Average Cost Variances
Under average costing variances are generated and handled as follows:
Average Cost Variance
Average cost variances are generated when you issue additional material even though the inventory balances for that material is negative. Inventory balances can be driven negative if the Allow Negative Balances parameter is set in the Organization Parameters window in Oracle Inventory is set. See: Organization Parameters Window and Defining Default Inventory Parameters
The Average Cost Variance account is charged only when a transaction results in a negative amount in inventory for one or more cost elements of an item. This account is used to account to balance the entry and represents the inventory valuation error caused by issuing inventory before receipts. See: Defining Costing Information
Attention: If you develop a large balance in the Average Cost Variance account, adjust your average costs.
If negative quantities are allowed, when a receipt (or transfer in) transaction occurs for an item with negative on-hand inventory, the following takes place:
- if the transaction quantity is less than or equal to the absolute value of the negative on-hand quantity, that is, the on-hand quantity would be zero or negative if the transaction were processed, the transaction is valued at the current average unit cost.
- if the transaction quantity is greater than the absolute value of the negative on-hand quantity, that is, the on-hand quantity would be positive if the transaction were processed, the transaction is valued in two parts:
- at the current average unit cost for the quantity required to bring on-hand inventory balance to zero
- at the normal transaction unit cost for the remainder of the transaction quantity.
The difference between the units valued at the current average unit cost and those valued at the normal transaction unit cost is written off to the average cost variance account.
Invoice Price Variance (IPV)
Invoice price variance is the difference between the purchase price and the invoice price paid for a purchase order receipt. Invoice price variances are generated when the invoice is processed and matched to the PO line items. Upon invoice approval, Oracle Payables automatically records this variance to both the invoice price variance and exchange rate variance accounts. IPV is determined and recorded the same under standard and average costing.
Cycle Count and Physical Inventory
Inventory considers cycle count and physical inventory adjustments as variances.
Distribute these variances to the general ledger when you perform the general ledger transfer or period close.
See Also
Using the Account Generator in Oracle Purchasing
Overview of Period Close
Inventory Average Cost Transactions
