FIFO Costing Method

8/14/2019 FIFO Costing Method

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FIFO/LIFO Perpetual Costing Overview

Laura MillerSeptember 2001


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FIFO/LIFO Perpetual Costing Overview

In addition to Standard and Weighted Average costing methods, there is anadditional primary cost method known as FIFO/LIFO costing. This method ofcosting is generally accepted and widely used. This functionality is available inOracle Applications Release 11.5.2.

FIFO is defined as First In First Out. The earliest received stock is used first whilethe latest received stock is still on hand. LIFO is defined as Last In First Out. Thelatest received stock is used first while earliest-received stock is still on hand. Thecompany will choose either FIFO or LIFO costing based on the businessrequirements of a particular organization.

FIFO Costing is a method of identifying inventory based on the assumption thatcosts should be charged against revenue in the order in which they occur. Theinventory remaining on hand is presumed to consist of themost recent costs. The first goods acquired are the first goods out, and thelast goods acquired are in ending inventory (assuming that ending inventoryexists). FIFO approximates the results that would be obtained by thespecific identification method of costing inventory. This means that the cost isdetermined by the association of flows of inventory. Under FIFO, the firstunits in stock are the first units out, which means that ending inventoryis of the units purchased last.

LIFO Costing is in general the opposite of FIFO costing with a few exceptions.Those exceptions will be highlighted further in this document as they are applicable.

FIFO/LIFO Item Costs and layer costs are maintained at the elemental levels and bycost groups. The FIFO/LIFO Item Cost is the weighted average of all inventory layercosts divided by the sum of the layer quantities. This item cost is used for currentinquiries and reports. The Copy Cost, Mass Edit and Cost Rollup process will usethis item cost for processing.

FIFO example:

Layer 1 LQ1 = 20 ea LC1 = $2.00/eaLayer 2 LQ2 = 10 ea LC2 = $1.40/ea

FIFO Item Cost = ($2.00 * 20 + $1.40 * 10)/(20+10) = 1.80 ea


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The costing can be processed at the organization level only. If the organization is aFIFO costing organization, then all inventories of the org is valued at FIFO. Nomixing of cost types is allowed in an organization and there is no sharing of costs

with orgs when using FIFO/LIFO costing. The FIFO/LIFO method can be used foran organization even if the other organizations in a company are using standard oraverage costing.

With perpetual costing, inventory balances and values are updated after everytransaction. Using FIFO/LIFO allows a company to have a more accurate inventoryvalue for the business practices of the organization.

The cost of the inventory is maintained in layers. Receipts and assemblycompletions are maintained in layers, each with its own costs and quantities. Issuesare valued at the costs of the earliest layers remaining in onhand inventory. Period

end value is kept in layers, based on receipts that sill have quantity balances. Asthe period closes, the layers for previous periods and years will be in a single layerand carried over to the next period.

The inventory layer is the unique identification of every receipt into inventory. Eachinventory layer has an associated cost and quantity. The costs are tracked withrespect to a cost group. Therefore the item cost in a cost group is the weightedaverage of costs across all inventory layers in that cost group.

Cost Layers are maintained at cost group level. This is available to support ProjectManufacturing. Using cost groups allows an organization to maintain layers andvalues at the project cost group level. This allows for a more accurate costing ofprojects to be reported.

A Cost Group is the entity that owns the cost of an item. The cost group is definedunder a specific legal entity and associated to an inventory organization in the LegalEntity. Assigning inventory organizations to the same cost group (organization type)allows the item to share costs across the inventory organizations. Cost Groups canbe of two types:

- Project type: Used to support Project Manufacturing in Perpetual Weighted

average costing.

- Organization type: Used to support Periodic Costing for legal reportingrequirements


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FIFO/LIFO costing is based on Purchase Order prices. No invoice or acquisitioncosts are considered when costing a suppliers receipt. This is similar to Averagecosting; invoice price, freight, taxes and other charges are not included. To include

those additional costs, a manual cost update for the item must be performed.

The Layer Cost of an item is updateable. Each items cost can be updated at aspecified layer with user-defined values. The process then creates adjustmententries onhand quantity. Also like average costing the update can only be done fora specific item not for a range of items or for all items.

In FIFO/LIFO costing, every receipt is stored as an inventory layer. The costhowever does not include acquisition costs so it is not a representation of the truecost of the item. To allow a realistic representation of the true cost, to includeacquisition costs, taxes and freight costs, the user can manually update costs

associated with an inventory layer.

This process is similar to the Average Cost update process

When the cost associated with an inventory layer is updated, the WIP layeradjustments is not supported. The new cost will be used the next time the layer isconsumed

Layer cost update form updates the cost of the inventory layer by inserting a layercost update transaction in MMT (txn_action_id = 24, txn_src_type_id =15) and costdetails into MSTCD

There are three ways to perform the update:

1 - Update the total item cost for the inventory layerThe total change in the item cost is proportionately distributed to individualelements and level types that currently exist for an item

2 - Update cost by element and level type

3 - Update total value, i.e. change to the value of layer_quantity * layer_cost.

Variance could occur if the value change leads to negative onhand value; inthis case onhand value becomes 0 and the balance becomes the varianceamount

Inventory quantities and values are tracked and reported by layer. The applicationtracks receipts throughout the lifecycle from the initial delivery until the item is usedup or shipped.


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Reports and Inquiries that are currently available for Weighted Average Costing arealso available for FIFO and LIFO costing. New reports and inquiries for the layerinformation have been added.

CMCLCW Layer Cost Transaction WorkerSpawned by Actual Cost Manager CMCACMRun sequentially, only on allowed at a time

CSTRLIVR Layer Inventory Value Report

FIFO/LIFO transactions are classified as two types:

1 - Layer-Identified transactions: these identify specific layers and can be a new

layer (from a new PO) or existing layers.

2 - Layer-Derived transactions: these transactions do not have layeridentification. Most miscellaneous issues are of this type and follow theFIFO/LIFO method established for the organization.

Layers are created as inventory is received. A receipt creates a new layer with it'sown quantity and cost. These layers will be consumed if there is a balance in thelayer. Then consumption moves to the next layer. The cost for issues can vary dueto the related cost of the layer being consumed.

Layers are maintained only in the seeded FIFO/LIFO cost types. User defined costtypes do not have layers costs. Cost layers are not held at sub-inventory levels.

FIFO Cost Flow example for an item:

1/1 Beginning Balance Layer 1 1000 @ $5/ea

1/8 Issue 100 100 @ $5/ea

1/10 Receive 20 20 @ $10/ea (creates Layer2)

1/18 Receive 30 30 @ $5.5/ea (creates Layer3)

1/25 Issue 910 900 @ $5 (from Layer1)

10 @ $10 (from Layer2)1/29 Receive 30 30 @ $6 (creates Layer4)

1/31 Ending Balance Layer 2 10 @ $10

Layer 3 30 @ $5.5

Layer 4 30 @ $6


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A new receipt layer is costed as follows:

- PO receipts are valued at PO price

- Assembly completions are valued at job completion cost- Misc. receipts, account receipts, and user-defined transactions are valued at

user entered transaction cost- Direct interorg transfer and intransit receipts are valued at transfer transaction

cost- WIP component returns are values at the job component cost- Positive cycle counts and physical adjustments are valued at the latest layers

cost- Customer returns (RMS receive transactions) are valued at the latest layers

cost; if the RMA is referred to a sales order line it is valued at that shipmentslayer cost

The Receipt Layer in Inventory is the entity that identifies a receipt into inventory.Each receipt layer has a cost and a quantity. The costs are associated with a costgroup. The cost of each item in a cost group is the weight average cost of the costsacross all receipt layers in that cost group. Quantities are consumed on theFIFO/LIFO basis identified for the organization.

A receipt into Inventory replenishes negative layers. Layers can be replenished upto a zero balance, oldest layers first for FIFO and recent layers first for LIFO. Ifthere are negative layers at the time of a receipt transaction, the receipt will causereplenishment of the negative layers. The layers will be replenished to a zerobalance with the oldest negative layers replenished first for FIFO and the mostrecent layer first for LIFO costing.

Inventory layers are consumed under these conditions:

- Issued to jobs- Transferred out of inventory, the project cost group or the org- Sold- Scrapped- Loss (cycle count or physical count adjustments)

Layer-Identified transactions have their own transaction costs and will consume thespecified layer if there is still a positive balance for the layer. Return to Vendor andAssembly Return to WIP are examples of this type of transaction.

When a Layer-Identified issue cannot consume the specified layers, then the nextlayer will be consumed. This alternate layer may not have the same costs as thefirst layer. This will cause a variance to be created.


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The variance is the difference between the cost of the transaction and the value ofthe layer(s) actually consumed. The variance account (Layer Variance) is entered bythe user when defining the organization parameters costing information or when

defining the cost groups for the organization. This variance account is then creditedor debited, depending on the value of the transaction.

For transactions that have a negative variance, the transaction is considered to beundercosted. For transactions that have a positive variance, the transaction isconsidered to be overcosted.

Material transactions in the MTL_MATERIAL_TRANSACTIONS table are groupedbased on layer identified and layer derived transactions. Layer identifiedtransactions identify the exact inventory receipt layer to consume

Examples: Return to Vendor, RMA, WIP Assembly returns

Layer Derived Transactions do not identify an exact receipt layer to consume. TheFIFO/LIFO processor chooses the layers to be consumed based on the layerconsumption algorithm. This is determined by the application.

Examples: Issues, Completions, and Physical Inventory Adjustments

Components issued to WIP are maintained in independent layers. Return jobcomponents to inventory based on the FIFO WIP layers; the earliest componentsissued to a job and not consumed are returned to inventory. Job components arereturned to inventory at the cost of the latest WIP layer.

WIP layers are created when there are WIP component issues. Each WIP layerconsists of one or more inventory layers. This depends on the number of layersconsumed by the issue transaction. Quantity and costs are maintained separatelyfor each inventory layer within a WIP layer.

When an assembly is completed, the relieved material costs for the assembly arecosted using the earliest layer's costs within the WIP layer that are still available tobe relieved. Scrap transactions relieve costs in the same manner.

WIP Component Issue- Consumes inventory layers in FIFO method- Creates one WIP layer and maintains the inventory layers visibility in WIP- Increases the applied_quantity in CST_WIP LAYERS tables


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WIP valuations are maintained in WIP_PERIOD_BALANCES table. This table issupported by the following tables:

WIP_REQUIREMENT_OPERATIONSWIP_REQ_OPERATION_COST_DETAILSWIP_OPERATION_RESOURCESWIP_OPERATION_OVERHEADS

For FIFO/LIFO costing, WRO and WROCD need to reflect the cost information bylayer; so additional tables were created to support the layer costing:

CST_WIP_LAYERSCST_WIP_LAYER_COST_DETAILS

Sub-inventory transfers for FIFO/LIFO costing is similar to the process that currentlyexists for Average Costing. The only difference is that layer maintenance must beperformed in the FIFO/LIFO cost method. Although the inventory layer is maintainedat the cost group level, not the sub-inventory level, then the sub-inventory transferdoes not affect the inventory level. Because transfers can be done between sub-inventories holding stock for different cost groups or between an asset and expensesub-inventories, logic is required to support these cases.

When a transfer takes place, two inventory transactions are created. One is createdfor the sending organization and one for the receiving organization. If there is a costgroup change, then the inventory layers will be consumed from the sendingorganization and an inventory layer is created in the receiving sub-inventory. If thereis no cost group change, then the current cost of the item is obtained and no newinventory layer is created in the receiving organization.

For an Asset to Expense transfer, the asset sub-inventory for the item is consumed.There is no new inventory layer created in the expense sub-inventory. For Expenseto Asset sub-inventory transfer and the item is an asset, a new inventory layer iscreated in the receiving sub-inventory. The cost of the item is taken from the latestlayer cost in the receiving cost group.

Inter-org Transfers and FIFO/LIFO Costing:

Direct transfer from FIFO/LIFO ==> FIFO/LIFO organization causes the costworkers to process the costs in each organization before the inventory istransferred. This allows the inventory layers to be consumed and the newweighted item cost to be used a s a new inventory layer in the receivingorganization.


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Direct transfer from FIFO/LIFO ==> Average Cost organization causes theinventory layers to be consumed in the sending organization. The cost workerthen picks up that new weighted item cost and re-averages the costs for the item

in the Average Costing organization.

Direct transfer from Average Organization ==> FIFO/LIFO organization causesthe cost worker to issue the item at the current cost. The FIFO/LIFO organizationwill then pick up the cost and create a new inventory layer for the item using thatcurrent cost.

Direct transfer from FIFO/LIFO ==> Standard Costing organization causes thecost worker to consume the inventory layers for the item in the sendingorganization. The item is then costed in the standard organization at thestandard cost.

Direct transfer from Standard Costing organization ==> FIFO/LIFO organizationcauses the new cost to be the standard cost of the item. A new inventory layer iscreated in the FIFO/LIFO organization with that cost.

New tables used for FIFO/LIFO are the following:

CST_INV_LAYERSThis table stores the layers that get created due to a receipt into inventory;Creation_date is the sysdate when the layer is created, NOT the transactiondate of the transaction creating the layerLayer_cost column stores the items layer cost and issues of the item will be atthat cost

CST_INV_LAYER_COST_DETAILSThis is the child table of CST_INV_LAYERS table and stores layer cost detailsby level/cost element

MTL_CST_LAYER_ACT_COST_DETAILSThis is the child table of MTL_CST_ACT_COST_DETAILS and storestransaction/layer cost information and quantityStores costs of layers by level and cost elementLayer_cost at which layer is consumedActual_cost cost at which layer is supposed to be consumedDifferences between the costs are stored in variance_amountSummarized cost variance across layers for a cost group is stored in MCACD


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Documents

FIFO Costing Method