Cost Accounting for Manufacturing Work Orders

Oracle Cost Accounting provides costing and accounting functionality for these manufacturing work order types:

Process and discrete manufacturing work orders
Standard and non-standard work orders
Orderless manufacturing

After a work order is released in manufacturing execution, it can be interfaced to cost accounting. These transactions reported for the work orders get interfaced to costing and are processed by costing:

Component issues and returns
Resource charging and reversals
Product completions and returns
Scrap transactions
Work order close
Work in Process Cost Adjustments

Component Issues and Returns

The component transactions are costed based on the cost method of the component.

Cost Method	Component Cost
Standard Cost	Uses current standard cost of the component.
Perpetual Average	Uses current perpetual average cost of the component.
Actual Cost	Uses the cost of the specific layer from which the component was issued by the cost processor.

Resource Charging and Reversals

Resource transactions are costed based on the resource cost set up in Manage Resource Costs and published to cost accounting. For all cost methods, you need to define the resource rates in a cost scenario. You need to first create a cost scenario for your cost organization and cost book combination. You then define the resource rates in the cost scenario and publish the cost scenario so that the resource rates are used for accounting.

Product Completions and Returns

All product completions are costed with an estimated cost as provisional completions and their actual cost is calculated when the work order is closed. The estimated cost used for the product completion is based on the cost method and the corresponding provisional completions option set in the item cost profile of the product.

Cost Method	Provisional Completions Options
Standard Cost	Value at standard cost
Perpetual Average	Value at last actual cost Value at perpetual average cost Value at standard cost Value at work order close Value using accumulated work in process balances
Actual Cost	Value at last actual cost Value at standard cost Value at work order close Value using accumulated work in process balances

Note:

Even if you're using the Actual Cost or Perpetual Average cost method, you can create a standard cost for any item.
If you set value at work order close, product completions are costed with the actual cost incurred for the work order when the work order close is processed. The product completion transactions won't be processed until work order is closed and will remain uncosted.

Scrap Transactions

The cost of scrap reported against a work order is calculated based on the actual cost incurred till the operation where the scrap has been reported. The scrap accounting is based on these parameters that are setup in the item cost profile.

The operation scrap valuation option is used to decide when the scrap transactions are processed.
- Value at work order close: Bunches all the scrap transactions together and processes them at work order close.
- Value immediately and at work order close: The scrap transaction is processed as soon as the cost processor encounters it and then corrects the value at work order close, if necessary. This option leads to more transactions than the previous option.
- Value at cost cutoff date and at work order close: This option is used for long running batches. The scrap transaction is processed on the cost cutoff date, which is usually the month end, and is corrected at work order close, if necessary.
The operation scrap accounting option indicates how to account for the scrap transactions.
- Include in inventory: The cost of the scrap is included in the inventory value. In essence, the cost of the scrap is spread over the good products produced in the work order. The scrap transaction is ignored by the cost processor and the distribution processor and is marked accordingly.
- Expense: The cost of the scrap is expensed out from the work order.

The Estimated Scrap transaction absorbs the costs due to the additional material used at each operation. An Estimated Scrap transaction is recorded for each completion of an operation that has operation yield associated with it. This is supported for all cost methods.

Estimated Scrap Quantity = Operation Completion Quantity * (1 - Operation Yield)/Operation Yield

Accounting entries for Estimated Scrap are listed here.

Accounting Line Type	Debit	Credit
Work in Process	X
Estimated Scrap Absorption		X

If an operation completion transaction is reversed, the estimated scrap gets reversed through an Estimated Scrap Return transaction.

Accounting Line Type	Debit	Credit
Estimated Scrap Absorption	X
Work in Process		X

Work Order Close

When the work order is closed, costing ensures that all the transactions reported for the work order are successfully costed. After successfully processing all transactions, these events are created in costing.

If the product is costed using actual cost or perpetual average, product cost adjustment transactions are created. After the work order is closed, cost processor calculates the actual cost for the product based on all the material and resource transactions reported for the work order. If there is a difference between this actual cost and the estimated cost used for the provisional completions, product cost adjustments are created.
The scrap costs are recalculated and necessary adjustments are created if the costs are different from the ones that were considered earlier. The actual scrap transaction reported in work orders that have operation yield associated with it are processed with the Operation Scrap Accounting option of Expense, irrespective of the value set up in the cost profile.

If the product is costed using standard cost, then the cost processor compares the components and resources used for the work order with the work definition used to roll up the product and creates these variances.

Variance	Description
Material Rate Variance	The difference in cost when the rate used for the component during cost rollup is different from the rate used while costing the component issue transaction.
Material Substitution Variance	The difference in cost when an item in the work definition isn't used in the work order or when an item that isn't in the work definition is used in the work order.
Material Usage Variance	The difference in cost when the quantity used in the work order is different from the quantity specified in the work definition.
Resource Rate Variance	The difference in cost when the rate used for the resource during cost rollup is different from the rate used while costing the resource charging transaction.
Resource Substitution Variance	The difference in cost when a resource specified in the work definition isn't used in the work order or when a resource that isn't in the work definition is used in the work order.
Resource Efficiency Variance	The difference in cost when the actual usage of resource is different from the one that's specified in the work definition.
Batch Size Variance	The difference in cost for items and resources that have a usage basis of 'fixed' and the quantity used in the work order.
Job Close Variance	This is used to accommodate any variances that the cost processor can't identify as one of those defined earlier. Also, if the standard cost of the product is manually setup and not through the cost rollup process, then the entire cost of components and resources is marked as job close variance.
Yield Variance	The difference between the planned output (from the work definition) and the actual output.

Note: If a closed work order is reopened and closed again in manufacturing execution, these transactions will be recreated to identify if any new resource or material transaction is reported since the last time the work order was reopened.

Work in Process Cost Adjustments

These are the work order cost adjustments.

Work in Process Material Standard Cost Adjustment - Captures the change in the standard cost of components for work orders that are in the Released and Completed status.
Work in Process Resource Cost Adjustment - Captures the change in cost of resources for work orders that are in the Released and Completed status.
Work in Process Product Cost Adjustment - The cost of product completions is estimated based on the provisional completions options set in the cost profile. After the work order is closed, the cost of the work order is recalculated and compared against the earlier estimated cost. The difference, if any, is accounted as cost adjustment. This cost adjustment is applicable only if the products are costed using the Actual or Perpetual Average cost methods.
Work in Process Scrap Cost Adjustment - Scrap can be accounted each time it's reported or at the end of the work order based on the scrap valuation option set in the cost profile. If scrap is accounted as soon as it's reported, then the actual cost accumulated in the operation till that point of time is considered. Scrap is recalculated at the work order close and if the value is different, then this cost adjustment is created.

Note: The Review Cost Accounting Distributions page doesn't lists the scrap cost adjustment transaction as a separate transaction, instead it's logged as a layer against the original scrap transaction.