Oracle Process

Manufacturing Actual
Costing
An Oracle White Paper
October 2006
Using Actual Costing in OPM
EXECUTIVE OVERVIEW
Actual Costing is one of the Cost Methods that is supported by
OPM Costing. This white paper provides an overview of the
calculation logic for Ite Costs and Oracle !ecoendations
to siplify reconciliation.
INTRODUCTION
OPM Costing has been designed to eet Process speci"c
re#uireents such as Co$Products% &y$products and 'ield
(ariations. OPM Costing helps you to calculate and aintain
costs of ites using various Cost Methods simultaneously. The
priary ethods that are supported are)
Standard Costs In this cost ethod% you establish the cost
of the raw aterials and resources and use the Cost !ollup
engine to calculate the standard cost of the products. These
costs are used for all transactions and if the transaction cost is
di*erent% variances are posted.
Actual Costs In this periodic cost ethod% transactions over
a period are used to arrive at the weighted average cost of the
ite. Transactions that a*ect the cost of the ite include
Purchases% Production and Transfers.
Lot Costing +ot Costing is a type of ,peci"c Identi"cation
costing which helps you to calculate and aintain costs at an
Ite +ot ,ublot level. All incoing transactions that a*ect
this lot are used to calculate the cost of the lot. This is a
perpetual average cost ethod unli-e the above . ethods.
In this white paper% we will focus on the Actual Costing logic of
OPM Costing. /e would also loo- at soe of the factors that
govern the cost calculation and soe recoendations that
ight help you to trac- costs accurately.
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OPM Actual Costing is Perioic Weighte
A!erage Costing"
A!eraging Methos
Perioic Mo!ing A!erage Cost
#PMAC$
Perioic Weighte A!erage Cost
#PWAC$
Perpetual Perioic Actual Cost
#PPAC$
%U&INE&& TRAN&ACTION& AND ACTUA' CO&T
The following are soe of the transactions that a*ect the cost
of the ite. Typically all 0incoing1 transactions are
considered by Actual costing such as Production &atches%
Purchase !eceipts and Inventory Transfers. All 0outgoing1
transactions don2t a*ect costs but use the costs calculated for
accounting entries. There are a few e3ceptions to these which
would be discussed at the appropriate places.
Purchasing Process
+et us loo- at soe of the Purchasing transactions and the
e*ect on OPM Costing fro such transactions.
Purchase Orers
/hile the Purchase Orders do not have an e*ect directly on
the cost of the ite% they do play an iportant role for cost
calculations. The purchase price is used to default at the
receipt and is used by the actual cost process.
Purchase Orer Receipt
The Actual Cost process pic-s up all the receipts received in a
period as part of its cost calculation logic. The unit price is
retrieved fro either the po4line4locations4all table or fro the
receiving table 0rcv4transactions1 is used as the basis for the
cost calculation.
Profiles
05M6) Include !eceipts in Actual Cost 'es78o1
Used to indicate if Purchase !eceipts needs to be included in
cost calculation.
Oracle Recommendation:
,et the pro"le to yes 9the default value:
In!oices
The invoices that are atched to !eceipts and Purchase
Orders are considered for actual costing. The types of Invoices
that are supported are) !egular Invoices% Credit Meos% ;ebit
Meos% and i3ed Invoices. The 0Ite1 line type of invoices
alone is currently pic-ed up Actual Costing.
If both the !eceipt and Invoice is available in the sae period%
then the Actual Cost process would pic- up the unit price as
speci"ed in the !eceipt and the Invoice Price (ariance IP(
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Transactions )or Actual Cost
Purchase Receipts * In!oices
Prouction %atches
In!entor+ Trans)ers
9di*erence between the PO Unit price and Invoice Unit Price:%
if any% is used to calculate the ite cost.
Profiles
5M6) Include Invoices in Actual Cost 'es78o
Used to indicate if Invoices are included in Actual Cost
Oracle Recommendation:
,et the pro"le to 'es 9the default value:
Out of Period Invoices
There ay be situations when the Invoice is received in a
di*erent period copared to the !eceipt. In these situations%
the pro"le value 05M6) Invoice Price (ariance Transfer
Method to Inventory in Actual Costing1 is used to deterine
the behavior.
The valid pro"le options and the e*ect are described below)
Transfer Entire IPV to Inventory In this case% the actual cost
process would loo- at all the invoices that are out of period
and calculate the IP( for each of these invoices. The entire IP(
is considered for the Actual Cost calculations
Prorate IPV based on Openin !alance In this case% the IP( is
prorated and transferred based on the prior period closing
balance. The rationale behind this pro"le option is that soe
custoers would li-e to include only part of the IP( in the ite
cost and if the #uantity has been consued then they would
not in<ate the Inventory with the IP(% but e3pense it.
Please note that these options are valid only if the cost ethod
is PMAC.
Purchase Returns
Purchase !eturns are returned to the vendor at the Purchase
unit price. This is the only 0outgoing1 transaction that is
considered by Actual Cost process for cost calculations.
Ac,uisition Costs
Ac#uisition costs are used to include other costs that are
incurred to procure the ite such as 6reight% Ta3es% ;uty etc.
'ou can de"ne Ac#uisition cost codes in OPM and use the to
record additional costs in Purchasing. The Ac#uisition costs
are attached to Purchase Orders and can be over$ridden during
!eceipt. The Ac#uisition costs can be either added to the Ite
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cost or e3pensed. If they are set to be included to the Ite
costs% then they are pic-ed up the Actual Cost and are included
in the cost calculation.
Tip) 6or trac-ing these additional costs or charges% you ay
want to create a uni#ue cost coponent class for each type of
charges. The Ite Cost calculated will coprise of these
individual coponent classes that can be easily identi"ed and
analy=ed.
Internal Orers . Receipts
Internal Orders are used to transfer aterial between various
subsidiaries of an organi=ation.
Internal Orders across Operating Units
The Pricing of internal orders that are across Organi=ation
Units depends on the transfer price that is set up in the Inter
Copany Transaction 6low. The incoing aterial is included
in the cost calculation at the transfer price siilar to a
Purchase !eceipt
Internal Orders across companies within an Operating Unit
6or these internal orders% the actual cost process uses the user
hoo- within the pac-age
5M64I8T>!8A+4O!;>!,.5>T4T!A8,6>!4P!IC>4U,>!4?O
O@ to retrieve the cost. The cost that is returned by the user
hoo- is used by the Actual Cost Process.
Internal Orders across warehouses within same company
6or these internal orders% the source organi=ation cost is used
by the Actual Cost Process to cost the internal order receipt.
Prouction Transactions
%atches
The batches that are beyond the !eleased ,tatus and that have
a yield associated with it are considered by Actual Cost
Process. Previously the Actual Cost Process used to consider
only batches that were in the Closed status% which is no longer
a restriction. The production batch cost is calculated as the
su of aterial% resource and burden costs.
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Batches that span across periods
If a batch spans across periods and there are yields associated
with it% then the Actual Cost Process calculates the cost based
on the following pro"le options)
GMF: Batch Actual Cost Calculation Basis
This pro"le option deterines how uch ingredient% resource%
and byproduct to use to deterine the product cost. If the
pro"le is set to "se Virtual Incremental !ac#$ush %uantities%
then the actual cost calculation for the product uses the
product yield to derive a virtual bac-<ush #uantity of the
ingredients% resources% and byproducts using increental
bac-<ush calculations. This can be di*erent fro the actual
consuption of ingredients% resources% and byproducts in the
batch. Use this option when the ingredient consuption does
not correctly re<ect the actual yield for the product.
If the pro"le is set to "se Actual %uantities%% then the actual
cost calculations for the product uses the actual units of the
ingredients% resources% and byproducts consued since the
last yield of the product in the batch.
GMF: Use Item & Step Dependencies or !roduct Actual
Cost Calculation
This pro"le option deterines which ingredient% resources%
and byproducts contribute to the product cost.
If the pro"le is set to 8o% then all ingredients% resources% and
byproducts contribute to the cost of all products in the batch.
If the pro"le is set to 'es% then the following points are
considered when calculating the product cost)
- ,tep% ite% and step dependency association deterine
which ingredients% resources% and byproducts contribute
to product cost.
- If an ingredient% resource% or byproduct is not
associated to a step% then it is considered as associated
to all products in the batch.
- If a product is not associated to any step% then it is
assued to be associated to all ingredients% resources%
and byproducts in the batch.
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/hen the pro"le is set to 'es% then the ;erived Cost Allocation
is calculated based on the ingredient% resource% and byproduct
association to products.
The ;erived Cost Allocation is calculated as follows)
where Product 9i: represents all products that use this
ingredient% resource% or byproduct. /hen the pro"le is set to
8o% then the ;erived Cost Allocation is e#ual to the Product
Cost Allocation.
Please refer to Metalin- note >nhanceent to Production
&atch in Actual Cost 9Patch ABCADEB: for ore details on how
the costs are calculated.
Circular Re)erence
Circular references occur in production batches if one of the
ingredients is also the product. ,ince this is a special situation%
the actual cost logic calculates the cost of
circular reference ite iteratively% until it arrives at a cost
which is stable. The calculation uses the cost fro the previous
iteration for use in the current
iteration. The calculation continues to re$calculate the cost
until the cost
in the previous iteration and the current iteration atch.
To safe$guard the actual cost engine fro running an in"nite
nuber of iterations% a a3iu liit of .BB is iposed in the
progra. The user can over$ride this value by setting a value
for the following pro"le option)
GMF: Actual Costing Ma"imum Iteration Limit for
Circular !eference.
The other pro"le that is used in case of circular references is
Tolerance +iit pro"le ) GMF: Costing #olerance !ercent$
which instructs the syste to stop calculating the cost if the
di*erence between two consecutive iterations is below this
costing tolerance percentage.
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%+2Proucts
&y$products are included in the batch cost calculations as
either negative or positive ingredients. 6or e3aple% if you
need to spend oney to dispose the by$product% then it adds to
the cost of the product. On the other hand if you can sell the
by$product% it reduces the cost of the product.
Co2Proucts 3 Cost Allocation 4actor
The batch costs of co$products are derived based on the cost
allocation factors. &ased on the pro"le 0Cost Allocation 6actor
Calculation1 the cost allocation factor is either calculated or
pic-ed up fro the cost allocation factors speci"ed in the
batch forula.
The valid pro"le options are)
Static to calculate the batch cost allocations based on the Cost
Allocation 6actor de"ned for each product in the production
batch forula. This is how the costs were apportioned before
this enhanceent.
Dynamic to calculate the batch cost allocations as a ratio of
actual #uantity of each product produced to the total
production batch output #uantity.
Profiles
5M6) Include Production &atches in Actual Cost 'es7 8o
Used to indicate if Production &atches are included in Actual
Cost
Oracle Recommendation:
,et the pro"le to 'es 9the default value:
In!entor+ Transactions
+et us now loo- at the various Inventory transactions and how
they a*ect the actual cost of an ite.
A5ust6ents
An adFustent is not included in the cost calculation. A way to
0include1 the to include the in cost calculations is to create
a corresponding Actual Cost AdFustent for the adFustent
#uantity and cost that you would li-e to assign to the
transaction.
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In!entor+ Mo!e6ents an Trans)ers
Inventory transfers are included in the Actual Cost calculations
siilar to a purchase receipt. The cost of the aterial in the
source organi=ation is used as the incoing cost in the
destination warehouse. Products and raw aterials can be
transferred and included in the cost calculation. Please refer to
the User 5uide for e3aples on how product and raw aterial
cost calculations wor-.
Profile
5M6) Include Inventory Transfers in Actual Cost 'es7 8o
Oracle recoends that you set it to 'es.
5M6) Include Inventory Moveents in Actual Cost 'es7 8o
Oracle recoends that you set it to 'es.
&ales an &hipping
,ince ,ales and ,hipping are outbound transactions% they are
not included in the actual costing calculations. The shipents
use the ite cost while it creates the accounting entries to
Cost of 5oods ,old and Inventory accounts.
RMA3Returns
,ales !eturns are not included in the actual cost calculation
logic.
Internal Orers &hip6ents
Internal order shipents are not included in the cost
calculation% but use the cost for creating the account entries. If
the shipent is across copanies and across OUs% it uses the
transfer price while if its across copanies within the sae
OU% they use the user hoo- to retrieve the cost.
Costing
Using Cost adFustents and e3pense allocations% you can
odify the actual cost that is calculated based on the
transactions in the various applications.
Actual Cost A5ust6ents
You can use the actual cost adjustments functionality to adjust the cost of
the item using the following adjustment types:
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Average Cost Adjustments
This adFustent is created with a #uantity and a cost. The
transaction is costed very siilar to a receipt. The Average
Cost AdFustent can be used to cost any Inventory
AdFustents that were created in Inventory .
alue Adjustments
In this type% you would Fust enter a total value of the
adFustent that would get applied on the entire actual cost
#uantity.
Unit Cost Adjustments
The Unit Cost AdFustents is used to adFust the cost of the
ite by a "3ed nuber.
Please refer to Using Actual Cost A5ust6ents in OPM Costing,
Meta+in- 8ote CD.EGD.H% for coplete details.
E9pense Allocations
>3pense Allocations are used to allocate any indirect e3penses
to the actual cost of the ite such as Adinistrative e3penses%
utility costs etc. The e3penses allocated to a speci"c ite are
calculated by the e3pense allocation logic based on the actual
e3penses that are retrieved fro the accounts and the basis
de"ned by you in the >3pense Allocation &asis.
The e3pense coponent for raw aterials is calculated as)
I9Prior Period Inv. &alance J Prior Period 5+ >3pense Cop. Cost: K 5+ >3pense for
Current PeriodL
[Previous Period Inventory Balance + Received Quantity]
The e3pense coponent of products is calculated as)
I9Prior Period Inv. &alance J Prior Period Coponent Cost: K 5+ >3pense for Current
Period]
IPrevious Period Inventory &alance K Produced Muantity K !eceived Muantity 9if
any:L
Please refer to the Cost Manageent user2s guide for details
on e3aples.
%urens
The &urden unit cost for raw aterials and products are
calculated based on the following logic)
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Burden Usage * Burden Count * Nominal Cost
Item Quantity
6or products% the PMAC logic calculates the burden
coponent as follows )
I9Prior Period Inventory &alance J Prior Period &urden Unit
Cost: K 9Current period Transaction Muantity J Current Period
&urden Unit Cost:L
IPrior Period Inventory &alance K Current Period Transaction
MuantityL
Please note that the percentage burdens functionality is
applicable only to ,tandard Costing and not to Actual and +ot
Costing.
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Actual Cost Process
This is how the costs are calculated by the various cost types.
Period !oving Average Cost "P!AC#
The Period Moving Average Cost is calculated based on the
following logic.
I9Prior Period Cost J Prior Period Closing balance: K&atch costs K (alue of Incoing
TransfersK (alue of !eceiptsK Cost AdFustents (alue K 5+ >3pense AllocationsL
IPrior Period Closing &alance K Product 'ield KTransfers K !eceipts KAverage Cost
AdFustent MuantityL
If an Unit Cost AdFustent e3ists% the PMAC cost is calculated
as above and then the Unit Cost is added7subtracted to arrive
at the "nal cost.
Period $eighted Average Cost "P$AC#
The Period /eighted Average Cost is calculated based on the
following logic.
I&atch costs K (alue of Incoing TransfersK (alue of !eceiptsK Cost AdFustent (alue
K 5+ >3pense AllocationsL
IProduct 'ield KTransfers K !eceipts KAverage Cost AdFustent MuantityL
If a Unit Cost AdFustent e3ists% the P/AC cost is calculated
as above and then the Unit Cost is added7subtracted to arrive
at the "nal cost.
Perpetual Period Average Cost "PPAC#
The cost calculation in this ethod is slightly di*erent fro
the above in that% the cost is calculated based on transactions
that have occurred starting fro the "rst period of the cost
calendar.
The PPAC cost calculation logic for a given period)
I9Prior Period PPAC Cost J Prior Period PPAC Muantity: K&atch costs K (alue of
Incoing TransfersK (alue of !eceiptsK Cost AdFustents (alue K 5+ >3pense
AllocationsL
IPrior Period PPAC Muantity K Product 'ield KTransfers K !eceipts KAverage Cost
AdFustent MuantityL
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%ast &ransaction Cost and %ast Invoice Cost
6or these ethods% the actual cost engine would loo- at all the
invoices and receipts for the current period and either pic- the
ost current !eceipt or Invoice for +ast Transaction and the
ost current Invoice for +ast Invoice cost ethod. Please note
that if there are any cost adFustents that you had entered%
then they override the receipts or invoices.
Actual cost process
&efore you run the Actual Cost Process% please ensure that you
have closed the Inventory period 9Preli or 6inal: and have
copleted all transactions. Actual Cost Process runs for all the
warehouses under a OPM Copany. ?ence please ensure that
all the Inventory /arehouses are Closed or Preliinary Closed.
Other Pro)iles
GMF: %"clude &egati'e In'entor( Balance ) If set to 'es%
all negative balances would be considered as =ero.
GMF: Concurrent De*ug Flag ) (alid options are B% H%.% and
C with B being the least detailed and C being the ost detailed.
Used priarily by ,upport and ;evelopent for trouble
shooting. Oracle !ecoends that you set this to the default
value of B 7 8U++.
GMF: Cost !rocess Message Le'el #hreshold ;ictates
the logging level of errors for the actual cost process. The valid
options are) ;iagnostic Messages% /arnings% ;ata ,etup
>rrors% >rrors Ipacting Cost and 6atal7Internal ,yste
errors.
Oracle recoends that you set it to ;iagnostic essages
during noral use. This is the ost detailed level of logging.
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White Paper Title
Octo<er 2;;0
Author= &rini Ragha!an
Contri<uting Authors= Ra5esh &eshari
Oracle Corporation
Worl >ea,uarters
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U"&"A"
Worl@ie In,uiries=
Phone= B:"0/;"/;0"1;;;
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