10Cost Accounting

This chapter contains the following:

Overview of Cost Accounting

Oracle Fusion Cost Accounting is used to plan, manage, review, and analyze inventory and manufacturing costing. It includes the following features:

  • Review Item Costs

  • Manage Standard Cost Definitions

  • Manage Standard Cost Import Exceptions

  • Analyze Standard Purchase Cost Variances

  • Manage Accounting Overhead Rules

  • Create Cost Accounting Distributions

  • Manage Cost Accounting Periods

  • Analyze Product Gross Margins

  • Review Journal Entries

To set up Cost Accounting and Cost and Profit Planning, you must complete the setup tasks displayed in the Setup and Maintenance work area.

  1. In the Setup and Maintenance work area, perform the tasks from the Cost Accounting functional area:

    • Offering: Manufacturing and Supply Chain Materials Management

    • Functional Area: Cost Accounting

  2. Perform the tasks in the same sequence that the list displays them.

    The following table describes the setup tasks to implement Cost Accounting, and states whether each task is required or optional.

    Setup Task Required or Optional Description

    Manage Costing Key Flexfields

    Required

    Define the costing key flexfield segments and validation for use as costing classification keys. The costing key flexfield must be defined for costing to operate correctly.

    Manage Costing Lookups

    Optional

    Define lookup codes for extensible lookup types.

    Manage Costing Descriptive Flexfields

    Optional

    Define validation and display properties of descriptive flexfields for costing. Descriptive flexfields are used to add attributes to entities.

    Manage Cost Organizations

    Required

    Create and edit cost organizations. Cost accounting setup data policies and user security policies for cost management are established in these organizations.

    Manage Cost Books

    Required

    Create and edit cost books that are used for inventory transaction accounting.

    Manage Cost Organization Relationships

    Required

    Associate inventory organizations to cost organizations and assign cost books to cost organizations.

    Define Cost Accounting Policies

    Required

    Specify cost elements, configure mapping between cost components and cost elements, and specify cost profiles and valuation unit structures.

    Define Cost Accounting Book Policies

    Required

    Configure default cost profiles, item cost profiles, and valuation units for items.

    Manage Cost Organization Data Access for Users

    Required

    Manage cost organization data access for user provisioned roles.

    Manage Overhead Expense Pools

    Optional

    Create and edit definitions of expense pools for overhead rules that are used in overhead absorption.

Set Up Cost Accounting Using Quick Setup

Quick Setup guides you through the setup process, and provides default setup values for some tasks according to recommended practices. The setup process automatically performs the following setup tasks:

  • Manage cost organizations

  • Manage cost book

  • Manage cost organization relationships

  • Manage cost element

  • Manage cost component

  • Manage cost component mappings

  • Manage valuation structures

  • Manage cost profiles

  • Manage default cost profiles

To set up Cost Accounting using Quick Setup, complete the following steps.

  1. From the Navigator menu, select Setup and Maintenance.

  2. On the Setup and Maintenance page, select the Manufacturing and Supply Chain Materials Management offering, and then click Setup.

  3. Click the Quick Setup icon next to Cost Accounting, and follow the on screen instructions.

    For more information about using Quick Setup, see Quick Start Guide for Manufacturing and Supply Chain Materials Management.

Set Up Legal Entity Time Zones

The accounted date of Inventory and Manufacturing transactions determines the accounting period in which the transactions are booked. You can configure whether cost transactions and accounting entries use the time zone of the server, or the time zone of the legal entity.

To enable legal entity time zone, perform the following steps.

  1. In the Setup and Maintenance work area, go to the following:

    • Offering: Manufacturing and Supply Chain Materials Management

    • Task: Manage Legal Entity Configurator Profile Options

  2. In the Profile Option Code field, query for the option XLE_ENABLE_LEGAL_ENTITY_TIMEZONE.

  3. In the Profile Values record, add a new row, and complete the required fields. The fields are described in the following table.

    Field Description

    Profile Level

    Set the profile level to Site. Don't use any other level because it would result in inconsistent data in Cost Management.

    Profile Value

    This field is configured using the following options.

    • Set the profile value to Yes to enable the legal entity time zone for transaction and accounting dates in Cost Management.

    • Set the profile value to No to disable the legal entity time zone and to use the server time zone for transaction and accounting dates in Cost Management.

  4. On the Setup: Manufacturing and Supply Chain Materials Management page, select the Manage Legal Addresses task.

  5. Locate the legal entity by querying on the address field.

  6. Set the legal entity time zone in the Time Zone field, and save your changes.

Manage Cost Organizations and Cost Books

A cost organization structure comprises cost organizations, inventory organizations, and cost books. Your accounting and business needs determine how you set up your cost organization structure. This structure in turn determines how the cost processors create cost accounting distributions and accounting entries for inventory transactions.

This figure illustrates the relationship between profit center business units, cost organizations, inventory organizations, and cost books.

Cost organization structure

Legal and Management Structures

An organization has:

  • A legal structure consisting of legal entities that establish contractual rights across the enterprise.

  • A management structure consisting of the strategic management team and operational business units:

    • Strategic management is responsible for setting strategic goals and business plans. It is typically at a high level in the corporate structure and reports directly to the holding company.

    • The operational business units report to strategic management and are responsible for managing the business operations and resources, usually organized along product lines or geographic regions. Operational business units can belong to one or more legal entities.

Profit Center Business Units

A profit center is an operational business unit that:

  • Reports to a single legal entity.

  • Supports strategic directives on products, pricing, investments, and financial planning.

  • May contain one or many inventory organizations and cost organizations.

  • Measures contributions by its organizations to enterprise profits, and tracks profit contributions against targets.

  • Enters into intercompany and intracompany trade agreements with other profit centers for various supply chain trade flows, such as customer drop shipments, internal transfers, and global procurement.

  • Is a segment in the chart of accounts for financial reporting.

  • Is on trade execution documents such as Purchase Orders, Sales Orders, Accounts Payable Invoices, and Accounts Receivable Invoices.

  • Is on costing transactions for operational analysis and management accounting.

Cost Organizations and Inventory Organizations

A cost organization can represent a single inventory organization, or a group of inventory organizations that roll up to a profit center business unit. You can group several inventory organizations under a cost organization for financial reporting purposes as long as they all map to a single profit center business unit. Because the inventory organizations that are assigned to a cost organization must all belong to the same business unit, it follows that they also belong to the business unit's legal entity.

The inventory organizations that are assigned to a cost organization must all belong to the same legal entity.

For each cost organization, define an item validation organization from which the processor should derive the default units of measure. You can designate one of the inventory organizations assigned to the cost organization to be the item validation organization, or you can designate the item master organization to be the item validation organization.

Cost Books

A cost book sets the framework within which accounting policies for items can be defined. You can define different cost books for each of your financial accounting, management reporting, and analysis needs. By assigning multiple cost books to a cost organization, you can calculate costs using different rules simultaneously, based on the same set of transactions.

Every cost organization must have one primary cost book that's associated with the primary ledger of the legal entity to which the cost organization belongs. You can also assign secondary ledger-based cost books for other accounting needs, as well as cost books that don't have an associated ledger, for simulation purposes. For example, you could assign a primary cost book for financial reporting, a secondary cost book for business analysis, and a third cost book to simulate results using different cost calculations.

When you assign a cost book to a cost organization, you can optionally associate it with a ledger. The cost book then inherits the currency, conversion rate, cost accounting periods, and period end validations of that ledger. If you're assigning a cost book that's not associated with a ledger, then you define these elements manually.

Set up your cost organization structure to accommodate your costing and accounting needs. The following discusses considerations for creating cost organizations, their association with inventory organizations, and their assignment to cost books.

Considerations for Creating Cost Organizations

When deciding what cost organizations to set up, consider the following:

  • Financial reporting and responsibility accounting. A profit center business unit may contain one or more cost organizations depending on use case requirements.

  • Data security needs. The cost organizations that you create may be determined by the separation of duties and security requirements for your users.

Considerations for Using Cost Organization Sets

By assigning cost organizations to a set, the entities defined at the set level can be shared by all the cost organizations belonging to that set. A cost organization set enables you to streamline the setup process, and helps you avoid redundant setup by sharing set-level definitions of your cost profiles, valuation structures, cost elements, and cost component groups across the cost organizations that belong to the set.

You also have the flexibility to assign cost organizations to different sets, for example if they're in different lines of business. That way you can segregate the definitions that are shared.

Considerations for Associating Inventory Organizations with Cost Organizations

Your operation may lend itself to a simple configuration of one inventory organization to one cost organization. Or, when there are many inventory organizations in the same business unit, you may group several inventory organizations under a single cost organization for any of the following reasons:

  • Costing responsibilities. You may want to group inventory organizations that roll up to the manager of a profit center business unit, or a cost accounting department within the business unit.

  • Uniform cost accounting. For example, to define your overhead rules just once and apply them to transactions from several inventory organizations, you can group those inventory organizations into one cost organization.

  • Cost sharing. If there are items in more than one inventory organization for which you want a single average cost, those inventory organizations must fall under the same cost organization.

Considerations for Assigning Cost Books to Cost Organizations

Every cost organization must be assigned one primary cost book that's associated with the primary ledger of the legal entity to which the cost organization belongs. You may also assign several secondary cost books as needed for other purposes such as: business analysis and management reporting, local currency accounting, or profit tracking of inventory items.

You can also assign cost books that don't have an associated ledger to a cost organization for simulation purposes.

Manage Cost Profile

This topic describes how to set up a cost profile to define the cost accounting policies for items, including the cost method and valuation rules. A cost profile must be associated with an item before the item can be costed.

To create a cost profile, perform the following steps.

  1. In the Setup and Maintenance work area, go to the following:

    • Offering: Manufacturing and Supply Chain Materials Management

    • Functional Area: Cost Accounting

    • Task: Manage Cost Profile

  2. Click the Create icon to create a new cost profile, and complete the required fields. The fields are described in the following table.

Field Description

Cost Profile Set

Set ID of a Cost Profile Set. Cost profiles use set-level definitions, and all cost organizations belonging to a set can share the same cost profile definitions.

Cost Method

Determines how the transaction cost is calculated by the costing application. The following cost methods are available:

  • Standard. Inventory is valued at a predetermined standard value. You track variances for the difference between the standard cost and the actual transaction cost, and you periodically update the standard cost to bring it in line with actual costs.

  • Actual. Tracks the actual cost of each receipt into inventory. When depleting inventory, the processor identifies the receipts that are consumed to satisfy the depletion, and assigns the associated receipt costs to the depletion.

  • Perpetual Average. The average cost of an item, derived by continually averaging its valuation after each incoming transaction. The average cost of an item is the sum of the debits and credits in the inventory general ledger balance, divided by the on-hand quantity.

Quantity Depletion Method

Determines how inventory quantity is depleted when costing inventory transactions. The method used by the costing application is first in, first out (FIFO).

Processing Negative Quantity

Determines how to treat depletion of inventory when the depletion quantity exceeds inventory on hand. When receipts are processed which correct the negative inventory state, Cost Accounting will automatically resolve previously negative inventory. The configuration options are as follows:

  • Always. Applies the cost for the entire transaction, including negative balances

  • To Zero. Applies cost only for quantity on hand, and holds the remaining shortfall until inventory is replenished.

  • Never. Does not apply cost for the transaction until quantity is sufficient to cover the entire transaction.

Account Intravaluation Unit Transfers

Enable this option to cost and account all transfers, including subinventory and locator transfers.

Valuation Structure Code

Select the control attributes that are used to define the cost of an item. You can maintain your cost calculation at any combination of the following levels:

  • Cost Organization

  • Inventory Organization

  • Subinventory

  • Locator

  • Lot

  • Serial

Cost Planning supports items assigned to a cost profile that uses a valuation structure at the level of Inventory Organization or Cost Organization, and doesn't support costs maintained in a more granular valuation structure, such as at the Subinventory or Lot level. You can create multiple cost profiles with different cost methods for the purpose of cost planning.

Provisional Completions

Determines the valuation method used for partial work order completions. For example, a manufacturing work order for a total quantity of 100 units has completed the first 10 units, and they are put into finished goods inventory. The cost of the work order will not be known until the entire work order is completed, but there needs to be a way to value the partially completed quantity. Once the work order has been completed and closed, the provisional valuation will be adjusted to the actual cost of the work order. The following options are available:

  • Value at Last Actual Cost. Use the cost of the last receipt processed for the same item and for the same cost organization, cost book, and valuation unit. This option can be used when the cost method is set to Actual or Perpetual Average.

  • Value at Perpetual Average Cost. Use the perpetual average cost that is effective when the partial work order completion is processed. This option can be used when the cost method is set to Perpetual Average.

  • Value at Standard Cost. Use the standard cost if it has been defined for the item and valuation unit. If a standard cost has not been defined for the item then the cost processor will wait until the work order is closed to set the cost. You can use this option to avoid write-off costs if you don't expect partial completions for your work orders. This option can be used when the cost method is set to Standard or Perpetual Average.

  • Value at work order close. This option is available when the cost method is set to Actual or Perpetual Average. When this option is used, the cost processor will not process partial completions until the work order is closed. This option is recommended for work orders that have a short duration, to avoid estimated provisional costs and cost adjustments.

Provisional Completion settings cannot be changed after the cost profile has been used for cost processing.

Operation Scrap Valuation

Determines the timing of accounting for scrap items. The following scrap valuation methods are supported:

  • Value at work order close. Use when it is not necessary for you to see approximate scrap costs in the general ledger and you want to keep entry adjustments to a minimum.

  • Value immediately and at work order close. Use when you want to see an immediate approximation of the scrap cost amount in your general ledger. Once the work order is complete and actual costs become known, it is possible for the application to compute the correct scrap cost post adjustments to the previous approximation.

  • Value at cost cut off date and at work order close. Determines the boundary for managing period end. You can avoid generating approximate scrap costs during the period, but for work orders that are work in process at period end (not completed), Cost Accounting can generate approximate scrap accounting entries for financial reporting.

Operation Scrap Accounting

Determines whether the scrap value is included in the inventory value, or expensed.

Cost component Mapping group

Maps incoming cost components to cost elements, which are used to cost transactions.

Receipt Without Cost

Specifies that for sales returns without a Return Material Authorization (RMA) reference or missing incoming cost, the cost processor uses the first or last receipt layer cost.

Referenced RMA Cost

Specifies how the cost processor determines what cost to use for sales returns. The processor uses an average of the actual cost layers from the shipments on the original sales order.

  • If the sales order consumed only one FIFO layer from inventory, then the actual cost of the shipment is used.

  • If the sales order is fulfilled by multiple shipments, or a single shipment that consumed multiple FIFO layers, then the average cost is used.

Propagate Cost Adjustment

Option to propagate cost adjustments down the supply chain to Cost of Goods Sold. This option is only applicable if the cost method is set to Actual.

Enforce Processing of Costs by Transaction Date

Enable this option to enforce processing of costs by transaction date. This option is available for all cost methods.

The following Cost Profile options must be set before you can enable the Enforce Processing of Costs by Transaction Date option:

  • The Process Negative Quantity field must be set to Always.

  • The Propagate Cost Adjustment option must be disabled.

The following are the default settings for the Enforce Processing of Costs by Transaction Date option.

  • This option is enabled by default for new cost profiles.

  • This option is disabled by default for existing cost profiles.

Set Up a Default Cost Profile

Use this task to create and edit cost profiles that can be automatically assigned to items at the cost organization, cost book, or item category level. A cost profile must be associated with an item before the item can be costed.

To create a default cost profile, perform the following steps.

  1. In the Setup and Maintenance work area, use the Manage Default Cost Profiles task:

    • Offering: Manufacturing and Supply Chain Materials Management

    • Functional Area: Cost Accounting

    • Task: Manage Default Cost Profiles

  2. Click the Create icon to create a new default cost profile, and complete the required fields. The fields are described in the following table.

    Field Description

    New Item Profile Creation

    Determines how the default cost profile is assigned to new items for cost processing. The following settings are available.

    • Automatic. The preprocessor automatically assigns the default cost profile to new items, and the new item cost profiles can be used by the cost processor.

    • Review Required. The preprocessor generates the cost profiles for new items based on the default cost profile and sets them to Awaiting Approval status. The new item cost profiles must be reviewed and approved before they can be used by the cost processor.

    It is recommended that you set this field to Automatic if you want to use file-based data import or the ADF Desktop Integrator to import cost data.

    Cost Organization

    Specifies that the associated cost profile will be assigned to all of the items in this cost organization.

    Category Name

    Specifies that the associated cost profile will be assigned to all of the items in this category.

The following examples illustrate cost organization structures that support different cost accounting needs.

Example 1

Set up three inventory organizations to optimize materials management across three different locations. Because they all belong in the same business unit and are managed by one cost accounting department, you could group them under a single cost organization; or you could assign each inventory organization to its own cost organization and then assign all three cost organizations to the same business unit.

Example 2

Three inventory organizations are geographically dispersed, or have autonomous managers responsible for the location's profits for internal management purposes. Create three cost organizations, and assign each inventory organization to its own cost organization.

Example 3

Four inventory organizations are geographically dispersed, or have autonomous managers responsible for the location's profits for internal management purposes. Two of them fall under one business unit, and two fall under another business unit. You could group the inventory organizations under two cost organizations corresponding to the two business units; or you could assign each inventory organization to its own cost organization.

Example 4

Two inventory organizations in the same business unit need to share a single average cost for some items. These inventory organizations must belong to the same cost organization.

FAQs for Managing Cost Organizations and Cost Books

A set-level definition enables you to segment and share your reference data. Entities that are defined at the set level can be shared by all cost organizations belonging to that set. For example, to segment your cost element reference data by country, you can define cost elements for each country set; and the cost organizations belonging to the country set can share the cost elements within that set. You can also use the Common set to share the same reference data across all cost organizations. This saves you redundant setup, and streamlines the process.

No. You cannot change the legal entity of a cost organization once transactions are processed under that cost organization.

You can create, edit, or delete a cost organization in the Oracle Fusion Global Human Resources application, on the Manage Cost Organization page.

No. You can associate an inventory organization with only one cost organization.

Yes. You can delete or deactivate a cost book or a cost book assignment to a cost organization if there are no costing transactions or other references that depend on the cost book or cost book assignment. Do this by first deleting references to the cost book in other cost management setup, then delete the cost book. Likewise, first delete references to the cost book assignment in other cost management setup, then delete the cost book assignment.

You can deactivate a cost book or cost book assignment to a cost organization at any time. To deactivate a cost book or cost book assignment, set the effective end date to a current or future date; however, all past assignments remain in effect.

Yes, you can set up multiple additional cost books on the Manage Cost Books page for the purpose of internal analysis. If you want to avoid posting to the general ledger, you can set up a cost book without an assigned ledger.

Yes. You can delete or deactivate the association of an inventory organization with a cost organization, but only if there are no costing transactions or other references that depend on the inventory organization and cost organization relationship. Do this by first deleting all references to the inventory organization and cost organization association in other cost management setup, then delete the association.

You can also deactivate the association of an inventory organization with a cost organization by setting the effective end date to a current or future date; however, all past associations remain in effect.

Cost Elements and Analysis Groups

Map cost elements to analysis codes within analysis groups. This enables you to define alternate views of item costs, and summarize costs for different reporting needs.

Map cost elements to as many analysis group and analysis code combinations as you need. For example, group cost elements into fixed and variable analysis groups, or direct and indirect analysis groups.

You can assign a cost element to multiple analysis codes. An analysis code must be unique within an analysis group, and it can be reused in multiple analysis groups. For each analysis group you can set up a default analysis code that's used for cost elements that aren't assigned to an analysis code.

The following table describes examples of cost elements mapped to analysis codes and analysis groups.

Analysis Group Analysis Code Cost Element

AG1

Variable Cost

Direct Material

AG1

Variable Cost

Inbound Freight

AG1

Variable Cost

Material Handling

AG1

Variable Cost

Outbound Freight

AG1

Variable Cost

Direct Labor

AG1

Variable Cost

Internal Profits

AG1

Fixed Cost

Store Supervisor

AG1

Fixed Cost

Factory Rent

AG2

Indirect Cost

Outbound Freight

AG2

Indirect Cost

Internal Profits

AG2

Indirect Cost

Store Supervisor

AG2

Indirect Cost

Factory Rent

AG2

Indirect Cost

Electricity

AG2

Indirect Cost

Depreciation

AG2

Direct Cost

Direct Material

AG2

Direct Cost

Inbound Freight

AG2

Direct Cost

Material Handling

AG2

Direct Cost

Direct Labor

AG2

Default

Miscellaneous Cost

FAQs for Managing Cost Components and Analysis

Yes. You can deactivate a user-defined cost component code at any time. You can delete a user-defined cost component code only if it is not mapped to a cost element or an analysis group, and it is not used in a standard cost definition.

Yes. You can delete or edit a cost component group mapping only if it is not referenced in a cost profile.

Yes. You can delete or edit the mapping of a cost element to an analysis group, even if the cost element is mapped to a cost component group that is referenced in a cost profile.

Cost Accounting Policies

Cost components are user-defined or come from external sources, and are mapped to cost elements which the costing application uses to track the cost of items. Use cost component groups to map cost components to cost elements, and to map source cost elements to destination cost elements when items are transferred from one inventory organization to another.

This figure illustrates the relationship between cost components, cost elements, cost component groups, and cost profiles.

Cost accounting structure

Cost Components

Cost components are the most granular representation of item costs. Examples of cost components are purchase order item price, material, freight, tax, and overhead. Cost Components come from different sources:

  • Predefined costs from external sources such as Purchasing, Accounts Payable, and Inventory Management

  • Landed cost charges from Oracle Fusion Landed Cost Management.

Cost Elements

A cost element is the level where the costs of an item are tracked through the inventory accounting life cycle. Cost components are mapped to cost elements, which enables you to calculate item costs at different granularity levels for different business needs. For example, you may want more granularity for high-value than for low-value items.

You can define cost elements for four types of costs:

  • Material cost element type for incoming material cost components.

  • Overhead cost element type for costs that are calculated by the cost processor based on user-defined overhead rules.

  • Profit in Inventory cost element type for tracking of internal margins when items are transferred from one inventory organization to another, including global procurement and drop shipment flows. For cost elements of this type, indicate the Profit in Inventory organization that incurs the gain or loss due to the transfer of goods.

  • Adjustment cost element type for separate tracking of cost adjustments, which provides a more detailed view of item costs and profit margins.

Cost elements are defined at the set level and thereby have the advantages of set-level definitions for sharing and segregation. A Profit in Inventory cost element must be assigned to the Common cost element set so that it can be shared across cost organizations.

The following table gives examples of cost element definitions:

Cost Element Set Cost Element Cost Element Type Inventory Organization

Country 1

Metals Material

Material

Not Applicable

Country 1

Plastic Material

Material

Not Applicable

Country 1

Miscellaneous Material

Material

Not Applicable

Country 1

Miscellaneous Material

Adjustment

Not Applicable

Country 1

Plant Depreciation

Overhead

Not Applicable

Country 1

Equipment Depreciation

Overhead

Not Applicable

Country 1

Freight Charges

Overhead

Not Applicable

Common

Internal Margin

Profit in Inventory

Seattle

Country 2

Dairy Material

Material

Not Applicable

Country 2

Miscellaneous Material

Material

Not Applicable

Country 2

Dairy Material

Adjustment

Not Applicable

Cost Component Groups

Use cost component groups to define mappings of cost components from external sources to cost elements in the costing application. These mappings provide flexibility in the granularity level where you track costs. You can map one cost component to one cost element for a detailed cost breakdown, or several cost components to one cost element for a less granular view of costs. For cost components and cost elements that are related to landed cost charges, you can choose to capitalize them into inventory value, or expense them. All other costs are automatically capitalized.

You can also map source cost elements to destination cost elements when transferring items from one inventory organization to another. This helps to maintain visibility of the item cost structure from the source application and across the supply chain.

You can specify a default cost component mapping to cost element to be used in cases where the source cost element doesn't have a matching destination cost element. The default cost component mapping is helpful when:

  • The detailed mapping of a cost component to cost element isn't required, and you want to map it to a single cost element.

  • The designated mapping for a cost component is missing. If the mapping is missing, the transaction automatically picks up the default cost component mapping.

Note: If the cost component mapping is missing, the cost processor logs a message in the processing log. If the cost component mapping is missing and there is no default mapping, you can create the mapping and the transactions will be processed in the next run. If there is a default mapping, the transaction is processed and you can review the message log to decide if you want to take further action: you can correct the mapping for future transactions, and you can create a cost adjustment to reclassify the costs as needed.

Cost component groups are one of the attributes of cost profiles, which the cost processor uses to determine how to calculate item costs. Cost component groups are defined at the set level and thereby have the advantages of set-level definitions for sharing and segregation. Cost component groups and cost profiles are both set enabled; therefore, only those cost component groups belonging to the same set as the cost profile are available to that cost profile.

Example 1: The following table describes mapping of one cost component to one cost element.

Mapping Group Cost Component Cost Element

MG1

PO Item Price

Material

MG1

PO Tax

Tax

MG1

Profit in Inventory

PII

MG1

Interorganization Freight

Freight Charges

MG1

Invoice Price Variance

IPV

MG1

Exchange Rate Variance

ERV

MG1

Tax Invoice Price Variance

TIPV

Example 2: The following table describes mapping of cost components to one or more cost elements.

Mapping Group Cost Component Cost Element

MG2

PO Item Price

PO Tax

NR Tax

Invoice Price Variance

Exchange Rate Variance

Tax Invoice Price Variance

Material

MG2

Interorganization Freight

Freight Charges

MG2

Profit in Inventory

PII

Example 3: The following table describes mapping of source cost elements to destination cost elements in an interorganization transfer.

Mapping Group Source Cost Element Set Source Cost Element Destination Cost Element Set Destination Cost Element

MG3

Country 1

Material Tax

Country 2

Material

MG3

Country 1

Freight Charges

Country 2

Freight Charges

MG3

Country 1

Other

Country 2

Other

You have flexibility in how you map cost component groups to items:

  • Different items in a cost organization and book combination can have the same or different cost component group mappings if they use different cost profiles.

  • One item can have different cost component group mappings in different cost books.

  • Several cost organizations can share the same cost component group mappings if they belong to the same set, or if they're defined the same way in different sets.

The following figure illustrates different mappings of cost component groups to items. That is, in a cost organization, Item A maps to two cost groups, and item B and Item C maps to only one cost group.

Cost component group mappings to items

Cost profiles define the cost accounting policies for items. The cost processor refers to the attributes of a cost profile to calculate costs and create accounting distributions for inventory and trade transactions. Each item in a cost organization book requires a cost profile to calculate the inventory transaction costs.

The following describes how to define cost profiles and assign them to items.

Cost Profile Definition

A cost profile has the following attributes:

  • Cost profile set. Cost profiles use set-level definitions, and all cost organizations belonging to that set can share the same cost profile definitions.

  • Cost method. Establishes how cost is calculated. The costing application uses the perpetual average cost , actual cost , or standard cost method.

  • Valuation structure. Sets the granularity level at which items are costed, for example Cost Organization level, or Inventory Organization, Lot, and Grade level.

  • Valuation structure type. Asset, Expense, or Consigned type.

  • Cost component group. Maps incoming cost components to cost elements, which are used to cost transactions.

  • Costing unit of measure (UOM). Used to cost the item. Some items have primary and secondary units of measure, and there is no fixed conversion factor between the two. For example, you can calculate the cost of chickens by chicken or by weight.

  • Quantity depletion method. Sets how inventory quantity is depleted when inventory transactions are costed. The method used by the costing application is first in, first out (FIFO).

  • Method for processing negative quantity. Establishes how to treat depletion of inventory when the depletion quantity exceeds inventory on hand. Options are Always, To Zero, or Never.

  • Propagate cost adjustment. Option to propagate cost adjustments down the supply chain, available only if using the actual cost method.

  • Receipt without cost. Specifies that for sales returns without a Return Material Authorization RMA reference or missing incoming cost, the cost processor uses the first or last receipt layer cost.

  • Referenced RMA cost. Specifies what the cost processor uses for sales returns with an RMA reference. For the Actual cost method, the processor uses the average cost of the original sales issue. For the Average cost method, the processor uses the current perpetual average cost. For the Standard Cost method, it uses the current standard cost.

  • Accounting distribution basis. Defines accounting for consigned inventory transactions. Options are At Zero, or Actual Cost.

Cost Profile Assignment to Items

Assign cost profiles to items in each cost organization and book combination where there are item transactions. Cost organizations can have multiple cost books and the same item can have different cost profiles in different cost books used by the cost organization. This is useful when you want to use different books for various financial reporting and decision making purposes, such as statutory reporting, or management reporting.

Items can also use different cost profiles in various cost organization and book combinations, when they require different cost accounting policies.

Note: An item can have only one Asset, one Expense, and one Consigned cost profile in each cost organization book. You must assign at least one cost profile to the cost organization book.

You can simplify the effort by assigning default cost profiles at the cost organization book level, or at the item category level within the cost organization book. Default cost profiles are generally used if the costing policy is the same for all items in the cost organization book, or in the item category.

Override default cost profiles by assigning specific item cost profiles at the individual item level. You can modify or delete a default cost profile assignment at any time before transactions have been processed. Once transactions for an item are processed you cannot change the cost profile of the item.

You can assign cost profiles in three ways:

  • Automatic without approval. If the default cost profile has the item profile creation mode set to Auto, the preprocessor automatically generates and assigns the default cost profile to new items. This means that the cost processor uses the same cost profile for all items within that cost organization book, or within the item category.

  • Automatic with approval. If the default cost profile has the item profile creation mode set to Review Required, you must review and approve the generated cost profile before the cost processor assigns it to new items.

  • Manual. Manually assign the cost profile to a new item before the cost processor processes the first transaction. This cost profile then remains in effect for subsequent transactions. The manually assigned cost profile always takes precedence over the default cost profile.

Note: When you are manually assigning a cost profile to an item, the options available are both:
  • Cost profiles belonging to the set that is specific to the cost organization of the item

  • Cost profiles belonging to the Common set which spans all cost organizations

One of the attributes of a default cost profile is the creation mode of item cost profiles, which can be set to Auto or Review Required. The creation mode determines how an item cost profile is created.

Cost Profile Creation Mode Settings

If you set the cost profile creation mode on a default cost profile to Auto, the preprocessor automatically assigns the default cost profile to new items, and the new item cost profiles can be used by the cost processor. If you set the cost profile creation mode to Review Required, then you must review and approve the new item cost profiles before they are used.

Review and Approval of Item Cost Profiles

When a default cost profile is in Review Required mode, the preprocessor generates the cost profiles for new items based on the default cost profile and sets them to Awaiting Approval status.

Review the cost profiles on the Review and Approve Item Cost Profiles page which is accessed from the Manage Default Cost Profiles page, or from the Cost Accounting work area. After reviewing the cost profiles that are in Awaiting Approval status, set them to Approved or Rejected status. If you approve them, the creation source becomes Default Cost Profile. If you reject the cost profiles, you can manually modify them, and the creation source becomes Manual.

Save your changes and rerun the preprocessor for final assignment of the item cost profiles.

Valuation structures and valuation units define the granularity level at which the cost of an item is maintained. You can maintain your cost calculation at any combination of the following levels: Lot ID, Serial ID, or Item. You can have a single average cost for an item spanning more than one inventory organization.

Cost Planning supports items assigned to a cost profile that uses a valuation structure at the level of Inventory Organization or Cost Organization, and doesn't support costs maintained in a more granular valuation structure, such as at the Subinventory or Lot level. You can create multiple cost profiles with different cost methods for the purpose of cost planning.

The following describes how to use valuation structures and valuation units.

Valuation Structures

A valuation structure defines the level at which item costs are maintained. It specifies which inventory control attributes are used to segregate costs, and it is one of the attributes of an item cost profile. When a cost profile is assigned to an item, the cost processor uses the valuation structure on that cost profile to determine how to calculate the item cost.

The flexfield structure specifies the costing attributes that are enabled for a valuation structure. The costing attributes can be one or more of the following: Cost Organization (mandatory), Inventory Organization, Subinventory, Locator, Lot, Serial, and Grade. The costing attributes must be consistent with the inventory attributes, and cannot be at a lower level of granularity than the inventory on hand.

Valuation structures are of three types, Asset, Expense, and Consigned. An asset valuation structure is used for receipts of items that are valued as inventory on the balance sheet. An Expense valuation structure is used to account for receipts to inventory of items that are expensed rather than treated as assets on the balance sheet. A Consigned valuation structure is used to account for consigned inventory transactions. A cost profile with an Asset valuation structure becomes an Asset cost profile, a cost profile with an Expense valuation structure becomes an Expense cost profile, and a cost profile with a Consigned valuation structure becomes a Consigned cost profile. Define the Asset, Expense, and Consigned valuation structures on your cost profile; the item then inherits those valuation structures when it is associated with the cost profile.

Valuation structures are defined at the set level and thereby have the advantages of set-level definitions for sharing and segregation.

The valuation structure mode determines whether the valuation units are created manually, or automatically by the cost processor, or both:

  • Valuation structures that you define as automatic are those that tend to be unlimited and unknowable in advance, such as lot IDs and serial IDs. With the automatic setting, the cost processor automatically creates a new valuation unit code as transactions for new lot IDs or serial IDs are processed.

  • Valuation structures that you define as manual are those that tend to have a finite list of possibilities, such as subinventories. Use the manual mode when you want to ensure that transactions that do not meet one of the expected possibilities will trigger an error condition.

  • Valuation structures that you set as both manual and automatic are those cases where you can either define the anticipated valuation units before they enter the processor, or you can let the processor automatically create the valuation units if you have not already created them manually.

Valuation Units

A valuation unit is the set of values for the control attributes defined by the valuation structure. For example, valuation unit V1 comprises cost organization A, and lot L1, and valuation unit V2 comprises cost organization B, and lot L2. The processor calculates two different costs for the item: a cost for valuation unit V1 and a cost for valuation unit V2.

You can define multiple valuation units under a valuation structure, using different combinations of these costing attributes. The cost processor will automatically generate these valuation units if the valuation structure mode is set to Auto or Both.

By assigning a valuation unit to a cost organization book you specify the set of values for the inventory control attributes that are used to cost the item within that cost organization book.

The valuation structure is one of the attributes of an item cost profile which is used to cost inventory items.

Conflicts may arise if the inventory control attributes in the valuation structure do not match the inventory control attributes of the inventory items.

Valuation Structure Conflict Resolution

In cases where the valuation structure specifies an inventory control attribute that is missing on the item, the cost processor applies the following rules.

If the inventory control attribute has the Required attribute set to Yes, then the association of the valuation structure to the item is disallowed. If the inventory control attribute has the Required attribute set to No, then the association of the valuation structure is allowed, and the valuation unit will have a Null value for that inventory control attribute.

For example, suppose an item is not lot enabled, whereas lot is an attribute of the valuation structure. In this case, if the Required attribute is set to No, the valuation structure is considered valid for the item, and the processor applies Null to the lot value. However, if the Required attribute is set to Yes, the valuation structure is considered invalid.

The Required attribute can be changed from Yes to No at any time to accommodate missing values. However it cannot be changed from No to Yes if any transactions using that valuation structure have been processed.

The following are examples of how the cost accounting application maintains costs for an item using different valuation structures.

Assume that a cost organization stocks an item in four stores under two inventory organizations, as given in the following table.

Cost Organization Inventory Organization Subinventory Lot Item Quantity Cost per Unit Total Cost

CO-US

Retail Store 1

Store 1A

A

Gadget A

50

50

2500

CO-US

Retail Store 2

Store 2B

C

Gadget A

45

44

1980

CO-US

Retail Store 2

Store 2A

C

Gadget A

60

45

2700

CO-US

Retail Store 1

Store 1B

B

Gadget A

40

48

1920

Example 1

The application calculates and maintains the item cost at the cost organization level. It maintains one cost for the item across all inventory organizations in the cost organization.

This table describes the cost distribution:

Valuation Structure Unit Average Cost

Cost Organization

46.67

Example 2

The application calculates and maintains the item cost separately for each inventory organization in the cost organization. This table describes the cost distributions:

Valuation Structure Inventory Organization Unit Average Cost

Cost Organization - Inventory Organization

Retail Store 1

49.11

Cost Organization - Inventory Organization

Retail Store 2

44.57

Example 3

The application calculates and maintains the item cost separately for each subinventory in the cost organization.

This table describes the cost distributions:

Valuation Structure Inventory Organization Subinventory Unit Average Cost

Inventory Organization - Subinventory

Retail Store 1

Store 1A

50

Inventory Organization - Subinventory

Retail Store 1

Store 1B

48

Inventory Organization - Subinventory

Retail Store 2

Store 2A

45

Inventory Organization - Subinventory

Retail Store 2

Store 2B

44

Example 4

The application calculates and maintains the item cost separately for each lot under each subinventory and inventory organization.

This table describes the cost distributions:

Valuation Structure Inventory Organization Subinventory Lot Unit Average Cost

Inventory Organization - Subinventory - Lot

Retail Store 1

Store 1A

A

50

Inventory Organization - Subinventory - Lot

Retail Store 1

Store 1B

B

48

Inventory Organization - Subinventory - Lot

Retail Store 2

Store 2A

C

45

Inventory Organization - Subinventory - Lot

Retail Store 2

Store 2B

C

44

Example 5

The application calculates and maintains the item cost separately for each lot under each inventory organization.

This table describes the cost distributions:

Valuation Structure Inventory Organization Subinventory Lot Unit Average Cost

Inventory Organization - Lot

Retail Store 1

Store 1A

A

50

Inventory Organization - Lot

Retail Store 1

Store 1B

B

48

Inventory Organization - Lot

Retail Store 2

Store 2A

C

44.57

Inventory Organization - Lot

Retail Store 2

Store 2B

C

44.57

Units of Measure to Cost an Item

You can cost an item using different units of measure (UOMs) for different business purposes, such as pricing, reporting or tracking costs.

The UOM is one of the attributes of a cost profile. You can calculate different costs for an item by assigning it cost profiles with different UOMs.

Primary and Secondary UOMs

To illustrate the use of a primary or secondary UOM, consider the case of chickens that can be costed by a UOM of each or of pounds. There's no standard conversion from one UOM to the other. In such a case, the costing UOM depends on how the chickens are sold, priced, or tracked. It may be more logical to cost the chickens by pound if that's how they're sold. However it may be more useful to cost them by each for planning and tracking purposes. In this case, the primary UOM could be each, and the secondary UOM could be pounds.

When an item in a cost organization and book combination is assigned a cost profile that specifies the use of the primary or secondary UOM, the cost accounting application uses the primary or secondary UOM that's defined in the item validation organization.

This example illustrates how to calculate costs for an item using different units of measure.

Scenario

Consider a jewelry retail business that sells gold rings. The company purchases the rings in dozens, and maintains inventory costs in dozens and single units.

Shipment Quantities and Costs

The company receives five shipments of rings as follows.

Shipment No. No. of Rings Total Shipment Cost

1

2 dozen

4,800 USD

2

3 dozen

5,400 USD

3

5 dozen

10,500 USD

4

2 dozen

5,400 USD

5

6 dozen

7,200 USD

Analysis

Define a primary unit of measure of dozens and a secondary unit of measure of single units. You can calculate two different costs for each shipment using the primary unit of measure and the secondary unit of measure.

Resulting Costs in Primary and Secondary Units of Measure

The costs using the primary versus the secondary units of measure are as follows.

Shipment No. Cost in Primary Unit of Measure Cost in Secondary Unit of Measure

1

2,400 USD

200 USD

2

1,800 USD

150 USD

3

2,100 USD

175 USD

4

2,700 USD

225 USD

5

1,200 USD

100 USD

FAQs for Defining Cost Accounting Policies

No. You cannot delete or modify a cost profile after it has been used to cost transactions for an item. However, if a cost profile has not been used to cost any transactions, you can delete or modify it after you delete references to it in other cost management setup.

The options for processing inventory quantities when the transaction quantity exceeds the quantity on hand are:

  • Always: applies cost for the entire transaction, including negative balances. The cost processor costs the transaction as follows:

    • If the cost method is perpetual average cost, it applies the average cost for the entire transaction quantity.

    • If the cost method is actual cost, it applies the FIFO layer cost for the entire transaction quantity, and then processes a cost variance when the next receipt replenishes inventory.

  • To Zero: applies cost only for quantity on hand, and holds the remaining shortfall until inventory is replenished.

  • Never: does not apply cost for the transaction until quantity is sufficient to cover the entire transaction.

Overheads Absorption

Use expense pools, cost element groups, and overhead accounting rules to calculate overhead absorption for inventory transactions. Overhead expenses can be absorbed and capitalized into inventory, or they can be absorbed and reclassified as an expense.

Overhead Costs Expensed or Capitalized

On inbound transactions and inventory transfer transactions, overhead expenses can be absorbed and capitalized into inventory value, or the absorption can be redirected to an expense account: a credit to an absorption account and a debit to either an inventory or expense account. On outbound transactions, overhead absorption is redirected to an expense account, and will be included in the gross margin calculation.

For example, consider a receipt of inventory items that cost $10 each to purchase, and you would like to absorb overhead cost of $2 each on the inbound transaction. When the item is sold, you would like to absorb additional overhead of $3 each on the outbound transaction. The total cost of goods sold is $15 each.

Expense Pools

Expense pools represent a collection of general ledger expense accounts that can be absorbed as overhead costs. Expense pools are defined at the cost organization level. Overhead rules are defined for expense pools, and an expense pool can have many overhead rules that absorb it.

Expense pools are mapped to a cost element, and a cost element can contain one or more expense pools. When overhead is absorbed, an accounting distribution is created for each expense pool, so you can define accounting rules crediting the absorption account at the expense pool level. Once the inbound transaction is in inventory, the application tracks the value of inventory at the cost element level, so that you can track costs through inventory at the desired level of granularity.

Cost Element Groups

Cost element groups tell the processor which cost elements to sum when the overhead rule is a percentage of cost. Cost element groups can be system defined or user defined, and they're set at the cost organization level.

There are two predefined cost element groups, Transaction Cost and Material. You can also define your own cost element groups.

Overhead Accounting Rules

The application uses the overhead accounting rules that you define to determine when and how overhead costs should be calculated. Overhead calculations are based on cost element pools or cost element groups.

Overhead accounting rules are defined at the cost organization book level. You can set the calculations to absorb overhead at the level of the cost organization, inventory organization, item category, or item.

This example shows how to use expense pools and cost element groups to define overhead accounting rules, and calculate overhead absorption for transactions.

Scenario

Your cost organization is a bicycle retail store with:

  • Monthly overhead costs of 10,000 USD for rent 500 USD for water, 1,500 USD for electricity, and 1,000 USD for gas.

  • Additional costs of 50 USD freight per incoming receipt; and 10 USD inspection fees per unit.

You want to calculate overhead absorption for 5 transactions during the month:

  • 2 receipts of bike X

  • 3 receipts of bike Y

Transaction Details

You combine the water, electricity, and gas costs into one utility expense pool of 3,000 USD. Then define the expense pools on the Manage Overhead Expense Pools page as described in this table.

Expense Pool Cost Element

Rent

Warehouse Overhead

Utilities

Warehouse Overhead

Freight

Freight Overhead

Inspection

Warehouse Overhead

Next, define a Materials cost element group on the Manage Overhead Cost Element Groups page. You use this cost element group to calculate overhead costs as a percentage of material costs. Your material costs are:

  • 500 USD per unit for bike X

  • 300 USD per unit for bike Y

Finally, you want overhead costs to include cost organization administrative and inventory organization facilities costs.

Analysis

Define the overhead accounting rules and absorption rates so that, for each month, the total amount absorbed by the transactions equals the overhead expense pools.

This table describes the overhead accounting rules and absorption rates:

Overhead Accounting Rule Transaction Group Transaction Type Item or Item Category Expense Pool Cost Element Cost Basis Based On Cost Element Group Rate

Rule1

Purchase Order Transactions

Purchase Order Receipt

Item Bike X

Rent

Warehouse Overhead

Per unit

Not Applicable

150

Rule2

Purchase Order Transactions

Purchase Order Receipt

Item Bike X

Rent

Warehouse Overhead

Per transaction

Not Applicable

500

Rule3

Purchase Order Transactions

Purchase Order Receipt

Item Bike Y

Rent

Warehouse Overhead

Percentage

Materials

45%

Rule4

Purchase Order Transactions

Purchase Order Receipt

Category Bike

Utilities

Warehouse Overhead

Percentage

Materials

12%

Rule5

Purchase Order Transactions

Purchase Order Receipt

Category Bike

Freight

Freight Overhead

Per transaction

Not Applicable

50

Rule6

Purchase Order Transactions

Purchase Order Receipt

Category Bike

Inspection

Warehouse Overhead

Per unit

Not Applicable

10

Rule7

Purchase Order Transactions

Purchase Order Receipt

Category Bike

Administrative

Warehouse Overhead

Percentage

Materials

5%

Rule8

Purchase Order Transactions

Purchase Order Receipt

Category Bike

Inventory Organization Facilities

Warehouse Overhead

Percentage

Materials

5%

Note: The value type in the Rate column is determined by the Cost Basis column. All Rate values not listed as percentages are in the currency of the applicable cost book.

Resulting Overhead Costs

The following table describes the overhead cost calculations based on the rules defined.

Transaction Item Quantity Rent Utilities Freight Inspection Cost Organization Administrative Costs Inventory Organization Facilities

1

Bike X

10

2,000

600

50

100

250

250

2

Bike X

15

2,750

900

50

150

375

375

3

Bike Y

10

1,350

360

50

100

150

150

4

Bike Y

15

2,025

540

50

150

225

225

5

Bike Y

10

1,350

360

50

100

150

150

Total Overhead Absorption

Not Applicable

Not Applicable

9,475

2,760

250

600

1,150

1,150

Overhead Accounting Rules

Overhead accounting rules establish how to absorb overhead costs into inventory value and into cost of goods sold. The overheads processor checks for the rule based on the type of transaction. If a rule is defined and set to active, the processor applies overhead absorption to the transaction.

The following describes the overhead accounting rule attributes and cost drivers.

Overhead Accounting Rule Attributes

Associate an overhead accounting rule with a cost organization, cost book, and expense pool. The cost element from the expense pool definition is displayed automatically.

Also specify the following attributes:

  • Transaction group (mandatory) and transaction type (optional). The transaction groups are predefined and they include one or more transaction types. You can define overhead rules at the transaction group level, or at the transaction type level. The transaction group options are Interorganization Transfers, Intraorganization Transfers, Inventory Transactions, Purchase Order Transactions, Sales Order Issues, and Sales Order Returns. The transaction group controls the transaction type options, which are more granular. If the transaction type detail is not provided, then the overhead absorption occurs for all transaction types within the transaction group.

  • Transaction flow (mandatory). Options are Issue or Receipt.

  • Inventory organization. Required only when absorbing overhead at the level of the inventory organization. If this attribute is blank, then the overhead is applied to all transactions in all inventory organizations under the cost organization.

  • Category name and item. Required only if you are absorbing overhead at the item category or item level.

Cost Drivers

In addition to the attributes, specify the cost drivers for the rule.

The cost drivers include:

  • Cost basis (required). Options are Per Lot, Per Transaction, Per Unit, or Percentage Value. Lot is based on the standard lot size defined in the item master. The processor divides the per lot overhead rate by the standard lot size to arrive at the per unit overhead cost. For example, suppose the lot size is 100 units, the overhead rate is $10 per lot, and the quantity is 150 units; then the overhead cost per unit is $10/100 = $0.1; and the overhead absorbed is $0.1 * 150.

  • Based on. Mandatory if the cost basis is Percentage Value, and it specifies the cost element group that the percentage is based on.

  • Rate (mandatory). Represents either the overhead percentage amount that you want to apply to the predefined cost element group, or the currency amount that you want to apply per unit or per transaction.

  • Absorption type (mandatory). Options are Include in Inventory, and Expense. The following are examples of different kinds of absorption:

    • Absorb to inventory value when overhead is applied to incoming transactions, including transfers from other inventory organizations.

    • Absorb and redirect as a period expense when overhead is applied to incoming transactions.

    • Absorb overhead from the expense pool and redirect to cost of goods sold when overhead is applied to outgoing transactions.

FAQs for Defining Overheads Absorption

Yes. You can deactivate a cost element group by first deactivating all rules where it is referenced. However, you cannot delete a cost element group after it has been used to define an overhead accounting rule because historical records are maintained for audit purposes.

Yes. You can deactivate an expense pool by first deactivating all rules where it is referenced. However, you cannot delete an expense pool after it has been used to define an overhead accounting rule because historical records are maintained for audit purposes.

Yes. You can deactivate overhead accounting rules. However you cannot delete overhead accounting rules that have been used to calculate overhead absorption in any transactions because historical records are maintained for audit purposes.

Subledger Accounting

Implement Subledger Accounting

Subledger Accounting provides rules that you can configure and then automatically transform subledger transactions into detailed subledger journal entries. Flexible rules are available to define accounting policies and generate accounting for legal and corporate reporting. Reconciling accounting to transaction data enables drill down from general ledger to the underlying subledgers and standard reports.

Based on your requirement, implement subledger accounting for Cost Accounting and Receipt Accounting using any of these methods.

Use Predefined Mapping Sets

For using predefined mapping sets, specify transaction attributes and account combinations.

Use Standard Implementation

Do the following to use the standard implementation:

  • Create an accounting method.

  • Set up user defined journal entry rule sets.

  • Assign user defined journal entry rule sets to accounting method.

  • Activate journal entry rule sets assignments.

  • Preview accounting results.

When you use predefined mapping sets, the commonly used transactional attributes are available to you to define the accounting rules. Whereas, if you opt for the standard implementation, then you can leverage the full feature set of transaction attributes for accounting purposes.

Set up tasks are available for implementing subledger accounting for Cost Accounting and Receipt Accounting.

Along with the information provided here, see Oracle Fusion Financials, Implementing Subledger Accounting documentation for more information on the core features of Subledger Accounting.

Define Subledger Accounting Rules

Overview of Accounting Methods

Accounting methods group subledger journal entry rule sets. This facilitates the definition of consistent accounting treatment for each accounting event class, and accounting event type, for all subledger applications. This grouping enables a set of subledger journal entry rule sets to be assigned collectively to a ledger.

For example:

  • A subledger accounting method can be defined to group subledger journal entry rule sets that adhere to and comply with US Generally Accepted Accounting Principles (GAAP) criteria.

  • By assigning a different subledger accounting method to each related ledger, you can create multiple accounting representations of transactions.

Accounting rules can be defined with either a top-down, or a bottom-up approach.

  • Top-Down: Define the accounting method, followed by components of each rule that must be assigned to it.

  • Bottom-Up: Define components for each rule and then assign them as required.

The Create Accounting process uses the accounting method definition with active journal entry rule set assignments to create subledger journal entries.

When an accounting method is initially defined its status changes to Incomplete. The status will also be Incomplete after modifying a component of any accounting rule associated with the assigned journal entry rule set.

Caution: The accounting method must be completed, by activating its journal entry rule set assignments, so that it can be used to create accounting.

The following definitions are used to define the journal entries, and are applied as updates to the accounting method:

  • Updates to the predefined accounting method

  • Assignment of journal entry rule sets for an accounting event class and accounting event type from the accounting methods page

  • Assignment of accounting methods to ledgers

  • Activation of subledger journal entry rule set assignments

Updates to the Predefined Accounting Method

You may update a predefined accounting method by end dating the existing assignment and creating an assignment with an effective start date.

Assignment of Journal Entry Rule Set for Accounting Event Class and Accounting Event Type

You create the assignment of a journal entry rule set for an accounting event class and accounting event type using the accounting method page.

The following should be considered for assigning rule sets:

  • If the accounting method has an assigned chart of accounts you can use journal entry rule sets that:

    • Use the same chart of accounts

    • Are not associated with any chart of accounts

  • You can assign to existing journal entry rule sets or create a new one.

Assignment of Accounting Methods to Ledgers

If the accounting method has an assigned chart of accounts, it may only be used by ledgers that use the same chart of accounts.

If the accounting method doesn't have an assigned chart of accounts, the accounting method can be assigned to any ledger.

Activation of Subledger Journal Entry Rule Set Assignments

You can activate the subledger journal entry rule set assignments from the Accounting Method page. You can also submit the Activate Subledger Journal Entry Rule Set Assignments process to validate and activate your accounting set ups.

Accounting Method and Accounting Rules

This figure illustrates the relationship of the components used in an accounting method.

The figure visually defines the flow of subledger
components. The subledger application may be set up top-down, or bottom-up,
using the components of the accounting method. These include the journal
entry rule set which is assigned journal line rules, account rules
and description rules. The journal entry rule set is assigned to the
accounting method, which is assigned to the ledger.

Overview of Subledger Journal Entry Rule Set

Subledger journal entry rule sets provide the definition for generating a complete journal entry for an accounting event.

Select the option to define the subledger journal entry rule set for a particular accounting event class or accounting event type.

If you're using multiple ledgers to meet divergent and mutually exclusive accounting requirements, you can vary journal entry rule sets by ledger. Each of the subledger journal entry rule sets can meet a specific type of accounting requirements.

For example, use US Generally Accepted Accounting Principles (GAAP) oriented subledger journal entry rule sets for a ledger dedicated to US GAAP reporting. Use French statutory accounting conventions for a ledger dedicated to French statutory reporting. These two sets of definitions have differences based on the setup of the various components that make up their subledger journal entry rule sets.

Predefined subledger journal entry rule sets are provided for all Oracle subledgers. If specific requirements aren't met by predefined subledger journal entry rule sets, create a copy of the predefined definitions, rename, and modify the copied definitions and their assignments.

Subledger journal entry rule set assignments can be made at two levels, header and line. The following are the sub-components of a subledger journal entry rule set:

Assignment at Header Level

Header assignments define subledger journal header information and line assignments define journal line accounting treatment.

A header assignment includes the following:

  • Accounting date (required)

  • Accrual reversal accounting date (optional)

  • Description rule (optional)

Assignment at Line Level

You can define multiple subledger journal entry rule sets for an accounting event class or accounting event type. Using the line assignment of the journal entry rule set assigned to the accounting event class or type, a single journal entry is generated per accounting event per ledger.

The following can be assigned to a journal entry line:

  • Journal line description rule

  • Journal line rule

  • Account rule

  • Supporting references

Assignment of Description Rules

If a description rule is defined with sources, the sources must also be assigned to the accounting event class that's assigned to the journal entry rule set. The description rule may be assigned at either the header or line level of the journal entry or to both levels.

Assignment of Journal Line Rules

When assigning the journal line rule, you must identify the line type: Gain, Loss, Gain or Loss, Credit, or Debit. The journal line rule must be assigned to the same accounting event class as the one assigned to the subledger journal entry rule set.

When assigning a journal line rule that's enabled for accounting for a business flow, the account combination and certain accounting attribute values are copied from its related journal line having the same business flow class as the current line. Optionally, copy the description rule into the current line instead of assigning a separate description rule.

When assigning a journal line rule that's enabled to copy from the corresponding line within the same journal entry, you have the option to copy the account combination, the segment value, or the line description from the corresponding line into the current line.

Assignment of Account Rules

The account rule assignment defines which accounts are used for the subledger journal line. If the account rule is set up with a chart of accounts, it must have the same chart of accounts as the one assigned to the journal entry rule set. When account rules are defined with sources, the sources must also be assigned to the accounting event class that's assigned to the journal entry rule set.

There are two types of account rules:

  • Account Combination Rule: Assign an account combination rule to derive the account combination.

  • Segment Rule: Assign a segment rule to derive a specific segment of an account. For example, a cost center or a natural account segment.

Assignment of Supporting References

Supporting references may be used to capture transaction values on journal entry lines. A supporting reference can be used on a journal entry rule set only if it's assigned a source from the event class of the journal entry rule set.

Journal line rules are defined within the context of accounting event classes. A journal line rule can be used in a subledger journal entry rule set that has the same event class. You may also assign conditions to the journal line rule.

How You Create Journal Line Rules

Journal line rules are assigned to journal entry rule sets.

To create a journal line rule, select values for options such as:

  • Side (Debit, Credit, Gain or Loss)

    For example, when a payables invoice is generated, the liability account should normally be credited. The journal line rule must therefore specify the Side option as Credit. On the other hand, the payment of the Payables invoice must be accounted with a debit to the liability account. A separate journal line rule must be defined to create this debit line.

  • Merge Matching Lines: To summarize subledger journal entry lines within each subledger entry. Journal entry lines with matching criteria are merged. Here is the list of matching criteria that are used:

    • Account combination

    • Accounting class

    • Anchor line (for PeopleSoft Accounting Hub Cloud)

    • Budgetary control status

    • Business flow class

    • Conversion date

    • Conversion rate

    • Conversion rate type

    • Currency

    • Description

    • Encumbrance type

    • Gain or loss

    • Gain or loss reference

    • Merge matching lines

    • Multiperiod accounting class

    • Reconciliation reference

    • Replaced account

    • Rounding class

    • Supporting references

    • Switch side

    • Third party

    • Third-party site

    • Third-party type

    • Transaction rounding reference

  • Accounting Class

    • Select an accounting class to classify journal entry lines.

    • For example, when a validated Payables invoice is accounted, the Item Expense and Liability journal lines are created. In this case, the journal line rules used in the accounting rules are assigned Item Expense and Liability accounting classes respectively.

  • Switch Debit and Credit: Reverses a debit for a credit and a credit for a debit. For example, you can select this option to ensure that if a negative amount is entered for a journal, the journal line is created with positive amount in the opposite side.

  • Conditions: To restrict the use of a journal line rule by controlling when a particular journal line rule is used by the Create Accounting process.

  • Accounting Attributes: When creating a journal line rule, accounting attribute assignments are automatically established. These are based on the default accounting attribute assignments for that journal line rule's accounting event class. You can override this default mapping of standard sources to accounting attributes. The list of values for the source override includes all sources assigned to the accounting attribute, for the event class associated with the journal line rule.

  • Advanced Options

    • The Subledger Gain or Less Option: Applies only to amount calculations for the primary ledger. Gain or loss amounts aren't converted to reporting currency or nonvaluation method secondary ledgers. If the option is selected, the journal line holds the gain or loss amounts calculated by the subledger.

      The gain or loss amount is calculated as the difference in applied amounts due to fluctuations in conversion rates, based upon conversion to the ledger currency. Foreign exchange gain or loss amounts occur when two related transactions, such as an invoice and its payment, are entered in a currency other than the ledger currency, and the conversion rate fluctuates between the times that the two are accounted.

    • The Rounding Class Option: Along with transaction rounding, groups journal lines together and calculates transaction rounding. Subledger transaction rounding differences can occur when a transaction has multiple-related applied-to transactions, such as a Receivables invoice that has multiple associated receipts.

    • The Link Journal Lines Option: Determines whether the journal line rule is set up to establish a link between the accounting of transactions that are related both within the same application, and across applications. The alternatives are described in this table:

This table contains the Link Journal Line Options and their descriptions.

Link Journal Lines Option Description

None

No link is established.

Copy from corresponding line

Build account for a journal line using segments from the offsetting entry of the current journal line.

For example, when the business process requires that a cost center incurring an expense must also bear the invoice liability and cash outlay.

Business flow

Link logically related business transactions.

For example, when recording the closing of a loan, you can link to the account that was used to book the loan origination. Journal line rules that are linked must also be assigned the same business flow class.

Defining Conditions for Journal Line Rules

You may set conditions to specify whether the journal line rule is used to create a subledger journal entry line. If the conditions are true, the line rule is used to create a subledger journal entry line. Use sources to create these conditions.

For example, you can set up a condition that creates a journal line to record tax, only if there's tax for an invoice. The line type and account class mentioned here are examples of sources.

  • The condition for a Payables invoice tax journal line rule could be:

    • Where Line Type = Tax

    • When this condition is true, there's tax for a payables invoice line. A journal entry line is created to record the accounting impact of the tax.

  • Similarly, the condition for an invoice tax journal line rule could be:

    • Where Account Class = Tax

    • In this case, if there's an account class of Tax, the journal line is used to record the accounting impact of the tax.

Another example is a condition that creates a journal line for freight when there are freight charges on an invoice.

Journal line rule conditions determine whether a journal line rule and its associated account rules and description rules are used to create the subledger journal entry line. If the conditions of all the journal line rules assigned to the journal entry rule set aren't met, the transaction is processed without the creation of any subledger journal entries, and the event status is set to Processed.

Note: Constant values that are used in any Conditions region must not contain the following characters:
  • "

  • ,

  • &

  • |

  • (

  • )

  • '

For example, in the condition "Project Type" = ABC (123), the constant value following the equal sign, ABC (123), contains restricted characters ( ) that enclose 123 and is invalid.

FAQs for Defining Subledger Accounting Rules

Create your subledger account rules on the Manage Account Rules page. It is recommended that you highlight the account rules predefined by Oracle, copy, and modify them as needed.

Create your subledger journal entry rule sets on the Manage Subledger Journal Entry Rule Sets page. It is recommended that you highlight the journal entry rule sets predefined by Oracle, copy, and modify them as needed. For each journal line rule specify the copied account combination rule.

In the Setup and Maintenance work area, you can access both the Manage Account Rules task and the Manage Subledger Journal Entry Rule Sets task in the Manufacturing and Supply Chain Materials Management offering.

Note: You must configure the predefined account rules and journal entry rule sets before proceeding with the setup of subledger accounting rules for cost management.

Create an Accounting Method

To create an accounting method, do the following:

  1. Click Navigator > Setup and Maintenance.

  2. On the Setup and Maintenance page, click the Manufacturing and Supply Chain Materials Management offering, and then click Setup.

  3. On the Setup: Manufacturing and Supply Chain Materials Management page, based on your requirement, click the Cost Accounting or the Receipt Accounting functional area.

    The subledger accounting related setup tasks are in the respective functional areas.

  4. Click the Manage Accounting Methods task.

  5. In the Manage Accounting Methods page, click Actions and then click Create.

  6. In the Create Accounting Method page, provide the required information and then click Save and Close.

Note: You can also duplicate the standard accrual accounting method instead of creating a new method.

Viewing Predefined Journal Line Types

In Journal Line Rules, there are various event classes and journal line types for each event class.

To view predefined journal line types:

  1. Click Navigator > Setup and Maintenance.

  2. On the Setup and Maintenance page, click the Manufacturing and Supply Chain Materials Management offering, and then click Setup.

  3. On the Setup: Manufacturing and Supply Chain Materials Management page, based on your requirement, click the Cost Accounting or Receipt Accounting functional area.

    The subledger accounting related setup tasks are in the respective functional areas.

  4. Click the Manage Journal Line Rules task.

  5. In the Manage Journal Line Rules page, set the Created By Application to Yes, select the event class and search.

    The Search result lists the predefined journal line types for the selected event class.

Set Up User-Defined Account Rules

Use account rules to create simple or complex rules to assign general ledger accounts to accounting events.

There are several predefined accounting rules that are available and are easily identifiable by looking at the Created By Application column. The predefined account rules aren't ready-to-use as they aren't created in the context of the chart of accounts. The predefined account rules are provided to help you create your own rules by using them as templates.

For example, create an account rule for identifying the general ledger account rules for the Cost of Goods Sold event class.

  1. Click Navigator > Setup and Maintenance.

  2. On the Setup and Maintenance page, click the Manufacturing and Supply Chain Materials Management offering, and then click Setup.

  3. On the Setup: Manufacturing and Supply Chain Materials Management page, based on your requirement, click the Cost Accounting or the Receipt Accounting functional area.

    The subledger accounting related setup tasks are in the respective functional areas.

  4. Click the Manage Account Rules task.

  5. In the Manage Account Rules page, search for the predefined account rule for Cost of Goods Sold.

    The Cost of Goods Sold event class is discussed here as an example.

    To identify the predefined rules, set the Created by Application search parameter to Yes.

  6. Click the Duplicate icon to create a duplicate of the predefined account rule for Cost of Goods Sold. Enter a rule name, a short name (in capital letters) and then select the chart of accounts.

    Once chart of accounts is assigned to an account rule and this task is saved, you cannot modify the assignment.

  7. Click Save and Close.

    The Edit Account Rule page is displayed.

  8. Specify the account selection criteria in the Rules region; however, don't change any values in the Conditions region.

  9. In the Rules region, the Value Type column has four options.

    • Source

    • Constant

    • Accounting Rule

    • Mapping Set

    Source Value Type

    Source is only applicable to the Accrual Account Rule in Receipt Accounting and the Offset Account Rule in Cost Accounting when the account is retrieved from the purchase order for the Accrual account and from the Miscellaneous Transaction for the Offset account.

    If you select Source as Value Type, then set the value as Code Combination Identifier.

    Constant Value Type

    If the Value Type is set to Constant, you can select the specific account from the chart of accounts as the default general ledger account type of the Journal line type.

    Accounting Rule Value Type

    Use this value type to retrieve values from the accounting rule.

    Mapping Set Value Type

    A mapping set is useful when you have a matrix of input values that produce distinct output values. For each input value, specify a corresponding account combination. One or more related pairs of these input values with the account combination output values form a mapping set. Ensure that a Chart of Accounts is associated with the mapping set.

    Once a mapping set is defined, you can associate the mapping set to an account rule. Copy each predefined account rule and create a rule.

    For more information on these four options, see documentation on Oracle Fusion Financials, Implementing Subledger Accounting Account Rules.

Set Up User-Defined Journal Entry Rule Sets

To set up journal entry rule sets:

  1. Create a journal entry rule set.

  2. Copy the predefined journal entry rule sets to associate the user-defined account rules.

  3. Set the Created by Application option to Yes and then click Search.

    The predefined journal entry rules sets are displayed.

To create a journal entry rule for associating the user-defined account rules:

  1. Create a copy of the predefined journal entry rule set by highlighting the row and clicking the Duplicate icon.

  2. Provide information for name, short name, description, and chart of accounts.

  3. Click Save and Close.

  4. In the Edit Journal Entry Rule Sets user interface, replace the predefined account rules with the account rules that you have created.

  5. After you have replaced all the account combination rules within the journal entry rule set, click Save and Close.

    The original search results are displayed.

    Repeat the previous steps to create all the necessary journal entry rule sets.

Assign User-Defined Journal Entry Rule Sets to Accounting Method

To associate the recently created journal entry rule sets to the newly created accounting method:

  1. Select the accounting method that you created while performing the activity, Creating an Accounting Method.

  2. In the Edit Accounting Method user interface, add the journal entry rule sets that you created.

  3. Identify the account class and the event type in the predefined journal entry rule sets that you want to replace with the new value after you have replaced all the account combination rules within the journal entry rule set you created earlier. Delete the row that you identified for replacement and add a new row with the same event class and event type and enter the new value once you have replaced all the account combination rules within the journal entry rule set. (Optional) Enter the effective start date and save the row.

    For example, to replace the Sales Order Issue predefined journal entry rule set after you have replaced all the account combination rules within the journal entry rule set with the newly created Sales Order Issue 2 journal entry rule set.

    1. Select the predefined journal entry rule set assigned to this subledger accounting method and delete it.

    2. Once this is deleted, add the new rule set Sales Order Issue 2 to this accounting method.

    3. Click Save and Create Another to replace all the predefined journal entry rule sets with the journal entry rule sets that you have newly created.

Activate Assigned Journal Entry Rule Sets

After the setup is complete, you must activate the journal entry rule sets that are newly assigned to the subledger accounting method. You can do this directly from the Edit Accounting Method user interface or from the separate task provided.

To run the accounting method activation as a separate process:

  1. In the Navigator, click Setup and Maintenance.

  2. On the Setup and Maintenance page, click the Manufacturing and Supply Chain Materials Management offering, and then click Setup.

  3. On the Setup: Manufacturing and Supply Chain Materials Management page, based on your requirement, click the Cost Accounting or the Receipt Accounting functional area.

    The subledger accounting related setup tasks are in the respective functional areas.

  4. Click the Manage Accounting Methods task, and then activate the subledger journal entry rule set assignments.

  5. Run this process for the accounting method and subledger application with Incomplete Status Only set to No.

    This step is recommended for activating an accounting method especially if many changes were made to the journal entry rule sets.

  6. You can review the status of the process from the Scheduled Processes task.

  7. (Recommended) Archive the current accounting rule setup configuration by initiating the Accounting Setups Report.

Preview Accounting Results

To ensure that the correct general ledger accounts are selected:

  1. Run Create Accounting.

    Once complete, check the results.

Overview of Mapping Sets

Mapping sets provide an efficient way to define a segment or account combination value for one or more transaction or reference attribute values. Using such input and output mappings is simpler than using complex conditions on account rules.

Based on the value of the source input, a single segment or a full account is derived.

Examples of source input value types:

  • Transaction attributes

  • Reference attributes

With mapping sets you can:

  • Use up to 10 transaction or reference attributes as inputs into a mapping.

  • Define default output value to use when actual input values don't match the mappings.

  • Use wildcards for multiple input mapping sets to indicate that the value of a particular input should be ignored for certain mappings.

  • Enter the mappings directly on the user interface or use the spreadsheet available in the Export option, and then import.

    Export allows:

    • Exporting a template to create mappings.

    • Exporting all mappings created for the mapping set to add or edit the current mappings.

Example

Assume a business operates in several regions, including:

  • East

  • South

  • West

The business has a Region segment in their chart of accounts.

The region name can be the input for the mappings to derive the value of the region segment. You can create a mapping set that maps region names to the corresponding region code.

This table contains region names and segment values used in this example.

Input Value (Region Name) Segment Value

East

01

South

02

West

03

Additional transaction information, such as transaction type and salesperson name, could also be used as inputs to help derive a different segment value for each combination of the input values.

Overview of Predefined Mapping Sets

There are predefined mapping sets for all the journal line rules with commonly used sources. For each journal line rule, there are three to five sources such as Inventory Organization, Sub-Inventory, Item Category, and Item.

The benefits of using predefined mapping sets for implementation include:

  • Enabling quick implementation of subledger accounting.

  • Providing commonly used transaction source attributes.

  • Enabling easy maintenance when compared with defining and maintaining the user-defined account rules.

Unique mapping sets are predefined for each journal line rule. Some of the predefined mapping sets for Cost Accounting are, Consigned Clearing, Consigned In-Transit, Consigned Inspection, and so on. View Cost Accounting user interface for the complete list of mapping sets. Predefined Mapping Sets for Receipt Accounting are, Consigned Accrual, Consigned Clearing, Consigned Inspection, and so on. View the Receipt Accounting user interface for the complete list of mapping sets.

The mapping set created for each journal line type is added to a predefined account rule.

Use Predefined Mapping Sets

Use predefined mapping sets for Cost Accounting.

The steps to use predefined mapping sets are:

  1. Select chart of accounts.

  2. Specify the transaction attributes as input and account combinations as output for every chart of accounts.

    Set up input parameters for every chart of accounts. While specifying inputs, you must provide input sources, that is, provide the transaction attributes.

    For example, if you are using the mapping set, Consigned Clearing, then you have to provide one or more of the following input sources.

    • Inventory Organization Code

    • Costing Category Identifier

    • Subinventory Code

    • Item Number

  3. For the mapping set Consigned Clearing, provide an account combination as the output type.

  4. Automatically enable or disable the account derivations using Effective Dates.

  5. (Optional) Set account combinations as default to support subledger accounting activities for which specific rules are not set up.

  6. Use spreadsheet based import and export functionality.

FAQs for Subledger Accounting

How can I resolve errors in the accounting results?

If the Create Accounting process ends with errors or warnings, you can resolve these errors or warnings using any of the following methods.

  1. Review errors in the Create Accounting Execution report.

  2. If you have selected viewing errors for a specific transaction, query the transaction from the Review Cost Accounting Distributions user interface.

  3. Navigate to the Journal Entries tab. If errors are present, then they are listed against each line.

  4. Use Advanced Diagnostic. For activating this feature, refer to the Accounting Event Diagnostic Report.

How can I modify predefined mapping sets?

You can modify existing predefined mapping sets by:

  • Adding input and output conditions.

  • Adding new chart of accounts.

Adding a new source to an existing predefined mapping set is not supported. Use standard implementation for creating mapping sets with new sources.