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Overview of Discrete Costing for Manufacturing
OAUG MFG Discrete SIG MeetingNovember 10, 2010
Douglas VolzDouglas Volz Consulting
Helping people using Oracle Applications since 1990
Agenda
Inventory Structure
High Level Review of Oracle Cost System Capabilities Costing Methods Oracle Cost Management Structure
Discrete MFG and Costing
Setting Standard Costs
Setting Average, FIFO, LIFO Costs
Month-End Accounting Close
Slide 2
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Agenda (Continued)
Release 12 Cost Improvements
Flexible Account Number Assignment
Little Known Cost Features
Slide 3
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Slide 4
Inventory Structure Global Organization (Item
Master)
Inventory Organization
Subinventory
LocatorsFG
SubinventorySTORES
SubinventoryMRB
SubinventoryWIP
Subinventory
Locators Locators
GlobalOrganization(Item Master)
InventoryOrganization
HDQTRSLocation
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Slide 5
Complex Financial EntitiesCorporate ConsolidatedLedger
Secondary Ledger
Primary Ledger
Legal Entity
Operating Unit
Inventory Orgs
Corporate Consolidated Ledger(USD)
USA PL(USD)
Other LEs
US OU
CORP LE
Item Master(ZZZ)
Switzerland Org
Korea OU
Switzerland(CHE) LSP’sLSP’s
European SLs
ORG Korea
SwitzerlandOU
US Dist. Centers
US LSP Orgs
Swiss Dist. Center
Asia-Pac OUs
Asia-Pac Dist. Centers
Europe Dist. Centers
Europe LSP Orgs
Other European
OUs
Korea LE Asia-Pac LEs
Swiss LEOther
European LEs
Korea(KRW)
Asia-Pac LEs
Swiss PL (USD)
European PL(USD)
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Slide 6
Costing Concepts
Costing Methods
Average Costing
Standard Costing
Periodic Costing
FIFO Costing
LIFO Costing
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Slide 7
Average Costing
Oracle supports a moving or weighted average cost The unit cost changes with each receipt transaction
Unit costs reflect the average of the incoming receipts from purchase order receipts, purchase order returns inter-organization receipts and for manufacturing, for WIP assembly completions miscellaneous issues may or may not affect the unit cost
All issues occur at the existing average costs
Assembly costs come from the cost of your assemblies built in WIP
You may have indirect costs (material overheads, etc.) as well
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Slide 8
Standard Costing The primary objective of standard costing is to provide a
performance measurement system Unit costs are set up in advance as an expected cost Component costs (material costs) are defined using the
projected average acquisition costs, plus any associated indirect costs
Assembly costs are rolled up using bills of material and routings Standards are reset periodically, depending on how quickly
your costs change
All manufacturing and distribution activities are measured against the expected costs
Typical variances include: Purchase Price Variance, Invoice Price Variance Manufacturing Variances (material usage, resource efficiency, etc.)
Helping people using Oracle Applications since 1990
Slide 9
Other Costing Methods
FIFO Costing FIFO costing values inventory by assuming that the oldest inventory
(first in) is the first to be used or sold (first out), but there is no necessary relationship to the physical movement of specific items
FIFO supports WIP costing
LIFO Costing LIFO costing values inventory by assuming that the most recently
received item (last in) is the first to be used or sold (first out), but there is no necessary relationship to the physical movement of specific items
LIFO supports WIP costing
Periodic Costing Periodic has dual costing capabilities, using Periodic Costing at
month-end and using transaction-based “real-time” costing prior to month-end
Periodic supports WIP costing
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Slide 10
Cost Structure
Inventory CostOrganization
GlobalOrganization(Item Master)
MatlCost Element
Matl O/HCost Element
ResourceCost Element
OverheadCost Element
OutsideProcessing Cost
Element
Matl1
Matl2
Matl O/H1
Matl O/H2
Res1
Res2
O/H1
O/H2
OSP1
OSP2S
ub-e
lem
ents
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Slide 11
Organizational Costing
Costing is by Plant or Warehouse (called an inventory organization)
Each inventory organization has its own item material, labor, outside processing, and overhead costs
• Each inventory organization may have multiple cost versions, called Cost Types
• You can have any number of cost types that are not active (unimplemented costs)
Each inventory organization can have its own costing method
There is only one “Active” cost type that is used to record your Subledger Transactions
• Standard costing uses the Frozen cost type, and average costing uses the Average cost type …
Within an inventory organization, all items have the same costing method, Average, or Standard or FIFO or LIFO or Periodic
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Slide 12
Cost Elements
You have five available cost elements for each cost type• Material (supplier purchase costs)
• Material Overhead (freight in, material handling, etc.)
• Resource (labor, machines, other factors of production)
• Outside Processing (subcontracting or outsourcing)
• Overhead (Resource and Outside Processing Overhead)
Only use the cost elements you need
But you can have an unlimited number of sub-elements• Material (metal, plastic, etc.)
• Material overhead (inter-co profit, in-bound freight, etc.)
• Resources (labor, machine groups, etc.)
• Outside Processing (subcontract vendor service1, service2, etc.)
• Production Overheads (Factory Burdens, etc.)
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Slide 13
Oracle Cost Management Interaction
GENERALLEDGER
ACCOUNTSPAYABLE
PURCHASING
FIXEDASSETS
ACCOUNTSRECEIVABLE
INVENTORY
ORDERENTRY
WORK INPROCESSShipment
Transactions
InvoiceInfo
BILL OF MATERIAL
MRP
SERVICE
RepairRMA's
S/O Requirements
WIP Supplyto MRP
MRP Releaseto WIP
ENGINEERING
COST MANAGEMENT
BOM's/Routings for Roll Up
Costs
Values Trans
ENG Itemsplanned in
MRP
WIP Consumption &WIP Completions
AssetAdditions
Invoices/Payments
Asset CostAccum Depr
Depr Exp
PUR provides PO'sand Receipts
Delivery Trans
Invoices/Cash Receipt
Trans
INV ReceiptTrans &Exp Accr
Items
BOM's
Items from BOM's
Matl Requirements
Inventory/WIP Trans
Values TransValues INV
Stds Adj
Misc Transfor WarrantyRepair Parts
CASHMANAGEMENT(Bank Recon)
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Slide 14
Inventory Costing
Costs Into Inventory/Stores Purchase costs into Inventory: Material, Material Overhead,
etc. costs For Standard Costing: Purchase Price Variances
More Costing for Inventory Movement Misc. Account Receipt / Issue Physical Inventory, Cycle Counts Consignment (WIP/OSP, purchase consignment) Subinventory and location transfers Customer shipments Internal orders Project shipments and transfers (PJM) Logical Transactions (extended supply chain network)
Supports many intercompany scenarios Internal orders Internal shipping and billing
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Slide 15
Discrete MFG and Costing
All of the Costing Methods support WIP Costing Timing varies by how your charge to WIP
• Backflush, Assembly Pull, etc.• Push
Costs into WIP: Material Issues Material Overhead Earning Resources, Outside Processing and Overheads
Costs out of WIP Scrap Assembly Completion
Job Close Variances Only for Standard Costing
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Slide 16
Manufacturing Variance Summary Costs-Incurred Costs-Relieved Variances
Previous-level costs @ actual usage
Previous-level costs @ standard
Material usage variance
Resource efficiencyResource Resource
Overhead efficiency
Outside processing Outside processingOutside processing
efficiency
Overhead Overhead
Sources of:• Components issued• Resources earned• OSP earned• Overheads earned
• WIP completions @ standard rolled up costs
= -
=
=
=
-
-
-
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Slide 17
Cost Reports and Inquiries
Material Distribution Detail/Summary Reports
WIP Account Detail/Summary Reports
Discrete Job Value
Expense Job Value Report
WIP Value Report
WIP Value Inquiries
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Slide 18
Setting Standard Costs
Cost Mass Edits
Item Cost Copies
Cost Rollups (also across the Supply Chain)
Standard Cost Updates
Bills of Material Cost Inquiries and Reports
Pending and Standard Cost Adjustment Reports
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Slide 19
Setting Average, FIFO, LIFO Costs
Simulation Costing with Cost Rollups and Mass Edits
Transaction-based updates of Average, FIFO, LIFO costs
Manual cost updates
PO retroactive price adjustments
And if you are clever, using open interfaces for custom updates
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Slide 20
Month-End Accounting Close
Close by Inventory Organization
Month-End Inventory, Receiving, WIP Value Reports
Release 12, close in Inventory Transfer to G/L using Subledger Accounting (Create
Accounting)
Closing Inventory closes Receiving and WIP
Purchasing has its own close (and also closes off Receiving)
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Slide 21
Month-End Inventory Value Reports
Inventory Value Report
Intransit Value Report
Subinventory Account Value Report (disabled in Release 12)
All Inventories Value Report
Receiving Value Report
Receiving Value by Destination Report (disabled in Release 12)
WIP Value Report
Period Close Value Summary Report
Period Close Reconciliation Report (11.5.10 and 12)
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Slide 22
R12 Improvements Period Close Diagnostics
Forms Drilldown• Using the same Inventory Accounting Periods form you can
drilldown to associated forms to view the problem transactions
New workflow to notify of failing transactions
Period Close Pending Transactions Report• Report for transactions holding up the inventory accounting
period
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Slide 23
Reconciliation Improvements in R12
Inventory Value Reports have an “as of date”
• Inventory Value Report• Receiving Value Report• Intransit Value Report• All Inventories Value Report
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Slide 24
Flexible Account Number Assignment
Release 12 Subledger Accounts allows you to extend the standard oracle setups (all costing methods except periodic)
Subledger Accounting rules govern how the final accounting entries are created and sent to the G/L
Subledger Accounting Offers Major Improvements
Subledger Accounting Comes with Default Rules
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Slide 25
SLA for Product Line Accounting, Variance Recognition
Transactions
Accounting Events
Cost Management SLA
AccountingConfigurations
SubledgerBalances
SubledgerJournal Entries
AccountingProgram
Journal Entry Setup
GLJournal Entriesand Balances
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Slide 26
SLA Accounting Tables
Enter Transaction(s)
Transaction Accounting Tables
AccountingProcessor
XLA_AE_HEADERS
XLA_AE_LINES
XLA_DISTRIBUTION_LINKS
XLA_EVENTS
Module Specific
Transaction Accounting
Tables
Create Accounting
G/L Tables
GL_LEDGERS
GL_JE_HEADERS
GL_JE_LINES
GL_JE_BATCHES
One Common Accounting Subledger
Table
GL_INTERFACE
ReceivingMaterial
WIP
Basic Table Structure for SLA
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Slide 27
More Release 12: COGS Recognition
In R12 the customer shipment entries go to deferred COGS
Automates the matching of Cost of Goods Sold (COGS) for a sales order line to the revenue that is billed for that sales order line.
“True” COGS
1. Customer Shipment 10
102. COGS Recognition
Deferred COGSInventory
10
10
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Slide 28
Related R12 BOM Features
Fixed Component Usage Support:Support for lot-based materials that have a fixed usage regardless of the job size for discrete WIP jobs, OSFM lot-based jobs and Flow Manufacturing
Component Yield Support:
Flexibility to control the value of component yield factors at WIP joblevel. The transaction logic now considers pre-yield BOM quantity per assembly rather than the quantity inflated by shrinkage.
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Standard Features You May Not Be Using
Currency setup
Period open and close by organization hierarchy
Material overhead absorption rules
Transaction Value Historical Summary Report
Period close snapshots
Slide 29
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Standard Features: Currency Setup You can change your item cost decimal precision at
any time
Slide 30
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Standard Features: Period Open/Close by Org Hierarchy
You can open and close multiple inventory periods by organization hierarchy Define your organization hierarchy using an Human
Resources, Purchasing or Inventory responsibility Using the Inventory Organization Parameters, Costing
tab, make sure your “Transfer to GL” settings are all the same for all orgs in the same organization hierarchy
Slide 31
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Standard Features: Period Open/Close by Org Hierarchy
Open Period Control request
Slide 32
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Standard Features: Period Open/Close by Org Hierarchy
Close Period Control request
Slide 33
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Standard Features: Mat’l Overhead Absorption Rules
Explicitly say which ones do and do not earn material overhead
Slide 34
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Standard Features: Transaction Value Historical Summary Report
Rollback inventory value to any date you choose
Choose which columns of information to view You have four columns to select The fifth column on the report is everything else
Useful as a “roll-forward” audit report
Useful to verify month-end inventory value report balances
Two reports: Transaction Value Historical Summary (for Standard
Costing) Transaction Value Historical Summary – Average Costing
Slide 35
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Standard Features: Transaction Value Historical Summary
Slide 36
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Standard Features: Period Close Snapshot
Period close snapshots (Release 11.5.10 onward)
Prior to Release 11.5.10, the inventory period close only stored summary values by inventory organization and subinventory (blank subinventories are for intransit)
When you close inventory you automatically store period-end inventory values and costs by organization, subinventory and item
Slide 37
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Desired Enhancements
Multi-Org Reporting Multi-Org Material Account Summary Report Multi-Org Receiving Account Summary Report Multi-Org WIP Account Summary Report Multi-Org All Inventories Value Report (with account
numbers) Multi-Org Inventory Value Report (with account numbers) Multi-Org Receiving Value Report (with account numbers) Multi-Org Expense Value Report (with account numbers) Multi-Org WIP Value Report (R12 still has account
numbers!)
Slide 38
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Slide 39
Summary
Oracle Discrete Costing offers robust, flexible costing
Multiple costing methods are supported
Powerful mass edits, item cost copies and cost update capabilities
Account classification is much better with Subledger Accounting
As you transact your cost accounting happens automatically
Multi-org reporting is a continuing area of concern
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Slide 40
Acknowledgements
Oracle Cost Development
Partners in crime at our clients
Thank You for Your Attendance and Participation
Douglas A. Volz
Slide 41
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Slide 42
Douglas Volz ([email protected])
Professional Background
Doug Volz is a Senior Architect and Advisor for Oracle Application projects, with a particular interest in Cost and Project Management. He has 30 years accumulated experience, including 5 years in Oracle Development (co-designing Oracle Cost Management) and 12 years in industry in Cost and Accounting Management positions. His Manufacturing and Cost systems experience covers project management, software design/development, delivery and consulting services, for both Oracle Corporation, and multiple international consulting firms. Prior to his systems career, Mr. Volz also held numerous management accounting positions for telecommunications, defense, and electronics companies.
In his consulting roles, Doug has served over 100 clients. Many of these were multi-org, multi-currency with global footprints. Countries include US, Mexico, UK, Netherlands, Belgium, Taiwan, P.R.O.C., Norway, Japan, Italy and Germany.
Doug leads the OAUG Cost Special Interest Group. He also advises and participates on the Oracle Customer Advisory Board for Fusion Costing.
Core Expertise Multi-organization, Multi-currency ERP
Implementations Project Management and Senior Project Advisor Core manufacturing processes
Cost Management Inventory Bills of Material WIP
Systems Integration and Data Conversions
Experience Sample of clients served:
Beckman Coulter (US) Matsushita (UK, Mexico) NTL (now Virgin Media) Logitech (US, Taiwan, P.R.C.) Celgene Corporation (US) NTL (UK, now Virgin Media) TCI International (US) Onninen AS (Norway)
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Slide 43
End of Presentation