Overview of Average Costing
Under average cost systems, the unit cost of an item is the average value of all receipts of that item to inventory, on a per unit basis. Each receipt of material to inventory updates the unit cost of the item received. Issues from inventory use the current average cost as the unit cost.
By using Oracle Cost Management's average costing functionality, you can perpetually value inventory at an average cost, weighted by quantity (inventory cost = average unit cost * quantity).
For purchased items, this is a weighted average of the actual procurement cost of an item. For manufactured items, this is a weighted average of the cost of all resources and materials consumed.
Note: Weighted average costing cannot be applied to repetitively manufactured items. Therefore, you cannot define repetitive schedules in an organization that is defined as a manufacturing average cost organization.
This same average cost is used to value transactions. You can reconcile inventory and work in process balances to your accounting entries.
Note: Under average costing, you cannot share costs; average costs are maintained separately in each organization.
Average costing enables you to:
- approximate actual material costs
- value inventory and transact at average cost
- automatically interface with your general ledger
- reconcile inventory balances with general ledger
Inventory allows negative on-hand quantity balances without adversely affecting average costs.
- analyze profit margins using an "actual" cost method
Charge Resources to Work in Process at Actual Cost
You can charge work in process resources at an actual rate. You can charge the same resource at different rates over time. You can also charge outside processing costs to a job at the purchase order unit cost.
Complete Assemblies at an Average Cost
When you complete assemblies into inventory, costs are relieved from work in process and inventory is charged using a cost that is calculated based upon a combination of several options.
Inventory Valued at Average Cost
Under average costing, all asset purchased items in inventory are valued based on their purchase order cost. This results in item unit costs that reflect the weighted average of the purchase order unit costs for all quantity on-hand.
There is only one average unit cost for each item in an organization. The same item in multiple subinventories within the same organization has the same unit cost.
Perpetual Recalculation of Unit Cost
For the transactions listed below, the transaction unit cost may be different from the current unit cost for an item. In such cases, after the transaction has been processed, the item's unit average cost is automatically recalculated. As a result, at any time, inventory is valued at a current, up-to-date average unit cost.
- Purchase order delivery to subinventory
- Transfer between organizations where the receiving organization uses average costing
- Miscellaneous and account receipts
See: Inventory Average Cost Transactions.
- Miscellaneous and account issues
Cost Element Visibility
For tracking and analysis purposes, you can see cost details by cost element in two ways:
- For unit costs, as a breakout of the total unit cost into each of the five cost elements. From this detail, you can determine the value of labor, overhead, and material components in inventory.
- For work in process, as all job charges (including previous level subassemblies) and relief in cost element detail.
Average Cost Updates
When you update average costs, items in all asset subinventories in your organization and inventory in intransit that is owned by your organization are updated (revalued) by changing the unit cost to the new specified cost.
You can change costs by cost element and can choose one, several, or all cost elements at the same time. The offset to the change in inventory value resulting from a cost update is posted to the average cost adjustment account(s). Items in work in process are not revalued by an average cost update, nor are expense items or any item in an expense subinventory. See: Updating Average Costs.
Material Overhead Application
You can add costs (receiving, stocking, material movement, and handling) using material overhead. You can define as many material overheads as required and have that additional cost be included in the average unit cost.
Material overheads are associated to items on an item-by-item basis. As under standard costing, you can define default material overheads to apply to selected categories of items or all items in your organization.
Specifically, you can charge material overhead when you perform any of the following three transactions:
- deliver purchased items to subinventory
- complete assemblies from WIP to subinventory
Material overhead is applied at the rate or amount in effect at the time of the transaction. On-hand balances are not revalued when the rate or amount of a material overhead is redefined.
- receive items being transferred from another organization and deliver to subinventory
Transfers between Organizations
You can transfer items in inventory to a subinventory in a different organization. This is done using a direct transfer or through an intransit transfer, just as in standard or inventory average costing. Because item unit costs are held elementally, like standard costs, elemental detail is available for items being transferred whether they are in subinventory or in intransit.
When such an item is received into an average costing organization and delivered to the destination subinventory, all of its cost elements from the shipping organization, plus freight, plus transfer charges, if any, are combined into the material cost element in the receiving organization.
Attention: All cost elements are combined into the material cost element so the receiving organization does not have another organization's overhead (over which they have no control and for which they have no absorption) combined with their own.
You can earn material overhead on the delivery as stated above. That amount goes into the material overhead cost element.
Attention: If either freight or transfer charges are expressed as a percent of the transaction value, this amount is calculated based on the average cost at the time the change-of-ownership transaction is costed and not when the transaction actually occurs.
Transaction and Cost Processing
The transaction processor, which affects current on-hand quantities of items, can be set up to run either periodically (in the background) or on-line (quantities updated immediately). Oracle strongly recommends that the transaction processor be set to run on-line. The cost processor is always run in the background at user-defined intervals.
You can backdate transactions the same as in inventory average costing. If you backdate transactions, the next time transactions are processed, the backdated transactions are processed first, before all other unprocessed transactions. Previously processed transactions, however, are not rolled back and reprocessed.