A GUIDE TO WIP COSTING FOR AVERAGE COSTING METHOD

An Oracle White Paper

December 2009
ABSTRACT
==========
Under average cost systems, the unit cost of an item is the average value of all receipts of that
item to inventory, on a per unit basis. Each receipt of material to inventory updates the unit cost of
the item received. Issues from inventory use the current average cost as the unit cost.
By using Oracle Cost Management’s average costing method, inventory can be valued at an
average cost, weighted by quantity (inventory cost = average unit cost * quantity).

For make items, in an average costing environment, the value of any receipt into sub-inventory
through WIP Assembly Completion can be derived using actual cost incurred or some predefined
cost. A note on the same has been provided in this paper. An attempt has been made to
understand the way in which cost of a make item is on Completion is derived for a manufactured
item through this paper. This paper also provides an insight into the WIP Value Summary
generated by transactions with different setups.

SCOPE
======
This paper has been authored keeping in view an audience familiar with Oracle Cost
Management in general and Average Costing method in particular.
An attempt has been made to explain the functionality of how cost is relieved in WIP under
Average Costing method with different setups. 6 scenarios have been covered using various
possible setup combinations.

OVERVIEW
==========
Before we take off with the scenarios, an overview of a few topics has been provided to facilitate
the understanding of the entire breadth of this paper.

Cost Elements

To begin with, let us look at the various cost elements present in Cost Management.
The unit cost of any item is the sum of the costs of all the cost elements.
There are 5 cost elements:
Material
Material Overhead
Resource
Overhead
Outside Processing

Cost Type

A cost type is a set of costs uniquely identified by name. In Average Costing method, ‘Average’ is
the seeded cost type. The unit cost in this cost type is used for calculating the accounting value
for any transaction.
Apart from this, we define another ‘Rates Cost Type’, the cost of which will be used for resources
and overheads. To determine the ‘Rates Cost Type’ for a given organization, the Navigation is as
follows:
Inventory -- Setup -- Organization --Parameters -- Costing Information (T).

Cost Incurred

Cost Incurred is the actual cost that was incurred to build an assembly. It includes the sum of all
the material transactions and the resource transactions that has taken place for a particular job.
Cost Relieved

Cost Relieved is the cost associated with the make item at the time of Assembly Completion. This
cost depends upon some setup combinations that will be studied in this paper.

SETUP
======

Step 1: Define an Organization (Fig.1)

Inventory -- Setup -- Organization --Parameters -- Costing Information (T).

Organization ‘Dallas Manufacturing – M3’ that already existed is chosen as the org for the test
cases. This is an average costing organization. In the organization parameters, we set the ‘Rates
Cost Type’. This cost type will be used for resources and overheads. For our test case we will use
‘AvgRates’.

Fig.1 Organization costing method and Rates Cost Type associated to the Org

Step 2: Define a Resource (Fig.2)

Billls of Materials – Routings – Resources

A resource ‘C-Res’ is created.
Charge type is defined as ‘WIP Move’
The Costed Flag is checked so that the resource becomes cost enabled.
A unit cost of 5 is given to this Resource in ‘Pending’ cost type.
For now, no cost is associated to ‘Avg Rates’ cost type.

Fig 2. Resource Definition

Step 3: Define a Department (Fig 3)

Billls of Materials – Routings – Departments

Department ‘C-Dept’ is created.
Resource ‘C-Res’ is associated to it.

Fig 3. Department Definition and Resource association

Step 4: Define an Assembly item

Inventory – Items – Master Items

Created Item ‘C-Assembly’ (using the Finished Good Template)
Gave Description 20GB Hard Drive
Assigned the item to organization ‘M3’.

Step 5: Define a Purchase Component

Inventory – Items – Master Items
Created Item ‘C-Comp’ (using the Purchase Item Template)
Gave Description 20GB Hard Drive
Assigned the item to organization ‘M3’.

Step 6: Define a Routing (Fig 4)

Billls of Materials – Routings – Routings

A Routing is created for assembly item ‘C-Assembly’ with one operation for department ‘C-Dept’
Resource ‘C-Res’ is associated to that department.
Uasge Rate is given as 1.

Fig 4. Routing Definition

Step 7 : Define a BOM (Fig 5)

Billls of Materials – Bills – Bills

A BOM is created for ‘C-Assembly’ with a component ‘C-Comp’.
Supply type of the Component is given as ‘Push’

Fig 5. BOM Definition

Step 8: Perform a Miscellaneous Receipt (Fig 6)

There will be requirement for component ‘C-Comp’ while manufacturing the assembly item ‘C-
Assembly’. We will perform a miscellaneous Receipt for the component to increase the inventory.

Inventory – Transactions – Miscellaneous Transactions

Choose the Transaction Type ‘Miscellaneous Receipt’ and continue.
Item = C-Comp
Subinventory = Stores
Quantity = 100
UOM = Ea
Unit Cost =2

Give an adjustment account and the Save.

Fig 6. Miscellaneous Receipt

Step 9: Define a WIP Accounting Class (Fig 7)

Work in Process – Setup – WIP Accounting Classes

WIP Accounting Class ‘Discrete’ will be used for our test cases initially. Note that completion
source is ‘System Calculated’ and System Option ‘Use Actual Resources’

Fig 7. WIP Accounting Class Definition

Step 9: Define WIP Parameters (Fig 8)

Work in Process – Setup – Parameters

The auto compute final completion flag is checked in WIP Parameters.

Fig 7. WIP Parameters Definition

TEST CASES
We shall demonstrate six test cases. Each case would highlight certain points that would provide
us with an understanding of how the WIP Costing logic works in Average Costing.

Case1:

Rates Cost Type : AvgRates

WIP Accounting Class : Discrete
Completion source : System Calculated
System Option : Use Actual Resources
Autocompute final completion : Checked

No cost is associated to ‘Avg Rates’ cost type for the resource as seen in Fig 2.

Create a job ‘C-1’ for 1 quantity and Release it.

Perform WIP Component Issue for 'C-Comp'

Perform the Move transaction. The resource transaction would also have happened since charge
type is ‘WIP Move’.

Complete the Job using WIP Assembly Completion.

Since Final completion is checked, all other setups will get over ridden and the Cost Relieved will
be based on the Cost Incurred.

Here cost incurred will be:

Material - 2
Resource - 0
Now we will change the completion source as below

Case2:

Rates Cost Type : AvgRates

WIP Accounting Class : Discrete
Completion source : User Defined
Cost Type : Pending

No cost is associated to ‘Avg Rates’ cost type for the resource.

Create a job ‘C-2’ for 1 quantity and Release it.

Perform the Move transaction. The resource transaction would also have happened.

Perform WIP Component Issue for 'C-Comp'

Complete the Job using WIP Assembly Completion by unchecking the Final Completion Flag.

Since the completion source is user defined, the Cost Relieved will be based on the Cost of the
Assembly for the cost type defined in WAC ('Pending' in our case).
Since there was no cost defined for pending cost type for the assembly item, the cost relieved is
zero.
Here cost incurred will be:
Material - 2
Resource - 0

Now define a cost of 5 for Pending cost type for the assembly item ‘C-Assembly’
Case3:

Rates Cost Type : AvgRates

WIP Accounting Class : Discrete
Completion source : User Defined
Cost Type : Pending

No cost is associated to ‘Avg Rates’ cost type for the resource.

Create a job ‘C-3’ for 1 quantity and Release it.

Perform WIP Component Issue for 'C-Comp'

Perform the Move transaction.
Complete the Job using WIP Assembly Completion by manually unchecking the Final Completion
Flag.

Since the completion source is user defined, the Cost Relieved will be based on the Cost of the
Assembly for the cost type defined in WAC ('Pending' in our case).
Since there was cost of 5 defined for pending cost type for the assembly item, the cost relieved is
5.

Here cost incurred will be:

Material - 2
Resource - 0
Note:
Once there is a completion done for a job with completion source as user defined, the completion
source is non updatable for that WAC.
Now add a cost of 3 to resource ‘C-Res’ for cost type ‘AvgRates’

Choose the WAC as ‘Prototype’

Case4:

Rates Cost Type : AvgRates

WIP Accounting Class : Prototype
Completion source : System Calculated
System Option : Use Actual Resources

Unit cost of 3 is associated to ‘Avg Rates’ cost type for the resource.

Create a job ‘C-5’ for 1 quantity and Release it.

Change the charge type of resource to ‘Manual’ through Job/Schedule Details.

Perform the Move transaction. The resource transaction would not have happened since charge
type is ‘Manual’.

Perform WIP Component Issue for 'C-Comp'

Complete the Job using WIP Assembly Completion. This time the final completion flag is
unchecked by default based on the WIP Parameters setup.
Since the System Option is ‘Use Actual Resources’ and there was no resource transaction
performed, the cost relieved is just having the cost of the component ‘C-Comp’.

Here cost incurred will be:

Material - 2
Resource - 0
Case5:

Rates Cost Type : AvgRates

WIP Accounting Class : Prototype
Completion source : System Calculated
System Option : Use Actual Resources

Unit cost of 3 is associated to ‘Avg Rates’ cost type for the resource.

Create a job ‘C-6’ for 1 quantity and Release it.

Perform WIP Component Issue for 'C-Comp'.

Perform the Move transaction. The resource transaction would also have happened.

Complete the Job using WIP Assembly Completion.

Since the System Option is ‘Use Actual Resources’ and there was a resource transaction
performed, the cost relieved is including the cost of the component ‘C-Comp’ as well as that of
the resource.
Here cost incurred will be:
Material - 2
Resource - 3

Change the system option to ‘Use Pre-defined Resources’

Case6:

Rates Cost Type : AvgRates

WIP Accounting Class : Prototype
Completion source : System Calculated
System Option : Use Pre-defined Resources

Unit cost of 3 is associated to ‘Avg Rates’ cost type for the resource.

Create a job ‘C-7’ for 1 quantity and Release it.

Change the charge type of the resource to ‘Manual’

Perform WIP Component Issue for 'C-Comp'

Perform a move-complete transactions using move transaction form. The resource transaction
would not have happened.
Since the System Option is ‘Use Pre-defined Resources’, hence even though there was no
resource transaction performed, the cost relieved is still including the cost of the resource along
with the Component cost.

Here cost incurred will be:

Material - 2
Resource - 0
White Paper: A GUIDE TO WIP COSTING FOR AVERAGE COSTING METHOD
MAY 2011
Author: Christopher David
Contributing Authors: N/A

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