DERIVING ACTUAL COST, ACTUALLY!

ORACLE COST ACCOUNTING

WHITE PAPER
Contents
Introduction .................................................................................................................................................. 2
Build-Up ........................................................................................................................................................ 3
Case-1: Cost Layer Generation ................................................................................................................. 4
Case-2: WO creation, completion, and the checking the cost layer consumption ................................ 6
Closing Notes .............................................................................................................................................. 11
About the Author ....................................................................................................................................... 11

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Introduction
Cost Accounting is the Cost Accountants’ tool to calculate
inventory transaction costs, maintain inventory valuation,
generate accounting distributions for inventory and WIP VALUATION STRUCTURE
transactions, analyze product costs, analyze usage of working
capital for inventory and analyze gross margins. Cost Accounting Oracle Cloud Cost
empowers you with flexible cost setup features, including Accounting empowers
multiple cost elements, resources, overheads, and activities. Cost customers to evaluate
planning also provides involves robust planning, costing and their costing at a much
analysis of manufacturing costs. more granular level than
ever by introducing
Oracle Cloud supports three costing methods- Standard Costing, Valuation Structure to
Average (Perpetual) Costing and Actual (FIFO) Costing. Currently, maintain the item cost at
LIFO is not supported. Cost Accounting is enabled by Valuation desired atomic level.
Structure and Valuation Unit, which define the granularity at Cost Accountants can
which the cost of an item is maintained. This empowers enjoy their life more
businesses to maintain cost at the desired level such as at lot than ever in an Actual
level or serial number level or at an item level. Cost method
environment. This paper
Valuation Structure states the level at which the item cost for a highlights the
business will be maintained. Oracle Cloud enables the business significance of deploying
to maintain cost at various granular levels in order to derive the valuation structure in
best and accurate costing. This significance of the valuation Cost Accounting to reap
structure is realized even more in the case of Actual Cost larger and sustainable
method. This document will talk about the importance of benefits.
implementing Actual Costing while maintaining cost at a granular
level of VIN (serial number) in case of the automobile industry
and will differentiate it from Actual Costing at a higher level.
This paper will demonstrate the significance of using Valuation Structure in Actual Cost method
environment with a use case.

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Build-Up
A bus manufacturer is implementing Actual Cost method to derive its costing. The decision has
to be made on valuation structure. The requirement is to track the cost of the bus based on
Vehicle Identification Number (VIN). Currently, the business is using costing at ‘Cost
Organization – Inventory Organization’ level and thus, they find it challenging to track the bus
manufacturing cost by VIN.
The following use cases will discuss and depict the significant benefits and shortcomings of
using the valuation structure functionality in Oracle cloud. For the stated requirement, the
valuation structure is changed to ‘Cost Organization – Inventory Organization – Sub inventory –
Serial Number’. Here in this discussion, we will focus on two parts- 1000-1660 (non-serial
controlled) and BCI_BUS (Serial Controlled). The hypothesis is that the new valuation structure
shall generate the cost layer and shall calculate the final cost of the finished good based on the
actual components utilized in manufacturing it.
For this purpose, we will discuss the details under following two cases-
1. Cost Layer Generation
2. Cost Layer Consumption
In the first case, we will analyze the differences when the cost processors generate the cost
layers. While in the second case, we will discuss the exhaustion of the cost layers under two
stated cost valuation structures.

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Case-1: Cost Layer Generation
With the previous setup, no matter how many transactions for different VIN Bus items were
made, Cost Accounting will generate just one cost layer based on the Item code. However, with
the new valuation structure, with every transaction, the system generates a new valuation unit
based on serial number (or VIN in this case). In the absence of serial number, valuation unit is
generated based on the sub-inventory for which transaction is being done. Thus, every bus with
a unique VIN is considered as a new valuation unit and hence a new cost layer is generated in
the system.
The below screenshot depicts the cost layer for the non-serial controlled item. In the absence
of serial number, valuation unit is limited up to sub-inventory. Hence based on transaction in
various sub-inventories, valuation unit has been generated. In this case, 2 cost layers can be
seen based on transaction in two different sub-inventories.

Below screenshot depicts the cost layers for serial controlled item, which creates the valuation
unit by considering the serial number in the respective sub-inventory.

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Noticeably, the system has generated a cost layer for each bus with a unique VIN, which is
apparently the valuation structure and the newly created valuation unit based on the profile
option. Every cost layer details out the cost of the unique VIN Bus.

While in case of previous valuation structure, the system would have generated just one cost layer with
multiple costs for the Bus item, irrespective of the VINs. This would pose to be a problem to the
accountant when distributions are generated. Any VIN bus is being issued to the shop floor, costing
would have considered the bus cost based on FIFO. This is likely to mess up the bus cost and generate
huge variance at the period end. We will be discovering the same in the next test case.

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Case-2: WO creation, completion, and the checking the cost layer consumption
A non-standard work order has been created and the required bus components have been attached for
the execution of work order. In the current example, work order consumes one serial controlled Bus and
one non-serial controlled component to produce the final sellable bus.

In the old scenario, irrespective of which VIN bus (and associated cost) was received in inventory first,
the bus was issued to the current work order in order to complete and receive the finished bus in final
sub-inventory. In the screenshot below, VIN-333333 is being issued to the WO which costs 100 000
bucks (check Case-1 screenshot)

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Post completing the work order, all the cost processes are run and distributions get generated.

Item 1000-1660 consumed from Spares sub-inventory, which has cost $10 (refer to screenshot). It has
exhausted the respective layer as the cost generated at Sub inventory level. Note that this item is not
serial controlled and the serial number is non-mandatory in valuation structure. Hence, it will not
mandate the serial number for generating the valuation unit.

The screenshot below demonstrates the case with old valuation structure. Item 1000-1660 is received
in Production sub inventory before the Spares sub-inventory. However, as the control is maintained only
up to Inventory Organization, it consumed the cost layer created for Production sub-inventory, even

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though we issued material from Spares sub inventory at a different cost.

While with the new valuation structure in place, in absence of the serial number, cost is maintained at
sub inventory level and hence the item and the item cost gets picked up from the corresponding cost
layer, which actually has been issued to work order. In the below screenshot, if the component item
would have been issued from Production sub-inventory then the corresponding cost would be used in
the work order.

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Similarly, VIN bus issued in accordance with the VIN issued to the work order i.e. serial number 333333
at the cost of $100000.

Below is the screenshot referencing the old valuation structure. It does not consider the VIN and the
sub-inventory. Hence it issues the BCI bus based on FIFO at a different cost $263952. In this case, only
one cost layer is available for BCI bus with multiple costs listed based on the transaction date. Thus, the
system picks up the first available cost from the list.

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Now when the same work order cost is compared based on two valuation structure methods, it
amounts to a significant difference as depicted below

Work order cost as per the new valuation structure-

Work order cost as per the old valuation structure-

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Closing Notes

This paper has specifically highlighted the significance of intelligent use of the valuation unit. From the
above two test cases, it is inferred that with the judicious use of Valuation Unit and Valuation Structure,
business can derive the cost accurately. A business can reap the benefits of costing largely in a
sustainable manner. This will not only make it easier during period end but will also facilitate the
reconciliation and audit process.

About the Author

Ashutosh Sahu

With almost 6 years of experience in Oracle VCP and Cloud applications, Ashutosh is a qualified MBA in
Industrial and Supply Chain Management. His focus areas are advisory and solutions consulting for range
of Supply Chain organizations.

Copyright © 2018, Trinamix Inc. All rights reserved. This document is provided for information purposes
only and the contents hereof are subject to change without notice. This document is not warranted
error-free, nor subject to any other warranties or conditions, whether expressed orally or implied in law,
did including implying warranties and conditions of merchantability or fitness for a particular purpose

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