I - Cost of Sales: General principles 

3. Proportional costs of sales

3.1. Definition

It includes the following reporting headings:

• R15400 - Proportional costs of sales - Standard
• R15410 - Actual/Standard variance - Proportional costs of sales
• R15430 - Elimination of margin in inventories

3.2. Proportional costs of sales - Standard (R15400)

For PF1 companies , these proportional (variable) costs of sales are ACTUAL costs.

For WP1 companies , they relate to STANDARD costs and correspond to:

Number of units sold during the period x unit standard variable cost

Unit standard variable cost is based on costing version of bill of material and recipe for the month. Costing version is the most likely version, based on cost analyst / production management judgment.

3.3. Actual/Standard variance - Proportional costs of sales (R15410)

For WP1 companies ONLY

See Standard Costing.

The variance is the difference between standard variable cost of units produced and actual variable cost during the period.

Variance are due to

1. Performance :

• Structure:
  Difference between standard and actual composition (Production version change, Raw material, Recycling)
• Yield:
  • Raw materials consumption is higher or lower than standard quantity
  • Utilities consumption different from standard costing
  • Purchased vs produced:
    Material is purchased instead of produced or vice-versa
  • Subcontractor:
    Material is produced by a subcontractor instead of an internal production, resulting in a higher proportional cost

1. Cost centers :

• Utilities costs, subcontracting costs are assigned to each finished product by multiplying the standard unit cost by the actual quantity.
• The variable cost centers variance is the difference between the costs invoiced and the amount of costs allocated to production.

1. Inventory revaluation from current month standard to next month standard
2. Purchase price : difference between raw material standard cost and actual cost

3.4. Content of the variable production cost

Proportional costs of sales include:

• For raw materials , merchandises or trading goods : the acquisition cost of the goods purchased for resale, allocated to the quantities sold during the period,
• For manufactured (finished) goods : the variable portion corresponding to factory production costs that are allocated to sales. These costs correspond to costs that are directly related to the production activity.

3.4.1. Acquisition cost = Purchase cost (less rebates and discounts obtained) + Incidental expenses

• Purchase price of
  • Raw materials
  • Supplies (consumables, packaging, spare parts, ...), including internal product transfers
  • Energy and utilities (steam, power, electricity, water, etc.) purchased
    For utilities purchased to another entity of the Group, only the variable part of the purchase is in variable costs.
  • Waste, by-products (treatment of waste from the production cycle)

Note: By extension, in the case of "internal sales" (cross-divisions sale with an internal transfer price inside a company), the buying division considers it as an external purchase, i.e. fully variable

• Incidental expenses
  • Non-recoverable/non-refundable taxes
  • Customs duties
  • Intermediary costs (transit, etc.)
  • Transport costs on purchase
  • Lost packaging

Are excluded from the acquisition cost:

• Recoverable/refundable taxes
• Bank charges, late payment penalties
• Financial costs
  In view of the short production cycle of the Group's products, the option to capitalize financial costs, as described in IAS 23, is NOT applicable.
• Purchasing controls (laboratory analyses, quality control, …)
• Storage/warehousing costs, reported under "R25510 - Logistics costs - Non-proportional"
• Transportation costs on sales, reported under "R12910 - Logistics costs - variable"
• Transport insurance (on sales), reported under "R27900 - Miscellaneous production"
• Inventory in transit insurance, expensed under "R27900 - Miscellaneous production"
• Write-down of raw materials.

3.4.2. Variable production cost

The cost of manufactured product inventories (finished products, work in progress etc.) includes the cost of purchase, the cost of conversion and other costs incurred in bringing the inventories to their current location and condition.

It includes:

• The acquisition cost of the raw materials, indirect materials, packaging and the part of utilities as variable cost consumed during the production process
• Direct production charges such as:
  • Reception and handling costs (raw materials, finished products, goods in process, etc.)
  • Processing effluents
  • Indirect charges such as WCM costs on site (World Class Manufacturing system)

Costs excluded from inventory valuation

Notes:

• The split between proportional (variable) and non-proportional costs of goods sold for intermediate products is only maintained along the products chain for transfers at cost.

• The valuation of the cost of products (incl. services) sold by the entity when going out of inventory (at the time of the sale) takes into account:
  • the value of products sold by an entity, whether or not they are stored on its production site
  • the salvage value of products returned by customers
  • the value of compensatory free deliveries to replace defective products (without generating a net sale). 
    The free deliveries for trial purposes (e.g.: samples) are NOT taken into account. 

3.5. Semi-standard principle for the Production Cost

The semi-standard principle applies only for WP1 companies.