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Cost Cutoff Date for 11i Inventory Organizations

Eric Guether Opnext, Inc.

Learning Objectives
• As a result of this presentation, you will be able to understand:
– How to defer costing of transactions through use of the Cost Cutoff Date (CCD) – Importance of CCD when updating standard costs – Impact of CCD & uncosted transactions on Inventory reports – Impact of CCD & uncosted transactions on intercompany sales & payables

Speaker’s Qualifications
• Eric Guether
– IT Director at Opnext in Eatontown, NJ – Manages Opnext’s Oracle 11i system – Provides user support for 11i modules, Oracle Alert and Discoverer 9i Desktop – Member of NJOAUG – Certified Public Accountant (CPA)

Presentation Agenda
• • • • Introduction Business Case Solution: Cost Cutoff Date Transaction Examples
– Inventory Miscellaneous Receipt – Purchasing Receipt into Inventory – WIP Workorderless Completion

• Lessons Learned
– Impact on Inventory Reports – Impact on Intercompany Sales & Payables

Introduction: Who Is Opnext?
• Designer & maker of “opto engines”
– Active fiber optic components – Wafer fab and assembly

• Pre-IPO spin-off of 2 Hitachi businesses
– Manufacturing in Yokohama & Komoro, Japan – Headquarters in Eatontown, NJ

• Sales in U.S., Canada, Europe, Japan, and Hong Kong
– Customers include Cisco, CIENA, Lucent, Alcatel, Fujitsu, NEC, Siemens, and Kodak

Examples of Opnext Products
Laser Diode Modules Transmitters Receivers

Transceivers

10GbE XENPAK Modules

11i EBS at Opnext
• Upgraded to release 11.5.8 in Oct. 2003 • Multiorg, single global instance
– American English with Japanese NLS – Separate operating units and inventory orgs for U.S., Japan & Europe – Standard costing in all orgs

• Financials, OM, Inventory & Cost Mgmt. used globally • Discrete MFG (BOM, WIP, MRP/MPS) & Purchasing for Japan & U.S.

Business Case
• Company practice is to update standard costs every 6 months as of:
– April 1st [Cost Period: April 1, 2005 to Sept. 30, 2005] – October 1st [Cost Period: Oct. 1, 2005 to March 31, 2006]

• New costs not finalized until after April 1st / October 1st • Standard cost updates typically occur around April 10th or October 10th • All transactions in the new 6-month cost period need to be valued at the new costs

Dilemma Before Release 11.5.7
• Record early April / October transactions (quantities) in the new cost period before the standard cost update • Value those early April / Oct. transactions after the standard cost update at the new costs • Cannot simply shut-off the Cost Manager
– Need to cost any March / September transactions created in early April / October at the old costs prior to standard cost updates

Initial Workaround
• Opnext’s only workaround under 11.5.3 • Record April / October inventory, WIP, shipping, and PO receiving transactions off-line (outside of 11i EBS) until completion of standard cost updates • Retroactively record early April / October transactions in 11i EBS after completion of standard cost updates

Workaround Issues
• • • • Unnecessary control weaknesses Risk of data inaccuracy Extra, unnecessary data entry for users Unreliable / unusable inventory quantities in 11i EBS for a week or more • Shipping and export documents had to be prepared manually (not via 11i EBS) for a week or more

Solution: Cost Cutoff Date
• Inventory organization parameter • Introduced in release 11.5.7 • Intended to keep “new period” transactions uncosted until you finish your standard cost updates for the org • Controlled simply by the entry of one Cost Cutoff Date for the org

Parameter Setup
• Organization Parameters –> Costing Information tab

Functionality
• Entirely met Opnext’s needs:
– Completely eliminated the need to record transactions outside of 11i EBS – Allowed transactions (quantities) to be recorded immediately in the new period while deferring their costing until frozen costs have been updated – Valued uncosted transactions using the new frozen costs

Functionality (Continued)
• Transactions in the org with G/L date:
– On or after the Cost Cutoff Date (CCD) parameter value will not be costed – Before the CCD value will be costed, even if created on or after the CCD

• Once the CCD has been changed to a later date, any uncosted transactions whose G/L date < new CCD will be costed at the current frozen cost the next time the Costing Manager runs

Functionality (Continued)
• If the Cost Cutoff Date = 01-APR-2005, transactions with G/L Date of:
– 01-APR-2005 or later will not be costed – 31-MAR-2005 or earlier will be costed, even if created on or after 01-APR-2005

Database Perspective
• When the CCD is deferring the cost of a transaction, the transaction has:
– A record on the MTL_MATERIAL_TRANSACTIONS table
• Allows the transaction quantities to be recognized by the EBS 11i modules

– Its COSTED_FLAG = ‘N’
• Indicates that the record has not yet been costed • As long as the flag = ‘N’, no accounting entries [“distributions”] have been created yet

Cost Update Sequence
• Complete all March trx by early April
– Valued at current frozen costs = “old” costs

• • • •

Begin entry of April-dated trx on 01-APR Close the March period in early April Perform std. cost updates (early/mid April) Change the CCD to a later date
– Example: 01-OCT-2005

• Cost Manager then costs all existing Aprildated transactions at updated frozen costs

Example # 1: INV Misc. Receipt
• Scenario where CCD will not defer costing • Receive 10 units of item LASER123 • Standard Cost
– $1,200 per unit through end of March – $1,000 starting April 1st (updated on 04-APR)

• Transaction date, 31-MAR-2005, is before the cutoff date of 01-APR-2005 • Creation date, 01-APR-2005, is on the cutoff date

Example # 1 Transaction

Example # 1 Chart
• 10 units received and recorded upon entry • Costed upon entry at old cost of $1,200

Example # 1 Results
• Transaction costing is not deferred, because transaction (G/L) date is before the Cost Cutoff Date
– Creation date of transaction does not matter

• Costed at old cost of $1,200, which is still the current frozen cost
– Standard cost update did not occur yet; occurs on 04-APR

• Material distributions created as soon as the transaction is costed

Example # 2: INV Misc. Receipt
• Scenario where CCD will defer costing • Receive 5 units of item LASER123 • Standard Cost
– $1,200 per unit through end of March – $1,000 starting April 1st (updated on 04-APR)

• Transaction date, 01-APR-2005, is equal the cutoff date of 01-APR-2005 • Creation date, 01-APR-2005, is on the cutoff date

Example # 2 Transaction

Example # 2 Cost Update
• To change the unit cost for LASER123 from $1,200 to $1,000

Example # 2 Change Cutoff Date
• Change CCD on April 4th to 01-OCT-2005

Example # 2 Distributions

Example # 2 Chart
• Quantity of 5 units recorded immediately • Costing deferred until 06-APR

Example # 2 Results
• Transaction costing is deferred, because transaction (G/L) date is on the Cost Cutoff Date
– Creation date of transaction does not matter

• Costed at new cost of $1,000, which is the current frozen cost when the cutoff date is changed on 06-APR to a future date • Material distributions created on 06-APR once the transaction is costed

INV Trx Affected by CCD
partial list; not complete • • • • • • • Miscellaneous / Account Alias Transactions Subinventory Transfer Interorg Transfer Receiving Pick Confirm Pick Release Create Intercompany AR Invoices

Other Trx Affected by CCD
partial list; not complete • Purchasing module
– PO Receiving (including PPV) – Returns to Supplier

• WIP module
– Discrete WIP assembly completion – Discrete WIP component issue – Workorderless completion

Example # 3: PO Receiving
• • • • Receive & deliver to INV (no inspection) Receive 200 units of item DIODE-5002 PO Unit Price = $0.90 Standard Cost
– $1.25 per unit through end of March – $1.00 starting April 1st (updated on 04-APR)

• Transaction date, 02-APR-2005, is after the cutoff date of 01-APR-2005 • Creation date = transaction date

Example # 3 Transaction

Example # 3 Chart
• Quantity of 200 units recorded immediately • Costing deferred until 06-APR

Example # 3 Results
• Transaction costing is deferred • Costed at new cost of $1.00 per unit • Material distributions created on 06-APR once the transaction is costed • Purchase Price Variance (PPV) calculated at $0.10 per unit
– Difference between PO unit price of $0.90 and new cost of $1.00, not old cost of $1.25

Example # 4: WOC
• Workorderless Completion (WOC)
– Transaction Type = WIP Assembly Completion

• Three Transactions in One
– Receive 10 units of final product TRM999 into inventory – Consume 10 units of component LASER123 from inventory – Create accrual distribution for Outside Processing (OSP) resource charge

• Transaction date 03-APR-2005 > CCD

Three Transactions in One
Final Product Added to Inventory

Liability Accrued for Outside Processing Charge

WORKORDERLESS COMPLETION
Component Consumed from Inventory

Example # 4 Costs
• Component Standard Cost
– $1,200 per unit through end of March – $1,000 starting April 1st (updated on 04-APR)

• Outside Processing Charge
– $50 per unit through end of March – $30 starting April 1st (updated on 04-APR)

• Final Product Standard Cost
– Derived from Assembly Cost Rollup – $1,250 through end of March [$1,200 + $50] – $1,030 starting April 1st [$1,000 + $30]

Example # 4 Transaction

Example # 4 New OSP Charge

Example # 4 Cost Rollup

Example # 4 Results
• Transaction costing is deferred in:
– INV module for final product completion and component consumption – WIP module for OSP routing resource charge

• Costed at new cost of $1,030 per unit • Material distributions created on 06-APR once the transaction is costed

Lessons Learned: Reports
• When so many transactions are uncosted for days or weeks, some INV reports in 11.5.8 show inaccurate historical balances • Reports affected:
– Transaction Value Historical Summary – Transaction Balance Historical Summary – Period Close Value Summary

• Cause: Reports fail to estimate cost of some uncosted WIP transactions when backing into historical balance

Report With Error

• Uncosted WIP component issue of LASER7777 for $480,000 is missing from Job or Schedule column • 28-FEB value of $-480,000 is incorrect; should be zero

Correct Version of Report

• Once the cutoff date is changed to a later date and all uncosted transacted are costed, these reports show accurate information when rerun

Lessons Learned: Intercompany
• The “Create Intercompany AR Invoices” program does not create a record until its parent record has been costed
– Parent record = “Sales order issue” material transaction type [action = “Issue from stores”]

• Therefore, the CCD indirectly defers creation of intercompany A/R invoices in the new cost period, because the CCD is directly defers costing of the parent record

Lessons Learned: Intercompany
Intercompany Invoicing Process Flow For Japan Customer Sale Sourced from U.S. Inventory Org
Parent Record: Trx type = “Sales order issue” Action = “Issue from stores”
2. Product Shipment [global drop shipment to customer from U.S. "BEI" Org]

Japan Customer
1. Japan Customer Sales Order sourced from U.S. "BEI" Org 6. Customer Payment

3. Customer OM Invoice

JAPAN SALES Operating Unit

5. I/C A/P Invoice created in JAPAN SALES

US MANUFACTURING Operating Unit

7. Payment or I/C Netting

4. I/C A/R Invoice created in U.S. MFG

Intercompany (Continued)
• The deferring of the I/C A/R invoice creation allows Opnext to update the price list used to value the I/C sales & payables
– Opnext’s intercompany prices are derived from standard costs and updated every 6 months at the start of a new cost period – New prices have 03-APR or 03-OCT start date

• Creation of the I/C A/P invoice is dependent on creation of the I/C A/R invoice, so CCD indirectly affects A/P too

Price List for I/C A/R Invoices

Additional Resources
• Metalink note # 213628.1: “What is the Cost Cutoff Date?” • Metalink bug # 3585271: “INVTRHAN:
HISTORICAL DATA QTY=0 BUT THE VALUE IS > 0”

• Metalink bug # 3480557: “11I INCIAR GETS APP5706 WHEN RUN ON END DATE OF PRICES APP-05706”

• 11i Inventory User’s Guide: Chapter 14 – “Intercompany Invoicing” • Connection Point 2004 presentation: “Workorderless Completion for Simple Outside Processing in 11i WIP”

Q&A

Thank You!