Iterative Periodic Average Costing (IPAC) is an alternative approach to standard periodic average costing and differs in the method of valuating the inter-organization transfers across cost groups. It is applicable in countries where the standards of cost absorption for inter-organization transfers across cost groups are more stringent and are not met by standard Periodic Average Costing (PAC). The inter-organization transfers that are impacted in this costing model are those transfers across cost groups within the same legal entity. Inter-organization transfers within the same cost group or across cost groups in different legal entities are not impacted in this costing model.
Cost Group
One or more premises of a company (e.g. manufacturing plants and/or warehouses) considered as a unit for costing purposes. All the premises belonging to the same cost group will carry the same unit cost.
Cost Owned Transactions
Cost owned transactions are transactions that carry their own costs and are used to compute the periodic average unit cost, which is applied to cost derived transactions. Some examples of cost owned transactions include PO receipts, WIP job completions, miscellaneous transactions with cost, and inter-organization transfers across cost groups.
Cost Derived Transactions
Cost-derived transactions are transactions that are transacted at the newly computed periodic average unit cost of the period. Some examples include sales order issue, issues to WIP job, material issues, and returns to WIP.
Periodic Moving Average Cost
Periodic Moving Average Cost (PMAC) is the cost computed by moving the previous period's cost and inventory balance at each step of the PAC calculation process for the current period. PMAC is used during the iteration process for valuating inter-organization transfers across cost groups. The final PMAC computed after valuating all transactions is the PAC for the period. PMAC is calculated as follows:
PMAC = ((Prior Cost * Prior Quantity) + (Inter-organization receipt quantity * PMAC cost of the corresponding shipment cost group)) / (Prior Quantity + inter-organization receipt qty)
Where: Prior Quantity: Previous Period Quantity + SUM (Transaction Quantity).
Prior Cost: ((Previous Period Quantity * Previous Period Cost) + SUM (Transaction Quantity * Transaction Cost)) / (Prior Quantity + SUM Transaction Quantity)
Previous Period Cost
The previous periods' Item cost.
Transaction Quantity
Receipt transaction quantities not including inter-organization receipts in the current period.
Transaction Cost
Receipt estimated prices or vendor's invoice final prices within the costing period.
Recursive Inter-organization Transfers
Recursive inter-organization transfers refer to goods that move in both directions between two cost groups. One cost group ships to and also receives from the other cost group the same item.