Overview of Discrete Costing for Manufacturing

OAUG MFG Discrete SIG Meeting November 10, 2010

Douglas Volz Douglas Volz Consulting

doug@volzconsulting.com

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
Helping people using Oracle Applications since 1990 Slide 2

Agenda (Continued)
Release 12 Cost Improvements Flexible Account Number Assignment Little Known Cost Features

Helping people using Oracle Applications since 1990

Slide 3

Inventory Structure
Global Organization (Item Master) Inventory Organization Subinventory Locators
FG Subinventory STORES Subinventory MRB Subinventory WIP Subinventory Inventory Organization HDQTRS Location Global Organization (Item Master)

Locators

Locators

Helping people using Oracle Applications since 1990

Slide 4

Complex Financial Entities

C orporate C onsolidated Ledger S econdary Ledger

Helping people using Oracle Applications since 1990

P rimary

Korea (KR W)

Slide 5

Costing Concepts
Costing Methods

    

Average Costing Standard Costing Periodic Costing FIFO Costing LIFO Costing

Helping people using Oracle Applications since 1990

Slide 6

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
Helping people using Oracle Applications since 1990 Slide 7

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 8

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
Helping people using Oracle Applications since 1990 Slide 9

Cost Structure
Global Organization (Item Master)

Inventory Cost Organization

Matl Cost Element

Matl O/H Cost Element

Resource Cost Element

Overhead Cost Element

Outside Processing Cost Element

Sub-elements

Matl 1

Matl 2

Matl O/H 1

Matl O/H 2

Res 1

Res 2

O/H 1

O/H 2

OSP 1

OSP 2

Helping people using Oracle Applications since 1990

Slide 10

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
Helping people using Oracle Applications since 1990 Slide 11

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.)
Helping people using Oracle Applications since 1990 Slide 12

Oracle Cost Management Interaction

Helping people using Oracle Applications since 1990

Slide 13

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
Helping people using Oracle Applications since 1990 Slide 14

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

Helping people using Oracle Applications since 1990

Slide 15

Manufacturing Variance Summary

Costs-Incurred
Previous-level costs @ actual usage

Costs-Relieved Previous-level costs @ standard

Variances = = = =
Material usage variance

Resource

Resource

Resource efficiency Outside processing efficiency Overhead efficiency

Outside processing

Outside processing

Overhead

Overhead

Sources of: Components issued Resources earned OSP earned Overheads earned

WIP completions @ standard rolled up costs

Slide 16

Helping people using Oracle Applications since 1990

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

Helping people using Oracle Applications since 1990

Slide 17

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

Helping people using Oracle Applications since 1990

Slide 18

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

Helping people using Oracle Applications since 1990

Slide 19

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)

Helping people using Oracle Applications since 1990

Slide 20

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)
Helping people using Oracle Applications since 1990 Slide 21

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

Helping people using Oracle Applications since 1990

Slide 22

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

Helping people using Oracle Applications since 1990

Slide 23

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

Helping people using Oracle Applications since 1990

Slide 24

SLA for Product Line Accounting, Variance Recognition

Accounting Configurations Transactions Subledger Journal Entries GL Journal Entries and Balances Subledger Balances Journal Entry Setup

Accounting Program

Accounting Events

Cost Management

SLA

Helping people using Oracle Applications since 1990

Slide 25

Basic Table Structure for SLA

Enter Transaction(s)

Accounting Processor

Module Specific Transaction Accounting Tables

One Common Accounting Subledger Table

Transaction Accounting Tables

SLA Accounting Tables

XLA_EVENTS

G/L Tables
GL_LEDGERS

Receiving Material WIP

Create Accounting

XLA_AE_HEADERS

GL_ INTERFACE

GL_JE_BATCHES

XLA_AE_LINES XLA_DISTRIBUTION _LINKS

GL_JE_HEADERS

GL_JE_LINES

Helping people using Oracle Applications since 1990

Slide 26

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.

Inventory 1. Customer Shipment 2. COGS Recognition

Deferred COGS

True COGS

10

10 10 10

Helping people using Oracle Applications since 1990

Slide 27

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 job level. The transaction logic now considers pre-yield BOM quantity per assembly rather than the quantity inflated by shrinkage.

Helping people using Oracle Applications since 1990

Slide 28

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

Helping people using Oracle Applications since 1990

Slide 29

Standard Features: Currency Setup

You can change your item cost decimal precision at any time

Helping people using Oracle Applications since 1990

Slide 30

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

Helping people using Oracle Applications since 1990

Slide 31

Standard Features: Period Open/Close by Org Hierarchy

Open Period Control request

Helping people using Oracle Applications since 1990

Slide 32

Standard Features: Period Open/Close by Org Hierarchy

Close Period Control request

Helping people using Oracle Applications since 1990

Slide 33

Standard Features: Matl Overhead Absorption Rules

Explicitly say which ones do and do not earn material overhead

Helping people using Oracle Applications since 1990

Slide 34

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
Helping people using Oracle Applications since 1990 Slide 35

Standard Features:
Transaction Value Historical Summary

Helping people using Oracle Applications since 1990

Slide 36

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

Helping people using Oracle Applications since 1990

Slide 37

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!)

Helping people using Oracle Applications since 1990

Slide 38

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
Helping people using Oracle Applications since 1990 Slide 39

Acknowledgements
 Oracle Cost Development  Partners in crime at our clients

Helping people using Oracle Applications since 1990

Slide 40

Thank You for Your Attendance and Participation

Douglas A. Volz

Slide 41

Douglas Volz (doug@volzconsulting.com) 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)
Slide 42

Helping people using Oracle Applications since 1990

End of Presentation

Helping people using Oracle Applications since 1990

Slide 43