How Cost Organizations, Inventory Organizations, and Cost Books Fit Together
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, which 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.
Legal and Management Structures
An organization has:
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A legal structure consisting of legal entities that establish contractual rights across the enterprise.
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A management structure consisting of the strategic management team and operational business units:
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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.
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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.
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Profit Center Business Units
A profit center is an operational business unit that:
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Reports to a single legal entity.
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Supports strategic directives on products, pricing, investments, and financial planning.
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May contain one or many inventory organizations and cost organizations.
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Measures contributions by its organizations to enterprise profits, and tracks profit contributions against targets.
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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.
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Is a segment in the chart of accounts for financial reporting.
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Is on trade execution documents such as Purchase Orders, Sales Orders, Accounts Payable Invoices, and Accounts Receivable Invoices.
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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.
When you associate a cost book with 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 associate a cost book without a ledger, then you define these elements manually.
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 associate one or more secondary ledger-based cost books for other accounting needs.
For simulation and analysis purposes, you can associate ledger-less cost books, which are cost books without an associated ledger, to a cost organization. For example, you could define 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. The cost processor creates distributions for the ledger-less cost book but excludes them from accounting and posting to the general ledger.
If you want to use the periodic average cost method for a cost book, you can select the Periodic Average Cost options when creating the cost book. All items for a periodic average cost enabled cost book can only use item cost profiles that have the cost method set to periodic average cost.