Cost Management Overview

This chapter covers the following topics:

Overview of Cost Management

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.

Costing Methods

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

Overview of Standard Costing

Overview of Average Costing

Overview of FIFO/LIFO Costing

Describing the Major Features of FIFO/LIFO Costing

Cost Structure

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:

Inventory Organizations

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.

Cost Organizations and Shared Costs

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.

Cost Elements

Product costs are the sum of their elemental costs. Cost elements are defined as follows:


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.

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

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 in Subelement and Routing Windows

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.

Basis types 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 Types Available to Subelements

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.

Resource Value

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

Resource Units

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.

Total Value

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

Cost Transfer and Distribution to the General Ledger

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.

Standard and Average Costing Compared

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:

Standard costing is used for performance measurement and cost control. Standard costing allows you to:

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.

Valuation Accounts and Cost Elements with Average Costing

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.

Work in Process: Elemental Visibility

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

Changing from Standard to Average Costing

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

Overview of Standard Costing

Standard Cost Transactions

Manufacturing Standard Cost Transactions

Overview of Average Costing

Average Cost Transactions

Manufacturing Average Cost Transactions

Standard Cost Valuation

Average Cost Valuation

Standard Cost Variances

Manufacturing Standard Cost Variances

Average Cost Variances

Retroactive Pricing

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:

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.

Landed Cost Management (LCM)

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:

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.