Cost Management

Cost management is a term that has been popularized by CAM-I (Consortium For Advanced Manufacturing International). Cost management is said to be a more comprehensive concept than cost accounting in that the
emphasis is on managing and reducing costs rather than reporting costs. In other words, it is a long run proactive
approach rather than a short run reactive approach. For example, a great deal of attention is given to reducing costs
at the design stage of a product's life cycle rather than simply attempting to measure and control cost during the
production stage.
Oracle Cost Management is a full absorption, perpetual, and periodic cost system for purchasing, inventory,
work in process, and order management transactions. Cost Management supports multiple cost elements, costed
transactions, comprehensive valuation and variance reporting, and thorough integration with Oracle Financials.

INVENTORY VALUATION METHODS

The four inventory valuation methods that appear in fig. shown @
http://www.oracleug.com/user-guide/cost-management/basics-cost-management
are arranged in the order of the amount of cost that is traced to the inventory. The throughput method involves tracing
the least amount of cost to the inventory, while the activity based method includes tracing the greatest amount of
costs to the inventory. In direct (or variable) costing, a greater amount of cost is traced than in the throughput method,
but a lesser amount than in the full absorption method. Direct costing and full absorption costing are the traditional
methods, while the throughput and activity based methods are relatively new. These inventory valuation methods are
very important because they control the manner in which net income is determined. Oracle provides full absorption
method.
Costing Methods
Cost Management supports four perpetual costing methods: Standard Costing, Average Costing, FIFO Costing, and
LIFO Costing. You can use the Average Costing method for one organization and the Standard Costing method for
another organization.

You can use FIFO Costing, which is based on the assumption that the first inventory units acquired are the first units
used. You can use LIFO Costing, which is based on the assumption that the last inventory units acquired are the first
units used. Cost Management also supports Periodic Costing.
Oracle Cost Management does not support costing for process inventory organizations.
PERIODIC VS. PERPETUAL INVENTORY SYSTEMS

There are fundamental differences for accounting and reporting merchandise inventory transactions under the
periodic and perpetual inventory systems. To record purchases, the periodic system debits the Purchases account
while the perpetual system debits the Merchandise Inventory account. To record sales, the perpetual system requires
an extra entry to debit the Cost of goods sold and credit Merchandise Inventory. By recording the cost of goods sold
for each sale, the perpetual inventory system alleviated the need for adjusting entries and calculation of the goods
sold at the end of a financial period, both of which the periodic inventory system requires.
Cost Type
Cost are of 2 Types:
Frozen Cost: Frozen Cost is the cost at which inventory transactions are costed
Simulated Cost: Simulated Costs are used to simulate cost scenarios to arrive at the best estimate of standard cost
Oracle provides a seeded simulated cost Pending. Unlimited number of simulated cost types can be defined in the
system
Cost Structure
A cost structure is the collection of definitions and methods used to cost inventory, bills of material, and work in
process. The cost structure is composed of:
Organizations

 Cost organizations and shared costs

General Ledger accounts
Cost elements
Subelements
Activities
Basis types

Basics of Cost Management

Costing Setup
Item Costing
Standard Costing
Revenue and COGS Matching

Basics of Cost Management

Submitted by Anonymous on Sat, 04/04/2009 - 16:51

Tag:

Cost Management /

The costs associated with a manufacturing firm are separated into two broad categories. These include
manufacturing costs and selling & administrative costs (G&A - General and Administrative). This functional
separation is important because each category of cost is treated differently in the accounting records. The different
treatments are required to obtain proper matching.

Manufacturing Costs
There are three types of manufacturing costs. These include:
1) Direct material or raw material,
2) Direct labor, and

3) Out side processing

4) Indirect manufacturing costs, or factory overhead.
Direct material becomes the product, or becomes a part of the product. Direct labor converts the direct material into a
finished product. Factory overhead represents all the other factory costs that cannot be directly identified with a
particular product. This indirect category includes a variety of costs that are discussed in more detail in subsequent
chapters. These three types of costs are also referred to as product costs, or inventoriable costs, because they are
capitalized in (or charged to) the inventory, i.e., they become assets.
Matching
Accountants capitalize manufacturing costs to obtain proper matching. The matching concept is pervasive in accrual
accounting and requires that costs and benefits are matched or brought together on the income statement. In a
production setting, the idea is to match the costs of producing a product (or service) against the benefits, i.e., revenue
derived from the sale. When the inventory is sold, these costs are charged to an expense account referred to as cost
of goods sold. At the end of the accounting period, cost of goods sold is closed to the income summary where,
theoretically, matching takes place.
Remember that unexpired costs represent assets. Expired costs represent expenses. When the inventory is sold, we
say these costs have expired, i.e., the benefits to be obtained (from the effort that generated the costs) have been
recognized. Thus, manufacturing costs become expenses when they reach cost of goods sold, but represent assets
until the sale takes place.
Selling and Administrative Costs
In traditional accounting systems , selling and administrative costs are expensed in the period in which they are
incurred. Theoretically, if there are future benefits associated with a cost, the cost should be capitalized as an asset
rather than expensed. Certainly there are some future benefits associated with costs such as research and
development, training, market promotion and advertising. However, these costs are expensed as incurred because it
is difficult if not impossible to relate them to the future benefits. As a result, these costs are referred to as period
costs.
COST BEHAVIOR AND PREDICTION
In addition to separating costs into categories such as direct and indirect and manufacturing and non-manufacturing,
costs are also frequently identified by their behavior in relation to changes in an activity level. This separation is
helpful for planning and budgeting purposes. The major types of costs, in terms of cost behavior, are:
1) variable costs,
2) fixed costs,
3) semi-variable costs and
4) semi-fixed costs.
COST ACCOUNTING SYSTEM
A cost accounting system requires five parts that include: 1) an input measurement basis, 2) an inventory valuation
method, 3) a cost accumulation method, 4) a cost flow assumption, and 5) a capability of recording inventory cost
flows at certain intervals. Note that many possible cost accounting systems can be designed from the various
combinations of the available alternatives, although not all of the alternatives are compatible. Selecting one part from
each category provides a basis for developing an operational definition of a specific cost accounting system.

INVENTORY VALUATION METHODS

The four inventory valuation methods that appear in below fig. are arranged in the order of the amount of cost that is
traced to the inventory. The throughput method involves tracing the least amount of cost to the inventory, while the
activity based method includes tracing the greatest amount of costs to the inventory. In direct (or variable) costing, a
greater amount of cost is traced than in the throughput method, but a lesser amount than in the full absorption
method. Direct costing and full absorption costing are the traditional methods, while the throughput and activity based
methods are relatively new. These inventory valuation methods are very important because they control the manner
in which net income is determined. Oracle provides full absorption method.

Absorption Costing or Full Costing System:

Absorption costing is a costing system which treats all costs of production as product costs, regardless weather they
are variable or fixed. The cost of a unit of product under absorption costing method consists of direct materials, direct
labor and both variable and fixed overhead. Absorption costing allocates a portion of fixed manufacturing overhead
cost to each unit of product, along with the variable manufacturing cost. Because absorption costing includes all costs
of production as product costs, it is frequently referred to as full costing method.
Variable, Direct or Marginal Costing:
Variable costing is a costing system under which those costs of production that vary with output are treated as
product costs. This would usually include direct materials, direct labor and variable portion of manufacturing
overhead. Fixed manufacturing cost is not treated as a product costs under variable costing. Rather, fixed
manufacturing cost is treated as a period cost and, like selling and administrative expenses, it is charged off in its
entirety against revenue each period. Consequently the cost of a unit of product in inventory or cost of goods sold
under this method does not contain any fixed overhead cost. Variable costing is some time referred to as direct
costing or marginal costing. To complete this summary comparison of absorption and variable costing, we need to
consider briefly the handling of selling and administrative expenses. These expenses are never treated as product
costs, regardless of the costing method in use. Thus under either absorption or variable costing, both variable and
fixed selling and administrative expenses are always treated as period costs and deducted from revenues as
incurred.

InVENTORY COST FLOW ASSUMPTIONS

A cost flow assumption refers to how costs flow through the inventory accounts, not the flow of work or products on a
production line. This distinction is important because the flow of costs is not always the same as the flow of work.
At first glance, you may see no nedd to make an assumption about how costs flow through the inventory account.
The cost of each item placed in the physical inventory can be entered into the account, and then, as the item is
physically taken from inventory, the cost can be removed from the account.In this way, the cost accumulated in the
account can be perfectly match the items physically held, and the cost of goods sold can equal the sum of the cost of
each item actually delivered to a customer. Such an inventory system can be identified as a specific identification
system.
Specifically identifying each item in inventory is relatively easy if each item is unique, such as an art object or a piece
of custom-made furniture, or if each item has an identification number, such as an automobile. However, specific
indentification is not practical when inventory items are not individually identifiable. This is the case with bushels of
wheat, caseloads of memory chips, and loads of brass hooks like the ones used in Amalgamated's hat racks. In these
cases, accountants commonly assume a flow cost through the inventory account that is not necessarily related to the
acctual physical flow of goods.
a) Average cost price items in inventory on the basis of the average cost of all similar goods available during the
period.
b) Standard Price versus Average Price
With average price control, a new material price is calculatedafter every goods receipt, invoice receipt, and/or order
settlement. This material price is an average value calculated from the total inventoryvalue and the total quantity of
the material in stock.
With standard price control, goods movements are valuated with a price that remains constant for at least one period.
The standard price that is assigned to a material is usually the result of a standard cost estimate.
The main difference between the two valuation procedures is that the average price represents a current delivered
price while thestandard price is based on planned values and not actual values. Differencs between the planned price
and the actual prices are not assigned to the material stock in Financial Accounting, but rather are assigned to a price
difference account. When using the moving average price, however, thematerial stock value in Financial Accounting
can reflect the pricesactually incurred.
c) First-In, First-Out (FIFO) assumes that costs are used in the order in which the related goods were purchased.
The cost of inventory at hand at the balance sheet date must therefore represent the most current purchase prices.
d) Last-In, Last-Out (LIFO) matches the cost of the last goods purchased against revenue.
The LIFO Reserve
Some companies use LIFO for tax and external reporting purposes, but they maintain a FIFO, average cost, or
standard cost system for internal reporting purposes. The difference between the inventory method used for internal
reporting purposes and LIFO is often referred to as the LIFO reserve. This is the allowance to reduce inventory to
LIFO. The LIFO reserve is a contra-inventory account that must be adjusted to its required balance at the financial
statement date.
RECORDING INTERVAL CAPABILITY
Inventory records can be maintained on a perpetual or a periodic basis. Conceptually, the perpetual inventory
method provides a company with the capability of maintaining continuous records of the quantities of inventory and

the costs flowing through the inventory accounts. The periodic method, on the other hand, requires counting the
quantity of inventory before inventory records can be updated. In the past, manufacturers tended to keep perpetual
inventories, while retailers used the periodic method. However, today a variety of modern point of sale devices and
dedicated microcomputer software are readily available to provide any company with perpetual inventory capability.

Cash vs. Accrual Accounting

Submitted by Anonymous on Sat, 04/04/2009 - 16:53

Tag:

Cost Management /

The cash method and the accrual method (sometimes called cash basis and accrual basis) are the two principal
methods of keeping track of a business's income and expenses. In most cases, you can choose which method to
use. Learn how they work and the advantages and disadvantages of each so you can choose the better one for your
business.
In a nutshell, these methods differ only in the timing of when transactions, including sales and purchases, are
credited or debited to your accounts. Here's how each works:
The accrual method.
Under the accrual basis accounting, revenues and expenses are recognized as follows:
Revenue recognition: Revenue is recognized when both of the following conditions are met:
a. Revenue is earned.
b. Revenue is realized or realizable.
( Revenue is earned when products are delivered or services are provided. Realized means cash is received.
Realizable means it is reasonable to expect that cash will be received in the future.)
Expense recognition: Expense is recognized in the period in which related revenue is recognized (Matching
Principle).
The accrual method is the more commonly used method of accounting. Under the accrual method, transactions are
counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them
(receivables) is actually received or paid. In other words, income is counted when the sale occurs, and expenses are
counted when you receive the goods or services. You don't have to wait until you see the money, or actually pay
money out of your checking account, to record a transaction.
Advantages and disadvantages of the accrual method.
While the accrual method shows the ebb and flow of business income and debts more accurately, it may leave you in
the dark as to what cash reserves are available, which could result in a serious cash flow problem. For instance, your
income ledger may show thousands of dollars in sales, while in reality your bank account is empty because your
customers haven't paid you yet.
The cash method.
Under the cash method, income is not counted until cash (or a check) is actually received, and expenses are not
counted until they are actually paid.
Advantages and disadvantages of the cash method
Though the cash method provides a more accurate picture of how much actual cash your business has, it may offer a
misleading picture of longer-term profitability. Under the cash method, for instance, your books may show one month
to be spectacularly profitable, when actually sales have been slow and, by coincidence, a lot of credit customers paid
their bills in that month.
To have a firm and true understanding of your business's finances, you need more than just a collection of monthly
totals; you need to understand what your numbers mean and how to use them to answer specific financial questions.

Cost Flow

Submitted by Anonymous on Thu, 04/09/2009 - 17:43

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Cost Management /

Accounting Entries
Submitted by Anonymous on Thu, 04/09/2009 - 19:06

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Cost Management /

Business Flows Across Inventory Organizations

Submitted by Anonymous on Wed, 07/15/2009 - 13:03

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Cost Management /

Inter-Organization Transfers
Submitted by Anonymous on Wed, 07/15/2009 - 13:38

Tag:

Cost Management /

You can transfer items directly from one organization to another, or transfer items through intransit inventory. You can
also use internal requisitions to replenish inventory to another organization; however, internal requisitions do not
support freight charges. You can also transfer inventory between discrete and process organizations. As a result, you
must properly handle the costing and accounting of transfers between process and discrete organizations. Transfers
between discrete and process organizations use a transfer price that is set up between the organizations.
Inter-organizational transfers use the following functionality:
Intransit inventory
Intransit inventory represents inventory items that have not arrived at the receiving organization. You can move items
from the shipping organization to intransit inventory using the Inter-organization Transfer window. Use the Receipts
window to move items to the receiving organization.
Direct Inter-Organization transfer
When the inter-organization relationship is set to direct transfer in the Shipping Networks window, an issue and
receipt transaction are performed in one step.
Inter-Organization receipt
Inventory creates the following calculation for material received intransit and material received directly from another
organization:

Current average or standard cost from shipping organization multiplied by transaction quantity plus freight charges
and transfer credit charges.
For a direct receipt, the organization that receives the material does not perform a transaction. The shipping
organization performs a ship transaction to the receiving organization. Inventory considers the transfer a receipt in the
receiving organization and updates the cost.
Elemental cost visibility
You can set elemental cost visibility during inter-organization transfers either to preserve the shipping organization's
elemental costs or to summarize all elemental costs into the material cost element. Enable this option using the
Elemental Visibility Enabled check box on the Main tab in the Shipping Networks window. This option is available for
each line in the shipping network, regardless of direction. Combining all cost elements into the material cost element
assures that the receiving organization does not have another organization's overhead in its calculation.
Expense subinventories and expense items
When you receive an inter-organization transfer into an expense subinventory, or receive an expense inventory item,
set the Oracle Inventory INV: Allow Expense to Asset Transfer profile option is set to Yes. This issues the material
from the expense subinventory. When you receive to expense locations or receive expense inventory items, the
subinventory expense account is debited for the receiving organization instead of the valuation accounts. The
subinventory expense account is charged the total transaction value from the other organization.
Inter-Organization transfers and ledgers
The Inter-Organization Direct Transfer transaction supports transfers from any ledger, including ledgers in different
currencies.
Freight transactions
The Free on Board (FOB) point influences the accounting entries generated for the shipment to intransit inventory.
The FOB point is determined by how the inter-organization shipping network is defined in the Shipping Networks
window. In addition to accounting for the movement of the items, these transactions also update the inter-organization
receivable and payable accounts. The FOB point changes the accounting for freight. When FOB is receipt, freight is
accrued on the receipt transaction by the shipping organization. When FOB is shipment, freight is accrued on the
shipment transaction by the receiving organization. For direct transfers, the receipt and shipment transactions occur
at the same time.

Freight and Transfer Charges

Submitted by Anonymous on Wed, 07/15/2009 - 14:28

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Inter-Organization Transfer Accountings

Submitted by Anonymous on Wed, 07/15/2009 - 14:12

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Cost Management /

Material Overhead and Inter-Organization Transfers

Submitted by Anonymous on Wed, 07/15/2009 - 14:52

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Cost Management /

If your item has material overhead, you can earn material overhead in the receiving organization as part of the receipt
transaction.

Costing Setup
Submitted by Anonymous on Sat, 04/04/2009 - 22:07

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Cost Management /

This section contains an overview of each task you need to complete to set up Oracle Cost Management.

Defining Cost Types

Submitted by Anonymous on Sun, 04/05/2009 - 01:01

Tag:

Cost Management /

A cost type is a set of costs uniquely identified by name. Two cost types are predefined for you, Frozen (for standard
costs) and Average. You can define and update an unlimited number of additional simulation or unimplemented cost
types. Each cost type has its own set of cost controls.

1. Enter a cost type name.

2. Select the default cost type.
For items where costs have not been defined for the cost type, the default cost type is used as the next source of
costs that the cost rollup and the inventory value reports use for items not associated with the cost type being rolled
up or reported upon. You can have a cost type default to itself. The default reflects the current organization's costing
method: Frozen for standard costing and Average for average costing.
3. Select a date on which to inactivate the cost type. You cannot inactivate the Frozen or Average cost types. You can
still inquire (but not change) inactive cost types. Inquiring has no effect on bill assemblies or work in process.
4. Indicate whether the cost type is a multi-organization cost type to share with other organizations.
Note: If disabled, this cost type name is available only to the inventory organization that creates it. If enabled, only the
cost type name is shared, not the costs.
5. Indicate whether to allow updates in this cost type.
6. Indicate whether this cost type is available to Oracle Engineering.
7. Select rollup options:
Indicate whether to include the effect of component yield when rolling up costs for this cost type.
Important: Changing the Include Component Yield flag when there are open WIP jobs in the inventory organization
may result in inaccurate cost variances. For example, if the standard cost rollup includes component yield and the
Include Component Yield flag is clear, then backflush transactions will no longer factor in component yield and
artificial variances will result.
Indicate whether to save a snapshot of the bill of material structure for items that you roll up. This creates an
alternate bill. (This is available only if you have Oracle Bills of Material installed.) Oracle recommends that you use an
alternate designator intended for the specific purpose of maintaining a snapshot of the bill being rolled up.
If Snapshot of Bills is enabled, you must select an alternate name. You can then run the Indented Bill of Material Cost
report for the alternate, even if the primary bill has changed.

8. Select previous level rollup options. These options determine how much information is generated by the rollup.
(These options do not effect the total unit cost.) If all options are not selected (if the options are clear), then the rollup
generates one record for all prior level costs and stores the total in the material cost element. The options are as
follows:
Element: Indicates that detail cost information by cost element is retained at previous levels. If not selected (cleared),
then all prior level costs are stored in the material cost element.
Subelement: Indicates whether to track subelement costs at previous levels. If not selected, then all prior level
information does not reference a subelement.
Activity: Indicates whether to track activity costs at previous levels. If not selected, then all prior level information does
not reference an activity.
Operation: Indicates whether to track operation costs at previous levels. If not selected, then all prior level information
does not reference an operation.

Copying Costs
Submitted by Anonymous on Sun, 04/05/2009 - 16:25

Tag:

Cost Management /

You can copy from one cost type to another and specify an item or a category range. You can copy from the Frozen
cost type, but you cannot copy to the Frozen cost type. Under average costing, you can copy from the Average cost
type, but you cannot copy to the Average cost type. Under FIFO/LIFO costing, you can copy from the FIFO/LIFO cost
type, but you cannot copy to the FIFO/LIFO cost type.
In a standard cost, inventory organization, you can perform a standard cost update from the newly copied costs. In
average, FIFO, or LIFO cost, inventory organizations, copied costs are generally used for simulations or comparisons

only.
You can copy item costs within an organization or across organizations.
Within an organization, you can also copy resource and overhead costs, or resource and overhead associations.
There are three copying options:
merge and update existing costs
copy over new information only
remove and replace all cost information
Across organizations, you have the flexibility to create new sub-elements, if required, or summarize the item costs
over all sub-elements into a pre-defined, summary sub-element in the destination organization. You can use
interorganizational cost copy to copy item cost information across two different organizations, specifying which items
you want to include in the item cost copy.
Interorganizational cost copy supports supply chain cost rollup. Supply chain cost rollup enables you to estimate item
costs created within BOM.
Copy Cost Examples: Copy from Cost Type 1 to Cost Type 2
Initial values in Cost Type 1 and Cost Type 2

The results for the Merge and Update Existing Costs option are: A = 20, B = 10, and C = 30. Item C did not exist in
Cost Type 1, so C's value in Cost Type 2 does not change.
The results for the New Information Only option are: A = 20, B = 50, and C = 30. Item A did not exist in Cost Type 2,
so its value is copied from Cost Type 1. Item B has a cost in Cost Type 2, so it's value does not change. Item C did
not exist in Cost Type 1, so C's value in Cost Type 2 does not change.
The results for the Remove and Replace All Cost Information option are: A = 20, B = 10, and item C does not exist.
These are the same values found in Cost Type 1; all values in Cost Type 1 replace those in Cost Type 2.
Note: You can also use the Supply Chain Cost Rollup to copy costs for based-on rollup items (assemblies). When the
assembly does not exist in the Supply Chain Cost type that you roll up, the rollup copies the assembly information
from the default cost type.
Note: For costs that are copied across organizations, the based on rollup flag for all copied costs is set as UserDefined.

http://www.oracleug.com/user-guide/cost-management/defining-subelements