1. Implementing Manufacturing and Supply Chain Materials Management
  2. Overhead Accounting Rules

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.

You can define the overhead accounting rules from the Manage Accounting Overhead Rules page in the Cost Accounting work area.

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 isn't 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're 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.

Note:

  • If you select the Transaction Type as Purchase Order Receipt Into Work Order, the Absorption Type options are Include in Work Order, instead of Include in Inventory, and Expense.

  • For maintenance work orders:

    • If you set the Absorption Type to Expense, the overhead component debits the Expense accounting line type.

    • If you set the Absorption Type to Include in Work Order, the overhead component debits the Maintenance Expense accounting line type.

  • For standard costed items, only overhead absorption rules with the Absorption Type set to Expense will be considered for cost processing.

Overhead Accounting Rules for Periodic Average Cost

When defining the overhead rules for a periodic average cost enabled cost book, you can set rules for cost owned and cost derived transactions.

In the case of cost owned transactions, you can define overhead rules with absorption type set to Inventory, WIP, and Expense. Overheads absorbed into Inventory or WIP are considered for calculating the periodic average cost. Overheads with absorption type as Expense are absorbed as period expense.

In the case of cost derived transactions, you can define overhead rules with absorption type as Expense only. This will be absorbed as period expense for the period.

Note: Receipt transactions without cost, such as miscellaneous receipt without cost, are cost derived transactions. However, if you define an overhead rule with transaction type as Inventory transaction, then this overhead rule won’t be applied to the cost derived receipt transactions. The rule will only be applied for cost owned receipt transactions.

The table lists the applicable overhead absorption for different transaction flow.

Transaction Flow Cost Owned/Cost Derived Overhead Absorption
Direct Intraorganization transfers Cost derived Expense
Direct Interorganization transfer within valuation unit Cost derived Expense
Interorganization transfer receipt across valuation units Cost owned Inventory or WIP and Expense
Interorganization transfer issue across valuation units Cost derived Expense
Inventory transactions with cost Cost owned Inventory and Expense
Inventory transactions without cost Cost derived Expense
Purchase order transactions Cost owned Inventory and Expense
Sales order issue Cost derived Expense
RMA against original sales order across periods Cost owned Inventory and Expense
Unreferenced RMA and RMA within same period Cost derived Expense
WIP material transactions Cost owned WIP and Expense
WIP completion transactions Cost owned Inventory and Expense
Trade events N/A Expense

When you are creating or modifying a rule revision, you must specify the starting period and an optional ending period. You can define rules for periods that are in the never opened, open, or pending close status.

An overhead rule is applicable from the first date of the starting period to the last date of the ending period. When you define a rule for the current open period, it will be applicable from the first date of the period, irrespective of the current date. This is different from defining overhead rules for cost books with the periodic average cost option not enabled, where you can’t define rules with an earlier start date than the current date.

If you define a rule to be valid across multiple periods or if you don’t set the ending period for the rule, the rule is carried forward to the next open period when the current period is closed. You can add and modify rules as long as the period is not closed. When a period is closed, the rules are frozen for that period and can’t be updated. However, you can revise the rules for the next open period. When you revise the rule, you must modify the ending period of the latest rule revision to ensure that there are no overlapping periods.

For example, you’ve defined an overhead rule in the period January’22.

Revision Number From Period To Period Start Date End Date Rate From Period Status
1 Jan'22 Jun'22 1/1/22 6/30/22 5.00000 Open

In the period April’22, you want to revise the rate to 6 percent. Then the rule revision will be as shown in the table.

Revision Number From Period To Period Start Date End Date Rate From Period Status
2 Apr'22 Jun'22 4/1/22 6/30/22 6.00000 Open
1 Jan'22 Mar'22 1/1/22 3/31/22 5.00000 Permanently Closed
Note: If you haven’t set the ending period for a rule, when you add revision with a new starting period, the existing revision is automatically end dated.

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