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Cost Management
Table of Contents
1. Introduction 3
i. Important Key Features 3
ii. Key concepts 5
iii. Item Cost Definition 6
iv. Standard Costing 9
v. Average Costing 10
vi. Comparison of Standard and Average Costing 11
2. Basic Functionalities of the module 12
i. Defining Item Costs 12
ii. Viewing Item Costs 12
iii. Mass Editing Costing Information 12
iv. Supply Chain Costing 12
v. Period Close Activity 12
vi. View Transactions 12
vii. Reports 12
viii. Case Study – Standard Costing 13
3. Advanced / other features of the module 37
i. Retroactive Pricing 37
ii. Transfer Price Costing 38
iii. Client Extensions 39
iv. Account Generation Extension Workflow 40
v. View Transactions 41
4. Important Set Ups 42
a) Setups Related to Other Modules 42
b) Setups Related to Cost Management 43
i. Set Personal Profile Options 45
ii. Set Security Functions 48
iii. Define Cost Types 49
iv. Defining Activities and Activity Costs 50
v. Define Cost Groups 51
vi. Define Material Sub-elements 52
vii. Define Overheads 53
viii. Define Material Overhead Defaults 54
ix. Associate Expenditure Types with Cost Elements 55
x. Define Category Accounts (Optional) 56
5. Inter Module Dependencies 58
6. Seeded technical objects 59
7. Periodic Actions, Reconciliations etc. 60
8. Accounting Entries 61
1. Introduction
Oracle Cost Management is a comprehensive solution that helps organizations defi
ne costs then performs cost accounting for supply chain transactions. These acti
vities serve as a key component for complying with regulatory reporting and acco
unting requirements, for streamlining the use of working capital in organization
s, and improved profitability for businesses.
i. Important Key Features
It is a cost system for Inventory, Order Management, Purchasing and Work in Proc
ess transactions. Cost Management supports various transaction costing, comprehe
nsive valuation and variance reporting and thorough integration with Oracle Fina
ncials.
The overview of Oracle Cost Management with the other functional modules can be
represented as below:
It provides flexible Item Cost setup features including multiple cost elements a
nd infinite sub-elements for each element. System defined cost elements are Mate
rial, Resource, Overhead, Material Overhead and Outside Processing. All these el
ements can have multiple Sub-elements help to analyze costs in greater details.
This helps to accurately identify and maintain costs and associate them with ite
ms.
It enables extensive cost simulation capabilities that help to define costs. It
also supports flexible period based accounting that enables you to transact in m
ore than one open period at the same time. You can simultaneously reconcile and
analyze one open period while conducting business in subsequent open period. Als
o you can transfer summary of detail account activity to Oracle General Ledger a
t any time and close the period at any time.
It provides flexible account setup such as accounts by Organization, Sub-Invento
ry, WIP accounting class such that total item cost can be distributed to right e
xpense accounts and capture valuation in proper asset accounts.
It Supports following types of Costing Methods:
i. Standard Costing
ii. Average Costing
iii. LIFO Costing
iv. FIFO Costing
v. Periodic Average Costing
vi. Activity based Costing
As per the scope of this document we will be considering details of only Standar
d and Average Costing Methods.
It can be broadly categorized based on functional criteria as:
a. Product Costing
Rollup costs for bills and routings
Report and view assembly costs by level
Rollup costs based on Levels, Cost Type
Rollup costs using alternate bills and routings
Use Mass Edits to easily maintain costs and accounts
Copy Costs across cost types or organizations
Update costs at any time to revalue inventory and WIP
b. Inventory Costing
Maintain perpetual inventory costs
Create inventory transaction accounting entries
Track Asset and Expense items and locations
Use Rule based accounting for Revenue and COGS
c. Manufacturing Costing
Maintain perpetual balances, discrete jobs and schedules
Charge resources at actual or standard cost including OSP
Charge resource cost based on operation completion
Apply overheads by fixed amount per Item / Lot, Percent of Item / Resource Value
and Amount per resource unit.
As shown in the above screenshot, BOM of ORA1 comprises 3 Purchased items and 1
Subassembly.
O1, R1 and A1 are the purchased items.
RA1 is the sub-assembly.
Yield of component R1 is specified as 0.8, in the Component Details Tab of Bills
of Material screen. This means to say that for every 1 unit of R1 used in the m
aking of RA1, 0.8 units would effectively get utilized and the remaining 0.2 uni
ts would go unutilized or waste. So, in order to see that 1 unit of RA1 effectiv
ely gets utilized; 1/0.8 or 1.125 units should actually be used.
The yield of A1 is set to 1.
Fig 2. Bill of Material of RA1 displaying the yield of components
Similarly, the yield of sub-assembly RA1 is set to 0.7 in the BOM of ORA1.
However, the yield of O1 is set to 1.
Fig 3. Bill of Material of ORA1 displaying the yield of components
Resources
3 Resources have been defined under 3 different Departments. DSR1, DSR2 and DSR3
are the 3 Departments defined. The Resources defined are LAM, FIX and SAW. Reso
urce ‘LAM’ used for Lamination purpose is defined under Department DSR1 Unit cost of
this Resource is defined as $12.
The Navigation Path used for defining the Resource Unit Cost is as follows:
Bills of Material -> Routings -> Resources -> Rates (B)
Fig 9. Association of Overhead Mgmt with Pending Cost Type and Departments DSR1
and DSR2
The same can be achieved using the following Navigation too:
Bills of Material -> Routings -> Resources -> Rates (B)
As shown above, a 3-way association among the Overhead ‘Mgmt’, ‘Pending’ Cost type, and
Departments – DSR1 and DSR2 is complete.
However, in order to charge the overhead based on specific resources within the
Department, there needs to be an association between the Overhead and the specif
ic Resource within the Department.
To satisfy this condition, Overhead ‘Mgmt’ has been associated with Resources LAM an
d FIX within Departments DSR1 and DSR2 respectively.
The Navigation used is as follows:
Cost -> Setup -> Subelements -> Overheads -> Resources (B)
Fig 10. Association of Overhead Mgmt with Resources FIX and LAM for Pending Cost
type
The same can be achieved for each resource using following Navigation too:
Bills of Material -> Routings -> Resources -> Overheads (B)
Similarly overhead MfgMgmt has been associated with Department DSR3 and Pending
Cost type with a rate of 7 using basis type ‘Resource Unit’. This Overhead has speci
fically been attached to Resource SAW within Department DSR3.
Fig 11. Association among Department DSR3, Pending Cost type and Overhead MfgMgm
t
Fig 12. Association between Overhead MfgMgmt and specific resource SAW within De
partment DSR3
Item costs
All the 5 items, namely O1, R1, A1, RA1 and ORA1 have costs defined.
These are supported with screenshots and would be introduced one after the other
in the course of the discussion, as and when required.
Section 2 – Item Cost Calculations
============================
Section 2 would look at the Cost rollup process for the Finished Good ORA1 in an
Organization employing the Standard Cost method.
COST ROLLUP
As we start the exercise of understanding the rolled up costs, we must be remind
ed of the following:
1) A yield factor of 0.8 has been set against R1 in the BOM of RA1.
This means to say that for every 1 unit of R1 used, there would be wastage of 0.
2 units in the process of making RA1.
2) A yield of 0.7 has been set against RA1 in the BOM of ORA1.
3) Usage rate of Resource SAW has been set to 0.9 in the routing for ORA1.
As we go forward, we would understand the implications of the above settings.
Purchased Item A1
---------------------------
Let us begin our understanding from the buy item A1.
Material Cost of Item A1 has been defined as $12 with a basis type of Item.
Material Overhead Cost has been defined with a basis type of Total Value and a r
ate of 0.3.This means that the Material Overhead value would be 0.3 times the ex
isting total value of item A1.
This results in a value of $3.6 i.e. 0.3 * $12
Fig 16. Bills of Material Indented Cost Report Output for Item R1
The ‘Extended Qty/ Rate or Amount’ Column shows a value of 1.785714 which is derived
as follows:
This value directly multiplies the Material and Material Overhead costs as they
use a basis type of Item, resulting in values of $17.85714 and $3.57143 in the e
xtended cost column against the Material and Material Overhead cost elements res
pectively.
Material Cost = $10 * 1.785714 = $17.85714
Material Overhead Cost = $2 * 1.785714 = $3.57143
Sub-assembly RA1
---------------------------
As we have understood the rolled up costs derived with respect to the buy items
R1 and A1, we now move to sub-assembly RA1.
A Material Overhead Cost of $4 was defined for sub-assembly RA1 before the rollu
p was carried out. Please note that there was no Material Cost defined.
Fig 18. Bills of Material Indented Cost Report Output for Item R1
Let us take the cost elements one by one and understand the costs.
The ‘Extended Qty/ Rate or Amount’ Column shows a value of 1.428571 against item RA1
which
is due to the yield factor of 0.7 set against RA1 in the BOM of ORA1.
The Material Overhead of $4 gets multiplied by this value to result in an extend
ed cost of $5.71429.
The Cost Element of Resource has got 2 sub-elements in the form of Resources LAM
and FIX under Departments DSR1 and DSR2 respectively with a basis type of item.
The unit cost of Resource LAM is $12 as shown in Fig.4.
The unit cost of Resource FIX is $16 as shown in Fig. 5.
These costs once again get multiplied by 1.428571 to result in extended costs of
$17.14286 and $22.85714 respectively.
The final cost element that needs to be accounted is overhead.
Overhead ‘Mgmt’ has been attached to Cost type ‘Pending’ with a rate of 9 and a basis ty
pe of Resource Value as shown in Fig. 9
A basis type of Resource Value means that the Rate defined against this Overhead
would get multiplied by the Value of Resource used. A prerequisite for this to
happen is that the Overhead should be attached to the specific Resource.
To satisfy this condition, the Overhead ‘Mgmt’ has been attached to Resources LAM an
d FIX as shown in Fig.10.
Hence, the cost of Overheads is calculated by multiplying the rate of 9 with the
extended cost of the Resources, LAM and FIX. This results in values of $154.285
71 and $205.71429 in the extended cost column against the Overhead ‘Mgmt’.
Material Overhead Cost = $4 * 1.428571 = 5.71429.
Resource Costs
--- LAM = $12 * 1.428571 = 17.14286
--- FIX = $16 * 1.428571 = 22.85714
Overhead Costs
--- Mgmt (based on Resource Value of LAM) = 9 * $17.14286 = $154.28571
--- Mgmt (based on Resource Value of FIX) = 9 * $22.85714 = $205.71429
The Value of $314.6 in the ‘Item Unit Cost/Res Unit Cost’ Column against RA1 is the
rolled up cost of sub-assembly RA1. This means to say that, if a rollup were car
ried out for RA1 only and not ORA1, the rolled up cost of RA1 would have been $3
14.6.
This is essentially computed without considering the yield factor of 0.7 defined
against RA1 in the BOM of ORA1. However, the yield factor of 0.8 defined for Bu
y item R1 would be considered in this computation as this item forms a part of t
he BOM of RA1.
Purchased Item O1
---------------------------
This should be the simplest of all. RA1 has a Material Cost of $18 and a Materia
l Overhead Cost of $7 defined with a basis type of ‘Item’.
Fig.19. Item Costs of O1
For a change, there is no yield factor linked to this item.
Hence, the costs defined would directly get considered for roll up.
Fig 20. Bills of Material Indented Cost Report Output for Item O1
Material Cost = $18
Material Overhead Cost = $7
Finished Good ORA1
------------------------------
Finally, we get to the Finished Good Item ORA1.
ORA1 has got a Material Cost of $5 with basis type ‘Item’.
The Material Overhead Cost has a rate of 2 with a basis type of ‘Resource Unit’.
This means to say that the Resource Units used in making ORA1 would multiply the
Rate. As noted earlier, usage of Resource SAW is set to 0.9 and that of FIX is
set to the not so interesting value of 1.
Hence, a total of 1.9 resource units are used.
This value gets multiplied with the rate of 2 and results in a value of $3.8.
Fig 22. Bills of Material Indented Cost Report Output for Item O1
As in the case of RA1, let us take each cost element and check for the Cost arri
ved at.
Material Cost element has an extended cost of $5, which is picked up from the It
em Costs screen. Similarly the Material Overhead Cost of $3.8 gets picked up.
Resource Cost element has 2 resources SAW and FIX as sub-elements.
Resource FIX has a unit cost of 16 as shown in Fig.5
Hence this cost is picked for the roll up.
Resource SAW has a unit cost of 20 as shown in Fig.6.
However SAW has a usage of 0.9 in the Routing for ORA1 as represented by Fig.8.
Hence the extended cost would get calculated as 0.9 * 20 resulting in $18.
The next Cost element to be considered is overhead.
There are 2 sub-elements under this cost element in the form of MfgMgmt and Mgmt
.
As shown earlier, Mgmt has a rate of 9 defined with a basis type of Resource Val
ue and it has been associated with Resource FIX. (Figs. 9 & 10)
Also, MfgMgmt has a Rate of 7 defined with a basis type of Resource Unit and has
been attached to the Resource SAW under Cost type Pending for the Resource Unit
basis type to be effective. (Figs. 11 & 12)
Hence the cost of sub-element Mgmt is calculated by multiplying the rate of 9 wi
th the Resource Value of $16 resulting in $144.
The cost of sub-element MfgMgmt is calculated by multiplying the rate of 7 with
the Resource unit value of $0.9 resulting in $6.3.
Material Cost = $5
Material Overhead Cost = $2 * 1.9 = $3.8
Resource Costs
--- SAW = $20 * 0.9 = $18
--- FIX = $16
Overhead Costs
--- MfgMgmt = $7 * 0.9 = $6.3
--- Mgmt = $16 * 9 = $144
A summation of all the extended costs discussed above results in the rolled up c
ost of ORA1, which is $667.52857.
Shrinkage Rate
This case could have been made more interesting by bringing ‘Shrinkage Rate’ into pi
cture. Enter the manufacturing shrinkage rate as 0.2 for the Finished Good ‘ORA1’.
This can be done using the following Navigation:
Cost -> Item Costs -> Item Costs -> Item Costs Summary -> Item Costs Details.
Fig 23. Shrinkage Rate of ORA1
Cost rollup uses the value entered here to determine the incremental component r
equirements due to the assembly shrinkage of the current item.
Shrinkage Rate cannot be entered for items that do not base costs on a rollup of
the item’s bill of material and routing (buy items).
Note:- This value is different from the ‘Shrinkage Rate’ entered in the MPS/ MRP Pla
nning Tab of the item Master. Shrinkage Rate is considered for planning purposes
by MRP / MPS.
Let us now understand the implication of this MFG Shrinkage Rate.
All the costs displayed in the ‘extended cost’ column of the earlier Indented Bill o
f Material Report would get multiplied by the following factor:
1 / (1 – manufacturing shrinkage)
Hence the final cost of ORA1 would become:
$667.52857 * 1/(1-0.2) = $834.411
Cost Update
As understood earlier, Standard Costing uses the cost of an item that exists in
the ‘Frozen’ cost type only for accounting all transactions pertaining to the Organi
zation. Hence, the rolled up cost in Pending cost type needs to be updated to Fr
ozen Cost type.
This is accomplished by running the ‘Update Standard Costs’ concurrent request.
The Navigation used for this purpose is as follows:
Cost -> Item Costs -> Standard Cost Update -> Update Costs.
The standard cost update procedure enables users to define and roll up pending c
osts, simulate changes to standard costs for “what if” analysis and then update pend
ing costs to the frozen standard cost type.
It is advisable to run cost update at the beginning of the inventory accounting
period before transactions have started for the new period. At this juncture, it
would be apt to introduce a new feature, Cost Cut-Off Date
Cost Cutoff Date
------------------------
This functionality is developed to allow businesses the option of changing labor
rates and overhead rates at the beginning of the accounting period while transa
ctions in the next period wait for these new costs to be completed. This feature
exists for all the perpetual costing methods available in Release 11i: Standard
, Average, FIFO and LIFO. This will allow period close, cost updates and rate ch
anges to occur without impacting or interrupting business operations.
When using the Cost Cutoff Date, all cost processing for the new accounting peri
od is stopped for that organization. This provides accountants with the opportun
ity of closing the previous period.
Once the new costs are set, then the costing is started for the new period. This
occurs by changing the cost cutoff date to a date in the future.
To use this functionality, the Cost Cutoff Date field must be populated with a d
ate in the Organization Parameters form.
The Navigation Path is as follows:
Inventory -> Setup->Organizations -> Parameters -> Costing Information (T)
With this new functionality, the Standard Cost Update can now run in one organiz
ation while other organizations are still costing transactions. Standard Cost Wo
rkers are launched based on organization, so this improves the speed of costing
transactions.
Example
-------------
Let us understand the functionality of this feature with the help of an example.
Assume December 2003 and January 2004 to be 2 accounting periods respectively.
Suppose the cost cut-off date is set to 01-01-2004. New standard costs can be es
tablished prior
to 01-01-2004, say in December 2003. These costs will not impact the December co
sting activities, as they will not be active until January 1, 2004. Also, no tra
nsactions that occur from January 1, 2004 are having cost. This will allow the a
ccountants to complete the costing for the December transactions, close the peri
od, and run the reports for review.
Now, a standard cost update can be performed using the new cost type for January
2004.This will update the cost of the costed items up to December 31, 2003. The
reports can then be rerun with the same quantity and newly updated costs. Even
at this stage, January 2004 transactions would not be costed. Costing in the new
period would not happen till the costing of the previous period is finished. Th
e uncosted transactions will remain in the
18 MTL_MATERIAL_TRANSACTIONS with costed_flag = N waiting for a cost worker to p
rocess them. The Cost Manager will spawn no cost worker until the Cutoff Date is
changed.
To cost the January 2004 transactions once period of December 2003 is properly c
losed, the Cost Cutoff Date is changed. This can be changed to the start of the
next period or next quarter or next year --- whenever the rates need to be chang
ed next. Once changed, the cost processing begins for the transactions that have
been waiting.
For standard costs, the processing of the transactions is immediate. For Average
, FIFO, and LIFO costing the process takes longer because of the need to process
the transactions sequentially to keep the costs accurate.
As part of our test case, Standard Cost Update has been run for all the 5 items.
Hence, costs of these items are now available for the system to consider them fo
r all further transactions and their subsequent accounting.
Section 3 - Transaction Costing
==========================
In Section 3, focus is laid on the behavior of Standard Costing method on some b
asic transactions across 4 different modules of Oracle Applications, namely Orac
le Purchasing, Oracle Inventory, Oracle Work in Process and Oracle Order Managem
ent.
A business requirement of manufacturing and shipping sub-assembly RA1 is assumed
.
A voluntary choice of RA1, instead of ORA1, has been made in order to maintain t
he complexity of transactions at a minimum level and also to aid a quicker and b
etter understanding of the accounting distributions generated by the system.
The series of transactions followed for manufacturing and shipping of RA1 is as
follows:
1) Purchase Order transaction for receiving 10 quantities of Purchased item A1 i
nto sub-inventory SUB2.
2) A ‘Return to Vendor’ transaction of 2 faulty quantities of A1 from SUB2 to Vendor
.
3) Miscellaneous Receipt transaction for receiving 10 quantities of purchased it
em R1 into sub-inventory SUB1.
4) Sub-inventory transfer transaction for transferring 8 quantities of R1 from s
ub-inventory SUB1 to sub-inventory SUB2.
5) WIP Completion of 3 quantities of sub-assembly RA1 into sub-inventory SUB3 by
sourcing components R1 and A1 from sub-inventory SUB2.
6) WIP Assembly Scrap transactions of 1 quantity each of RA1 at Operation 10 and
Operation 20 respectively.
7) Sales Order transaction for shipping 2 quantities of RA1.
From the above flow of transactions, it is evident that 3 sub-inventories – SUB1,
SUB2 and SUB3 have been used for carrying transactions. These sub-inventories ha
ve a set of accounts (cost group) defined, representing each of the 5 cost eleme
nts. Similarly, the WIP accounting class, Discrete, used for WIP transactions al
so has a set of accounts defined.
These accounts are as represented below:
Fig 24. Accounts of Sub-inventories and Accounting Class
These are the accounts that are frequently hit by the transactions.
In addition to the above accounts, there are a few other accounts that would get
hit by the transactions, which would be presented at a later stage as and when
required.
Now, we proceed with the understanding of the transactions and the corresponding
accounting distributions generated.
1) A Purchase Order for 10 quantities of item A1 is created, received and delive
red into Sub-inventory SUB2. Price of item A1 on the Purchase Order is $14.
Please note that the material cost of A1 is $12 and Material Overhead cost is $3
.6 as shown in Fig.13.
Fig 48. Navigation for defining the Cost of Goods Sold account
Each of the workflows processes is launched from the Account Generation Client E
xtension. The exact workflow process called is dependent on the costing method (
standard or average) and the accounting line type. The workflow begins at node 1
with the Start activity. At node 2, the default account (–1) is returned. Node 3
is the end activity.
v. View Transactions
Explain in brief the advanced or other features of this module. Explain the purp
ose, importance and functionalities in brief. Show navigations. Attach screen sh
ots. But you need not have to offer detailed information on these features.
fix:
The update standard cost program (CMCICU) updates the following tables:
CST_COST_UPDATES
CST_ITEM_COSTS
CST_ITEM_COST_DETAILS
CST_RESOURCE_COSTS
CST_STANDARD_COSTS
MTL_MATERIAL_TRANSACTIONS
MTL_SYSTEM_ITEMS
WIP_OPERATIONS_RESOURCES
WIP_PERIOD_BALANCES
WIP_SCRAP_VALUES
The assembly cost rollup (CSTRBICR) updates the following tables:
BOM_BILL_OF_MATERIALS
CST_COST_TYPES
CST_ITEM_COSTS
CST_ITEM_COST_DETAILS
The above tables do not actually grow in size. The updated information
replaces the records already in the tables.
The actual tables that grow will be temp tables, such as:
CST_STD_COST_ADJ_TEMP
MTL_MATERIAL_TRANSACTIONS_TEMP
CST_ROLLUP_DELETE_TEMP,
BOM_EXPLOSION_TEMP
These tables should be self-cleaning (i.e., they should automatically delete
the records after completion of the process). If for some reason they do not,
because they are temp tables, truncate them from time to time.
This is a very important aspect of this document and you need to use your all ex
perience while drafting this. Detail out all important periodic actions performe
d within this module, give their importance. Attach screen shots, show navigatio
ns.
Show…..
1. Module opening and closing
2. Data transfer to GL or other module, if applicable
3. Processes that are to be followed on occurrence of certain events (e.g.
Fill Employee Hierarchy request in PO module)
4. Show how do you reconcile this module with GL. This is more applicable f
or Finance modules; however, equally applicable for some other modules live INV,
WIP.
5. Month End, Quarter End, Year end processes to be followed.
6. Periodic Change of set ups (e.g. Resetting document numbering in Purchas
ing if separate series is to be used for the new year)
7. Change of set ups due to change in tax structure (applicable for Finance
modules to fix changes made in Union Budget)
8. Running of certain reports to capture monthly, yearly data.
8. Accounting Entries
This needs to be done only for the basic functionalities of the module.
Show accounting effects of major transactions within your module. Also show the
source (with screen shots) of the account code combinations (CC) used within the
accounting entry.
e.g. Accounting Entry generated upon Ship Confirm is….