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An Oracle White Paper October 2006
Purchase Receipts and Inventory Transfers. In this white paper. The primary methods that are supported are: Standard Costs – In this cost method. Actual Costing is one of the Cost Methods that is supported by OPM Costing. Transactions that affect the cost of the item include Purchases.Using Actual Costing in OPM EXECUTIVE OVERVIEW OPM Actual Costing is Periodic Weighted Average Costing. We would also look at some of the factors that govern the cost calculation and some recommendations that might help you to track costs accurately. All “outgoing” transactions don’t affect costs but use the costs calculated for accounting entries. Typically all “incoming” transactions are considered by Actual costing such as Production Batches. These costs are used for all transactions and if the transaction cost is different. BUSINESS TRANSACTIONS AND ACTUAL COST • Perpetual Periodic Actual Cost (PPAC) Transactions for Actual Cost Purchase Receipts & Invoices Production Batches Inventory Transfers The following are some of the transactions that affect the cost of the item. This is a perpetual average cost method unlike the above 2 methods. OPM Costing helps you to calculate and maintain costs of items using various Cost Methods simultaneously. Production and Transfers. we will focus on the Actual Costing logic of OPM Costing. variances are posted. This white paper provides an overview of the calculation logic for Item Costs and Oracle Recommendations to simplify reconciliation. By-products and Yield Variations. Actual Costs – In this periodic cost method. Lot Costing – Lot Costing is a type of Specific Identification costing which helps you to calculate and maintain costs at an Item – Lot – Sublot level. transactions over a period are used to arrive at the weighted average cost of the item. All incoming transactions that affect this lot are used to calculate the cost of the lot. White Paper Title Page 2 . you establish the cost of the raw materials and resources and use the Cost Rollup engine to calculate the standard cost of the products. INTRODUCTION Averaging Methods • Periodic Moving Average Cost (PMAC) • Periodic Weighted Average Cost (PWAC) OPM Costing has been designed to meet Process specific requirements such as Co-Products. There are a few exceptions to these which would be discussed at the appropriate places.
Purchase Order Receipt The Actual Cost process picks up all the receipts received in a period as part of its cost calculation logic. is used to calculate the item cost. In these situations. Purchase Orders While the Purchase Orders do not have an effect directly on the cost of the item. If both the Receipt and Invoice is available in the same period. then the Actual Cost process would pick up the unit price as specified in the Receipt and the Invoice Price Variance – IPV – (difference between the PO Unit price and Invoice Unit Price). Profiles “GMF: Include Receipts in Actual Cost – Yes/No” Used to indicate if Purchase Receipts needs to be included in cost calculation.Purchasing Process Let us look at some of the Purchasing transactions and the effect on OPM Costing from such transactions. and mixed Invoices. they do play an important role for cost calculations. Profiles GMF: Include Invoices in Actual Cost – Yes/No Used to indicate if Invoices are included in Actual Cost Oracle Recommendation: Set the profile to Yes (the default value) Out of Period Invoices There may be situations when the Invoice is received in a different period compared to the Receipt. The unit price is retrieved from either the po_line_locations_all table or from the receiving table “rcv_transactions” is used as the basis for the cost calculation. Credit Memos. Oracle Recommendation: Set the profile to yes (the default value) Invoices The invoices that are matched to Receipts and Purchase Orders are considered for actual costing. The types of Invoices that are supported are: Regular Invoices. if any. The “Item” line type of invoices alone is currently picked up Actual Costing. the profile value “GMF: Invoice White Paper Title Page 3 . Debit Memos. The purchase price is used to default at the receipt and is used by the actual cost process.
The Acquisition costs are attached to Purchase Orders and can be over-ridden during Receipt. The rationale behind this profile option is that some customers would like to include only part of the IPV in the item cost and if the quantity has been consumed then they would not inflate the Inventory with the IPV. This is the only “outgoing” transaction that is considered by Actual Cost process for cost calculations. The entire IPV is considered for the Actual Cost calculations Prorate IPV based on Opening Balance – In this case. Duty etc. You can define Acquisition cost codes in OPM and use them to record additional costs in Purchasing. The valid profile options and the effect are described below: Transfer Entire IPV to Inventory – In this case. but expense it. you may want to create a unique cost component class for each type of charges. The Acquisition costs can be either added to the Item cost or expensed. Tip: For tracking these additional costs or charges. The incoming material is included in the cost calculation at the transfer price similar to a Purchase Receipt White Paper Title Page 4 . Acquisition Costs Acquisition costs are used to include other costs that are incurred to procure the item such as Freight. Internal Orders across Operating Units The Pricing of internal orders that are across Organization Units depends on the transfer price that is set up in the Inter Company Transaction Flow. Please note that these options are valid only if the cost method is PMAC. the IPV is prorated and transferred based on the prior period closing balance.Price Variance Transfer Method to Inventory in Actual Costing” is used to determine the behavior. then they are picked up the Actual Cost and are included in the cost calculation. Internal Orders – Receipts Internal Orders are used to transfer material between various subsidiaries of an organization. the actual cost process would look at all the invoices that are out of period and calculate the IPV for each of these invoices. Purchase Returns Purchase Returns are returned to the vendor at the Purchase unit price. If they are set to be included to the Item costs. Taxes. The Item Cost calculated will comprise of these individual component classes that can be easily identified and analyzed.
resources. resources. and byproducts contribute to the cost of all products in the batch. Previously the Actual Cost Process used to consider only batches that were in the Closed status.GET_TRANSFER_PRICE_USER_HOOK to retrieve the cost. This can be different from the actual consumption of ingredients.Internal Orders across companies within an Operating Unit For these internal orders. resources. then the Actual Cost Process calculates the cost based on the following profile options: GMF: Batch Actual Cost Calculation Basis This profile option determines how much ingredient. If the profile is set to Use Actual Quantities. which is no longer a restriction. the source organization cost is used by the Actual Cost Process to cost the internal order receipt. then the actual cost calculations for the product uses the actual units of the ingredients. and byproducts using incremental backflush calculations. Internal Orders across warehouses within same company For these internal orders. and byproduct to use to determine the product cost. and byproducts consumed since the last yield of the product in the batch. If the profile is set to Use Virtual Incremental Backflush Quantities.. resource and burden costs. resources. GMF: Use Item & Step Dependencies for Product Actual Cost Calculation This profile option determines which ingredient. Use this option when the ingredient consumption does not correctly reflect the actual yield for the product. then all ingredients. then the actual cost calculation for the product uses the product yield to derive a virtual backflush quantity of the ingredients. and byproducts in the batch. and byproducts contribute to the product cost. If the profile is set to No. The cost that is returned by the user hook is used by the Actual Cost Process. resource. resources. Batches that span across periods If a batch spans across periods and there are yields associated with it. Production Transactions Batches The batches that are beyond the Released Status and that have a yield associated with it are considered by Actual Cost Process. The production batch cost is calculated as the sum of material. the actual cost process uses the user hook within the package GMF_INTERNAL_ORDERS. White Paper Title Page 5 .
resource. and byproducts in the batch. then the following points are considered when calculating the product cost: Step. resources. and step dependency association determine which ingredients. Please refer to Metalink note Enhancement to Production Batch in Actual Cost (Patch 5035680) for more details on how the costs are calculated. then the Derived Cost Allocation is equal to the Product Cost Allocation. The Derived Cost Allocation is calculated as follows: where Product (i) represents all products that use this ingredient. resource. White Paper Title Page 6 . Circular Reference Circular references occur in production batches if one of the ingredients is also the product.If the profile is set to Yes. If a product is not associated to any step. which instructs the system to stop calculating the cost if the difference between two consecutive iterations is below this costing tolerance percentage. To safe-guard the actual cost engine from running an infinite number of iterations. a maximum limit of 200 is imposed in the program. The user can over-ride this value by setting a value for the following profile option: GMF: Actual Costing Maximum Iteration Limit for Circular Reference. Since this is a special situation. When the profile is set to Yes. until it arrives at a cost which is stable. item. then the Derived Cost Allocation is calculated based on the ingredient. then it is considered as associated to all products in the batch. If an ingredient. the actual cost logic calculates the cost of circular reference item iteratively. resource. and byproduct association to products. The calculation continues to re-calculate the cost until the cost in the previous iteration and the current iteration match. The other profile that is used in case of circular references is Tolerance Limit profile : GMF: Costing Tolerance Percent. resources. then it is assumed to be associated to all ingredients. and byproducts contribute to product cost. The calculation uses the cost from the previous iteration for use in the current iteration. When the profile is set to No. or byproduct is not associated to a step. or byproduct.
Inventory Movements and Transfers Inventory transfers are included in the Actual Cost calculations similar to a purchase receipt. A way to “include” them to include them in cost calculations is to create a corresponding Actual Cost Adjustment for the adjustment quantity and cost that you would like to assign to the transaction. On the other hand if you can sell the by-product. Adjustments An adjustment is not included in the cost calculation. then it adds to the cost of the product. Profiles GMF: Include Production Batches in Actual Cost – Yes/ No Used to indicate if Production Batches are included in Actual Cost Oracle Recommendation: Set the profile to Yes (the default value) Inventory Transactions Let us now look at the various Inventory transactions and how they affect the actual cost of an item. For example. The valid profile options are: Static to calculate the batch cost allocations based on the Cost Allocation Factor defined for each product in the production batch formula.By-Products By-products are included in the batch cost calculations as either negative or positive ingredients. The cost of the material in the source organization is used as the incoming cost in the destination warehouse. Based on the profile “Cost Allocation Factor Calculation” the cost allocation factor is either calculated or picked up from the cost allocation factors specified in the batch formula. it reduces the cost of the product. Dynamic to calculate the batch cost allocations as a ratio of actual quantity of each product produced to the total production batch output quantity. Please refer to the User Guide for examples on how product and raw material cost calculations work. This is how the costs were apportioned before this enhancement. if you need to spend money to dispose the byproduct. Products and raw materials can be transferred and included in the cost calculation. Co-Products / Cost Allocation Factor The batch costs of co-products are derived based on the cost allocation factors. White Paper Title Page 7 .
they use the user hook to retrieve the cost. The transaction is costed very similar to a receipt. Costing Using Cost adjustments and expense allocations. they are not included in the actual costing calculations. you can modify the actual cost that is calculated based on the transactions in the various applications. If the shipment is across companies and across OUs. Actual Cost Adjustments You can use the actual cost adjustments functionality to adjust the cost of the item using the following adjustment types: Average Cost Adjustments This adjustment is created with a quantity and a cost. Value Adjustments In this type. Unit Cost Adjustments The Unit Cost Adjustments is used to adjust the cost of the item by a fixed number. you would just enter a total value of the adjustment that would get applied on the entire actual cost quantity. The Average Cost Adjustment can be used to cost any Inventory Adjustments that were created in Inventory . RMA/Returns Sales Returns are not included in the actual cost calculation logic.Profile GMF: Include Inventory Transfers in Actual Cost – Yes/ No Oracle recommends that you set it to Yes. The shipments use the item cost while it creates the accounting entries to Cost of Goods Sold and Inventory accounts. but use the cost for creating the account entries. GMF: Include Inventory Movements in Actual Cost – Yes/ No Oracle recommends that you set it to Yes. Internal Orders Shipments Internal order shipments are not included in the cost calculation. White Paper Title Page 8 . Sales and Shipping Since Sales and Shipping are outbound transactions. it uses the transfer price while if its across companies within the same OU.
Balance * Prior Period GL Expense Comp. Burdens The Burden unit cost for raw materials and products are calculated based on the following logic: Burden Usage * Burden Count * Nominal Cost Item Quantity For products. The expenses allocated to a specific item are calculated by the expense allocation logic based on the actual expenses that are retrieved from the accounts and the basis defined by you in the Expense Allocation Basis. the PMAC logic calculates the burden component as follows : [(Prior Period Inventory Balance * Prior Period Burden Unit Cost) + (Current period Transaction Quantity * Current Period Burden Unit Cost)] [Prior Period Inventory Balance + Current Period Transaction Quantity] Please note that the percentage burdens functionality is applicable only to Standard Costing and not to Actual and Lot Costing.1. for complete details. Balance * Prior Period Component Cost) + GL Expense for Current Period] [Previous Period Inventory Balance + Produced Quantity + Received Quantity (if any)] Please refer to the Cost Management user’s guide for details on examples. White Paper Title Page 9 . utility costs etc. MetaLink Note 362896. Cost) + GL Expense for Current Period] [Previous Period Inventory Balance + Received Quantity] The expense component of products is calculated as: [(Prior Period Inv. The expense component for raw materials is calculated as: [(Prior Period Inv. Expense Allocations Expense Allocations are used to allocate any indirect expenses to the actual cost of the item such as Administrative expenses.Please refer to Using Actual Cost Adjustments in OPM Costing.
[Batch costs + Value of Incoming Transfers+ Value of Receipts+ Cost Adjustment Value + GL Expense Allocations] [Product Yield +Transfers + Receipts +Average Cost Adjustment Quantity] If a Unit Cost Adjustment exists. [(Prior Period Cost * Prior Period Closing balance) +Batch costs + Value of Incoming Transfers+ Value of Receipts+ Cost Adjustments Value + GL Expense Allocations] [Prior Period Closing Balance + Product Yield +Transfers + Receipts +Average Cost Adjustment Quantity] If an Unit Cost Adjustment exists. the PMAC cost is calculated as above and then the Unit Cost is added/subtracted to arrive at the final cost.Actual Cost Process This is how the costs are calculated by the various cost types. the PWAC cost is calculated as above and then the Unit Cost is added/subtracted to arrive at the final cost. Period Weighted Average Cost (PWAC) The Period Weighted Average Cost is calculated based on the following logic. the cost is calculated based on transactions that have occurred starting from the first period of the cost calendar. Please note that if there are any cost adjustments that you had entered. then they override the receipts or invoices. The PPAC cost calculation logic for a given period: [(Prior Period PPAC Cost * Prior Period PPAC Quantity) +Batch costs + Value of Incoming Transfers+ Value of Receipts+ Cost Adjustments Value + GL Expense Allocations] [Prior Period PPAC Quantity + Product Yield +Transfers + Receipts +Average Cost Adjustment Quantity] Last Transaction Cost and Last Invoice Cost For these methods. Period Moving Average Cost (PMAC) The Period Moving Average Cost is calculated based on the following logic. please ensure that you have closed the Inventory period (Prelim or Final) and have completed all transactions. Actual cost process Before you run the Actual Cost Process. the actual cost engine would look at all the invoices and receipts for the current period and either pick the most current Receipt or Invoice for Last Transaction and the most current Invoice for Last Invoice cost method. Perpetual Period Average Cost (PPAC) The cost calculation in this method is slightly different from the above in that. Actual White Paper Title Page 10 .
GMF: Concurrent Debug Flag . and 3 with 0 being the least detailed and 3 being the most detailed. Warnings. Used primarily by Support and Development for trouble shooting. all negative balances would be considered as zero.Cost Process runs for all the warehouses under a OPM Company. Oracle Recommends that you set this to the default value of 0 / NULL. 1.Valid options are 0. Hence please ensure that all the Inventory Warehouses are Closed or Preliminary Closed. GMF: Cost Process Message Level Threshold – Dictates the logging level of errors for the actual cost process.2. Other Profiles GMF: Exclude Negative Inventory Balance . Errors Impacting Cost and Fatal/Internal System errors. White Paper Title Page 11 . The valid options are: Diagnostic Messages. Oracle recommends that you set it to Diagnostic messages during normal use. This is the most detailed level of logging.If set to Yes. Data Setup Errors.
650. Worldwide Inquiries: Phone: +1.7200 oracle. Oracle.650.7000 Fax: +1.506. including implied warranties and conditions of merchantability or fitness for a particular purpose. We specifically disclaim any liability with respect to this document and no contractual obligations are formed either directly or indirectly by this document. without our prior written permission. whether expressed orally or implied in law.com Copyright © 2005. nor subject to any other warranties or conditions. This document may not be reproduced or transmitted in any form or by any means. are registered trademarks of Oracle Corporation and/or its affiliates.S.A. . This document is not warranted to be error-free. This document is provided for information purposes only and the contents hereof are subject to change without notice. CA 94065 U. electronic or mechanical. All rights reserved. for any purpose. Oracle. and PeopleSoft.506. Other names may be trademarks of their respective owners. JD Edwards.White Paper Title October 2006 Author: Srini Raghavan Contributing Authors: Rajesh Seshadri Oracle Corporation World Headquarters 500 Oracle Parkway Redwood Shores.
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