
infrequently because of the difficulty of doing so. As a result, these companies often do not
know how much it actually costs to produce a unit of a product. As the following example
illustrates, knowing precisely how much production costs can be very important.
Suppose Fitter has an opportunity to sell 300,000 NRG-A bars to a new customer. This
is a huge order for Fitter. The customer wants a price of $0.90 per bar. Fitter’s standard
cost per bar is currently $0.75—based on information that is two months old. Fitter knows
that the costs to manufacture snack bars have been increasing significantly in the past few
months. Fitter does not want to sell at a loss per unit, but it also does not want to lose a
large order or a potentially good long-term customer. Because of the difficulty of compiling
all the data to calculate cost variances, Fitter only analyzes cost variances quarterly, and
new data will not be available for another month. Should Fitter accept the large order?
If Fitter had an ERP system, employees throughout the company would have recorded
costs in the company-wide database as they occurred. The methods for allocating costs to
products and for computing variances would have been built into the system when it was
configured. Thus, the system could compute variances automatically when needed. This
would simplify the process of adjusting accounts, and Fitter’s management would always
have accurate, up-to-date information on cost variances. Fitter could make an informed
decision on whether it could profitably sell snack bars for $0.90 each. Furthermore, with a
properly operating sales and operations planning process, Fitter could determine whether
it has the capacity to complete the order on time, as well. If overtime would be required to
complete the order, then analysts could use the planning capabilities of the ERP system
to evaluate costs using overtime production.
ERP system configurations allow analysts to track costs using many bases—by job, by
work area, or by production activity. This means that unit costs can be computed using
different overhead allocation bases, allowing an analyst to play “what if” with product
profitability decisions. In an unintegrated system, doing such multifaceted tracking would
be time consuming and difficult.

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