COST ACCOUNTING FOR REPAIRABLES
In 1993, the Vice-President of Maintenance and Engineering was frustrated by the unpredictability of the division’s expenses against budget. I was asked to lead a team to look into the matter. I formed a large team of everybody affected by the issue from all departments, and we quickly identified that the charging of repairables in the repair cycle was the problem.
USA had originally used an Average Unit Price (AUP) system in which parts returning to stock from the repair cycle were “bought” into stock at a price equal to the repair cost. This system had many disadvantages and was replaced by a Debits and Credits system. Parts divorced from their next higher assembly (NHA) for repair were charged at full price to the NHA as if scrapped, then when they were repaired and returned to stock, the NHA work order was credited with the full price. This caused a number of problems, including tremendous swings in expenses, depending on repair activity that month.
I urged the team to look at the idea I had seen in Europe of having a Work In Process (WIP) account in which the cost of a repairable divorced from its NHA was transferred to the WIP account, and when repaired, was transferred to stores inventory. The team worked out the details of making this work and it not only resolved the budget issue, but had several beneficial side effects as well.
I presented a paper on this at an airline conference. British Car Co. sent a copy of my paper to QANTAS, and QANTAS’ controller visited us at USA to see what we had done. He then went and introduced something along the same lines in QANTAS.