This chapter covers the following topics:
Oracle Cost Management is a full absorption, perpetual, and periodic cost system for purchasing, inventory, work in process, and order management transactions. Cost Management supports multiple cost elements, costed transactions, comprehensive valuation and variance reporting, and thorough integration with Oracle Financials.
Cost Management automatically costs and values all inventory, work in process, and purchasing transactions. This means that inventory and work in process costs are up-to-date, and inventory value matches the cumulative total of accounting transactions.
Cost Management provides flexible cost setup features, including multiple cost elements and unlimited subelements, unlimited resources and overheads, and unlimited activities. You can use one or more of the following cost elements: material, material overhead, resource, outside processing, and overhead. Subelements enable you to analyze costs in greater detail. For example, you can have multiple material overhead subelements, such as purchasing, material handling, freight, duty, and so on. This flexibility enables you to accurately define and maintain costs and associate them with items.
Cost Management provides flexible account setup, including accounts by organization, subinventory, and work in process accounting class so that you can distribute costs to the proper expense accounts and capture valuation in the proper asset accounts.
Cost Management provides comprehensive valuation and variance reporting. Perpetual inventory and work in process balances are maintained on-line. Multiple variances are supported: purchase price, standard cost, cycle count, physical inventory, work in process usage, and work in process efficiency.
Cost Management also provides extensive cost simulation, copying, and editing capabilities that enable you to project costs and keep them accurate.
Cost Management supports flexible period-based accounting that lets you transact in more than one open period at the same time. You can reconcile and analyze one open period while conducting business in a subsequent period. Additionally, you can transfer summary or detail account activity to Oracle General Ledger at any time and close a period at any time.
Cost Management supports four perpetual costing methods: Standard Costing, Average Costing, FIFO Costing, and LIFO Costing. You can use the Average Costing method for one organization and the Standard Costing method for another organization.
See: Standard and Average Costing Compared.
You can use FIFO Costing, which is based on the assumption that the first inventory units acquired are the first units used. You can use LIFO Costing, which is based on the assumption that the last inventory units acquired are the first units used. Cost Management also supports Periodic Costing. See Overview of Periodic Costing
Oracle Cost Management does not support costing for process inventory organizations. See: Oracle Process Manufacturing Costing for costing and accounting functions for process organizations.
Related Topics
Describing the Major Features of FIFO/LIFO Costing
A cost structure is the collection of definitions and methods used to cost inventory, bills of material, and work in process. The cost structure is composed of:
Organizations
Cost organizations and shared costs
Cost elements
Subelements
Activities
Basis types
General Ledger accounts
In Oracle Manufacturing, each inventory organization must have a cost structure that you define. Organizations can have their own cost structure or can share attributes of a similar cost structure. See:Defining Organization Access, Oracle Inventory User's Guide .
Before you set up Inventory, Bills of Material, or Work in Process, examine the current cost structure of your organization(s) to determine which costing features and functions to use.
You can share costs across standard cost organizations as long as the child cost organizations have not enabled WIP. You cannot share costs across average costing organizations.
The two item attribute controls, Costing Enabled and Inventory Asset Value, determine whether you share costs. If you plan to share costs across standard costing organizations, then set the control level for these attributes to the item level. The organization that holds the costs is called the cost master organization.
Costs are maintained by the cost master organization and shared by the child cost organizations. All reports, inquiries, and processes use the shared costs. You cannot enter costs into the child cost organizations.
Note: The cost master organization can be a manufacturing organization using Work in Process.
You can also set up average cost organizations even if you share standard costs with another group of organizations. The average and standard costing organizations can share the same item master organization. However, the average cost organization does not share costs.
For each organization to create and maintain its own costs, set the control level for Costing Enabled and Inventory Asset Value item attributes to the item/org level. Even if each organization holds its own costs, multiple organizations can share the same common item master. See: Defining Items, Oracle Inventory User's Guide.
Product costs are the sum of their elemental costs. Cost elements are defined as follows:
Material - The raw material/component cost at the lowest level of the bill of material determined from the unit cost of the component item.
Material Overhead - The overhead cost of material, calculated as a percentage of the total cost, or as a fixed charge per item, lot, or activity. You can use material overhead for any costs attributed to direct material costs. If you use Work in Process, then you can also apply material overhead at the assembly level using a variety of allocation charge methods.
Resource - Direct costs, such as people (labor), machines, space, or miscellaneous charges, required to manufacture products. Resources can be calculated as the standard resource rate times the standard units on the routing, per operation, or as a fixed charge per item or lot passing through an operation.
Overhead - The overhead cost of resource and outside processing, calculated as a percentage of the resource or outside processing cost, as a fixed amount per resource unit, or as a fixed charge per item or lot passing through an operation. Overhead is used as a means to allocate department costs or activities. For example, you can define multiple overhead subelements to cover both fixed and variable overhead, each with its own rate. You can assign multiple overhead subelements to a single department, and vice versa.
Outside Processing - This is the cost of outside processing purchased from a supplier. Outside processing may be a fixed charge per item or lot processed, a fixed amount per outside processing resource unit, or the standard resource rate times the standard units on the routing operation. To implement outside processing costs, you must define a routing operation, and use an outside processing resource.
You can use subelements as smaller classifications of the cost elements. Each cost element must be associated with one or more subelements. Define subelements for each cost element and assign a rate or amount to each one. You can define as many subelements as needed.
Material Subelements - Classify your material costs, such as plastic, steel, or aluminum. Define material subelements and assign them to item costs. Determine the basis type (allocation charge method) for the cost and assign an appropriate amount. See: Defining Material Subelements.
Material Overhead Subelements -
Define material overhead subelements and assign them to item costs. Determine the basis type for the cost and define an appropriate rate or amount, such as purchasing, freight, duty, or material handling. See: Defining Overhead.
Resource Subelements - Define resource subelements. Determine the basis type for the cost and define an appropriate rate or amount. Each resource you define is a subelement, can be set up to charge actual or standard costs, and may generate a rate variance when charged. See: Defining a Resource, Oracle Bills of Material User's Guide.
Overhead Subelements - Define overhead subelements and assign them to your item costs. Determine the basis type for the cost and define an appropriate rate or amount. Overhead subelements are applied in the routing and usually represent production overhead. You can define overheads based on the number of units or lot moved through the operation, or based on the number of resource units or value charged in the operation. See: Defining Overhead.
Outside Processing Subelements - Define outside processing subelements. Determine the basis type for the cost and define an appropriate rate or amount. This subelement is associated with the outside processing cost element and represents service provided by suppliers. Each outside processing resource you define is a subelement, may be set up to charge actual or standard costs, and may generate a purchase price variance when charged. See: Defining a Resource, Oracle Bills of Material User's Guide.
Note: Negative item costs are not supported in Oracle Cost Management.
An action or task you perform in a business that uses a resource or incurs cost. You can associate all product costs to activities. You can define activities and assign them to any subelement. You can also assign costs to your activities and build your item costs based on activities.
Basis types determine how costs are assigned to the item. Basis types are assigned to subelements, which are then assigned to the item. Each subelement must have a basis type. Examples: one hour of outside processing per basis item, two quarts of material per basis lot.
Basis types are assigned to subelements in three windows and, for the overhead subelement, a setting established in one window may not always be applicable in another. (This refers specifically to the overhead subelement, not the material overhead subelement.)
Basis types assigned to subelements in subelement and routing windows are the defaults for the purpose of routing. Basis types Resource Units and Resource Value, when assigned to an overhead subelement(Routing only in the table below), are available to flow through to routing, but are not available in the Item Cost window.
When you are defining item costs, for any overhead subelement with a previously assigned basis of Resource Units or Resource Value, that basis is ignored, and only item or lot appears in the basis pop-up window. This does not change the assigned basis for the purpose of routing.
The following table details the basis types available for use with each subelement.
| Basis Type | Material | Material Overhead | Resource | Outside Processing | Overhead |
|---|---|---|---|---|---|
| Activity | n/a | yes | n/a | n/a | n/a |
| Item | yes | yes | yes | yes | yes |
| Lot | yes | yes | yes | yes | yes |
| Resource Units | n/a | yes | n/a | n/a | Routing only |
| Resource Value | n/a | yes | n/a | n/a | Routing Only |
| Total Value | n/a | yes | n/a | n/a | n/a |
Used with material and material overhead subelements to assign a fixed amount per item, generally for purchased components. Used with resource, outside processing and overhead subelements to charge a fixed amount per item moved through an operation.
Used to assign a fixed lot charge to items or operations. The cost per item is calculated by dividing the fixed cost by the item's standard lot size for material and material overhead subelements. For routing steps, the cost per item is calculated by dividing the fixed cost by the standard lot quantity moved through the operation associated with a resource, outside processing, or overhead subelement.
Used to apply overhead to an item, based on the resource value earned in the routing operation. Used with the overhead subelement only and usually expressed as a rate. The overhead calculation is based on resource value:
resource value earned in the operation x overhead rate
Used to allocate overhead to an item, based on the number of resource units earned in the routing operation. Used with the overhead subelement only. The overhead calculation is based on resource units:
resource units earned in an operation X overhead rate or amount
Note: You may optionally use resource units and resource value to earn material overhead when you complete units from a job or repetitive schedule.
Used to assign material overhead to an item, based on the total value of the item. Used with the material overhead subelement only. Material overhead calculation is based on total value:
Used to directly assign the activity cost to an item. Used with the material overhead subelement only. The material overhead calculation is based on activity:
activity occurances / # of items X activity rate
All costs are maintained by cost element. If you assign a different account to each cost element as you define your subinventories and WIP accounting classes (if you use Work in Process), then elemental account visibility is maintained when transactions are processed.
Cost Management offers many perpetual costing methods, including standard costing and average costing.
Average costing is used primarily for distribution and other industries where the product cost fluctuates rapidly, or when dictated by regulation and other industry conventions. Average costing eliminates the need to set standards. Average costing allows you to:
Value inventory at a moving weighted average cost
Track inventory and manufacturing costs without the requirement of having predefined standards
Determine profit margin based on an actual cost method
Measure the organization's performance against historical costs
Include all direct costs of manufacturing an item in that item's inventory cost
Standard costing is used for performance measurement and cost control. Standard costing allows you to:
Value inventory at a predetermined cost
Determine profit margin based on projected costs
Record variances against expected costs
Update standard costs from any cost type
Evaluate production costs relative to standard costs
Measure the organization's performance based on predefined product costs
Evaluate product costs to assist management decisions
The following table shows the functional differences between average and standard costing.
| Average Costing | Standard Costing |
|---|---|
| Material with Inventory; all cost elements with Bills of Material | Material and material overhead with Inventory; all cost elements with Bills of Material |
| Item costs held by cost element | Item costs held by cost subelement |
| Unlimited subelements | Unlimited subelements |
| No shared costs; average cost is maintained separately in each organization | Can share costs across child organizations when not using Work in Process |
| Maintains the average unit cost with each transaction | Moving average cost is not maintained |
| Separate valuation accounts for each cost group and cost element | Separate valuation accounts for each subinventory and cost element |
| Little or No variances for Work in Process Transactions | Variances for Work in Process transactions |
Under average costing, you cannot share costs. Average costs are maintained separately in each organization.
Under standard costing, if you use Inventory without Work in Process, then you can define your item costs in the organization that controls your costs and share those costs across organizations. If you share standard costs across multiple organizations, then all reports, inquiries, and processes use those costs. You are not required to enter duplicate costs. See: Defining Costing Information, Oracle Inventory User's Guide.
Note: The organization that controls your costs can be a manufacturing organization that uses Work in Process or Bills of Material.
Organizations that share costs with the organization that controls your costs cannot use Bills of Material.
The system maintains the average unit cost at the organization level; it does not use any subinventory valuation accounts. If you had separate valuation accounts by subinventory, then total inventories would balance, but account balances by subinventory would not match the inventory valuation reports.
Note: In Average Costing, depending on the FOB point, the elemental valuation accounts defined are used for either the cost group or the transfer cost group as the intransit accounts. Otherwise, the balances of inventory valuation reports do not equal the sum of accounting transactions.
You can assign different accounts to each cost element when you define a WIP accounting class. This provides maximum elemental account visibility. In average costing and standard costing, elemental account visibility is automatically maintained.
Related Topics
Work in Process Transaction Cost Flow
You cannot change the costing method of an organization once transactions have been performed.
Defining Organization Parameters, Oracle Inventory User's Guide and Defining Costing Information, Oracle Inventory User's Guide.
Related Topics
Manufacturing Standard Cost Transactions
Manufacturing Average Cost Transactions
Manufacturing Standard Cost Variances
Cost Management supports retroactive price changes in Oracle Purchasing. Over the life of purchasing documents, prices can change. The Retroactive Price Update on Purchasing Documents concurrent program automatically updates standard purchase orders against global agreements and blanket releases retroactively with price changes. When this occurs, the accounting is adjusted:
For purchase orders with a destination type of Inventory/Shopfloor, the adjustment account is posted to the Retroactive Price Adjustment account. This account is defined at the organization level in the Receiving Options window in Oracle Purchasing. The following accounts and costs are not adjusted:
Inventory and Work in Process valuation accounts
Average and LIFO/FIF0 cost organizations (costs are not recalculated)
Purchase price variance
When a price change is approved, adjustments for prior receipts are created:
| Account | Debit | Credit |
|---|---|---|
| Retroactive Price Adjustment | XX | - |
| Inventory AP Accrual | - | XX |
For purchase orders with a destination type of Expense, the adjustment amount is posted to the Charge account specified on the purchase order.
When a price change is approved, adjustments are created in the following accounts:
| Account | Debit | Credit |
|---|---|---|
| Charge | XX | - |
| Inventory AP Accrual | - | XX |
For periodic costing, the adjustment is posted to the Periodic Retroactive Adjustment account. This account is defined at the Legal Entity and Organization Cost Group level, in the Periodic Account Assignments window.
Transfer of ownership transactions, created for consigned goods, are also adjusted when the price on the associated blanket agreement is changed and approved.
Note: The application prevents retroactive price adjustment transactions when purchase orders are Landed Cost Management (LCM) enabled.
Related Topics
Retroactive Price Update on Purchasing Documents, Oracle Purchasing User's Guide.
Oracle Landed Cost Management is a new application for Release 12.1. Landed Cost Management (LCM) enables organizations to gain insight into all of the real costs associated with acquiring products. These costs are initially estimated and then updated with actual amounts as they become known, allocating them to shipments, orders, and products. Cost methods and inventory valuations are accurately maintained providing better visibility into an individual product’s profitability and an organization’s outstanding exposure. This data provides better insight for product forecasting and budgeting, and provides clear evidence of the detailed accumulation of expenses for regulatory requirements and reporting.
Landed cost is the cost to “land” a product on the buyer’s ultimate (final) location. These costs include, but are not limited to:
Freight
Transportation
Insurance
Handling
Storage costs
Container fees
Import and export charges
Taxes
Pier fees
Minimum and maximum order charges
Discounts
Surcharges
Currency revaluations
Landed Cost is calculated to accurately measure a corporation’s costs and profitability by the goods and items, product line, lot, business unit, organization, and so on. Landed cost plays a significant role in actual costing, evaluating on-hand inventory, as well as setting sales prices and revenue forecasting.
Standard Costing, Average Costing, FIFO and LIFO Costing, and Periodic Average Costing methods all support LCM.
See the Oracle Landed Cost Management Process Guide for complete details on setting up and using Landed Cost Management.