Understanding Average Cost Variance An Oracle White Paper
average cost and transaction cost. SCOPE ====== This paper has been authored keeping in view an audience familiar with Oracle Cost Management in general and Average Costing method in particular. As a result. Issues from inventory use the current average cost as the unit cost. After the transaction has been processed. Later the onhand quantity of the same item is driven positive and the functionality explained. i. the transaction is valued at the current average unit cost or at the normal transaction cost. For purchased items. this is a weighted average of the actual procurement cost of an item. when a receipt (or transfer in) transaction occurs for an item with negative on–hand inventory. Inventory balances can be driven negative if the Allow Negative Balances parameter is set in the Organization Parameters window in Oracle Inventory. • PO delivery to subinventory • Return to vendor • Transfer between organizations where the receiving organization uses average costing • Miscellaneous and account receipts • Miscellaneous and account issues • Average cost update • Assembly completion
. the unit cost of an item is the average value of all receipts of that item to inventory. Recalculation of unit cost For the transactions listed below. the item’s unit cost will be automatically recalculated. inventory can be perpetually valued at an average cost.e. up-to-date unit cost. This valuation methodology results in a unit cost for each item.ABSTRACT ========== Under average cost systems. This behavior of Average Costing method has been explained by carrying out miscellaneous transactions of a buy item. weighted by quantity (inventory cost = average unit cost * quantity). at any point in time. An attempt has been made to explain the functionality of Cost Variance in Average Costing method when the onhand quantity of an item is driven negative along with the inventory valuation of the item. Each receipt of material to inventory updates the unit cost of the item received. In an average cost environment. Average cost variances are generated if you issue additional material even though the inventory balances for that material is negative. PO cost. all items in inventory are valued at their procurement cost. inventory value will reflect a current. the transaction unit cost may be different from the current unit cost for an item. which is a weighted average of the purchase order unit costs for all quantity on hand. If negative quantities are allowed. By using Oracle Cost Management’s average costing method. The functionality of Average Cost Variance has been explained in detail based on these scenarios. on a per unit basis. transaction quantity. 7 scenarios have been covered using various possible combinations of onhand quantity.
The above behavior has been captured in the form of 7 scenarios and is presented in a sequential format. Transaction Cost (TC) The cost per unit at which the transaction quantity is being valued. Transaction Quantity (TQ) The quantity of a transaction. This may be user specified for some transactions. Average Cost Variance is favorable (a credit) when the current average unit cost is greater than the PO unit
. Average Cost Variance (ACV) A variance account used to hold amounts generated when onhand inventory quantity is negative and the unit cost of a subsequent receipt is different from the current unit cost. This includes Miscellaneous Issues/Receipts. It is related to COQ and TQ by: NOQ = COQ + TQ. that can be performed through the Miscellaneous Transactions Form. the CAC is used in its place. computed by the Average Cost processor. The distribution of the transactions is performed in a separate stage and is performed by the Distribution processor. To achieve this end the Distribution Processor uses the costs stored in the Material Transaction table. If unspecified. New Average Cost (NAC) The new average cost of an item after a transaction has been performed. maintained and updated by the system as needed after each transaction.When a material transaction is performed under the current transaction processing engine. Current Average Cost (CAC) The weighted average cost per unit of an item in the system. let us run through some important terminology. It is a function of all the above quantities and values. These are as follows: Current Onhand Quantity (COQ) The total quantity of the item that is onhand currently in the Organization. The User can provide the transaction cost for all transactions. Account Issues/Receipts and Account alias Issues/Receipts. Before we take off with the scenarios. the Average Cost Processor recomputes the average cost. A discussion of the same follows. the Distribution processor generates debits and credits for appropriate accounts. The number is considered to be negative in sign if it results in a reduction in onhand quantity. New Onhand Quantity (NOQ) The quantity onhand immediately after the transaction is performed and has been saved. The transaction cost (TC) can be provided by the user for some material transactions. Once these costs are available. If the transaction cost is not provided by the user then the Current Average Cost (CAC) is used as the transaction cost instead. which has been used in this document to explain the behavior of Average Costing method. If a transaction causes an increase in the onhand quantity it is considered to be a positive number. The Average Cost Processor recomputes the average cost based on several considerations.
TQ>0.cost for the aforementioned receipt transaction. This transaction is represented by the following distributions:
Fig. The Unit Cost of ITEM as shown in the Item Costs form:
Fig. ITEM. the average cost variance account gets credited for the entire amount issued. The variance account also comes into the picture during an issue transaction when the Inventory Onhand Quantity is positive and Inventory Value is zero. Scenario 1: Let us create an unhand of 10 quantities and a unit cost of 30 for ITEM in the inventory organization by carrying out a miscellaneous receipt transaction for 10 quantities at a unit cost of 30. let us understand the way in which costs are computed by the system. The behavior under Average Costing is presented with the help of miscellaneous transactions carried out for a buy item. the values are as follows: COQ CAC 0 0
. NAC = (COQ*CAC + TQ*TC)/(NOQ) = [(0*0)+(10*30)] / 10 = 30 As a result. This case can be represented in the following manner: COQ>=0.1 Material Transaction Distributions
01-000-1410-0000-000 is the Material sub-element account of the Organization in which the material is being received. NOQ>0. in this case the entire unit cost of the purchased item is represented by the cost of Material sub-element only. Now. In this case. 01-580-7740-0000-000 is the miscellaneous account entered during the miscellaneous transaction. To start with. ITEM does not have any defined cost or unhand in the organization. The transaction credits this account. This transaction debits the material account. 2 Unit Cost of Item in Item Costs Form.
Please note that.
where COQ CAC 10 30
There are 2 sub cases satisfying these criteria. This scenario can be represented as: COQ>0.Scenario 2: Now let us issue a quantity of 5 at a unit cost of 40 by carrying out a miscellaneous issue transaction. TQ<0. NOQ>0.5 Item Cost History
The last line in the above screenshot displays the first transaction wherein 10 quantities were received at a unit cost of 30. The first line represents the next transaction where in 5 quantities
.e. In this case Dr = abs (TQ*TC) = 200 Cr = abs (TQ*TC) = 200 The material distributions generated are as follows:
Fig. 200 < 300.
Fig.4 Unit Cost of Item in Item Costs Form. Let us deal with the first sub-case in this scenario. where ABS (TQ*TC)<ABS (COQ*CAC) i.
The Item Cost History form displays all the transactions carried out for ITEM in descending chronological order.3 Material Transaction Distributions
NAC = (COQ*CAC + TQ*TC)/(NOQ) = [(10*30)+(-5*40)] / 5 = 20 as shown in the Item Costs form:
the inventory value is being driven negative as we are issuing quantities worth 150(3*50) from an inventory whose value for this item is 100(5*20). NOQ and NAC are represented as follows: NOQ NAC 5 20
Scenario 3: This scenario represents a sub case of the criteria discussed above. NOQ>0.e. at the end of this scenario. TQ<0. So when crediting inventory we have to ensure that there is no value left in Inventory.were issued at a unit cost of 40 leading to a new / current onhand of 5 and a new / current average cost of 20. COQ>0. TQ<0 could potentially result in a situation of a negative resultant NAC if ABS (TQ*TC) > ABS (COQ*CAC) i. Hence.6 Material Transaction Distributions
Fig. To ensure this: Dr = ABS (TQ*TC) = 150 Cr = (COQ*CAC) = 100 ACV = Abs (Cr) – Dr = -50 These Distributions are represented as follows:
Fig.7 Material Transaction Distributions
The Cost Variance account is defined using the following Navigation: Inventory Setup Organizations Parameters Other Accounts (T)
. 150 > 100 If resultant NAC<0 then it is set to ‘0’ since negative costs cannot exist in the system. where COQ CAC TQ TC 5 20 -3 50
In this scenario.
9 Item Cost History
As discussed above.
.Fig. one more line is added to the item Cost History representing an issue of 3 numbers at a unit cost of 50 and a new cost of zero for the current onhand quantity of 2.10 Unit Cost of Item in Item Costs Form. This scenario can be represented as: COQ>0. Since quantity is being driven negative. Please note that this scenario differs form the previous one where the inventory value was driven negative though the onhand remained positive. the unit cost of the item is shown as zero in the item costs form too. we have to ensure that the value in inventory is also zero.
Fig. when the quantity is zero.
So. COQ CAC 2 0
This is an extension of the previous case.8 Navigation for defining Cost Variance Account
So. NOQ <= 0. the NOQ and NAC can be represented as follows: NOQ 2
Scenario 4: In this scenario. TQ<0. we would discuss the impact on the unit cost when we drive the onhand negative.
NAC = TC. This transaction is represented in the Item Cost History by changing the new cost to 20.
Fig.12 Item Cost History
As a result of this scenario.13 Unit Cost of Item in Item Costs Form. which is same as the transaction cost.11 Material Transaction Distributions
In this case. NOQ and NAC are as follows: NOQ -2
. the same cost of 20 is not displayed in the Item Cost form as it picks up the cost from CST_ITEM_COSTS table where the item_cost column would still show as ‘0’.Hence Dr = abs (TQ*TC) = 80 Cr = [(COQ*CAC)+abs (NOQ*TC)] = [(COQ*CAC)+abs (NOQ*NAC)] = 40 ACV = Abs (Cr) – Dr = -40 The same is represented by the Distributions created as follows:
16 Unit Cost of Item in Item Costs Form.Scenario 5: In this scenario we would drive the onhand and thereby the inventory value more negative by issuing 2 numbers of ITEM at a unit cost of 30. Dr = abs (TQ*TC) = 60 Cr = abs (TQ*TC) = 60 This is represented by the Material Distributions as follows:
Fig.15 Item Cost History
The Item Costs form continues to display a unit cost of ‘0’. NOQ<0 where COQ CAC TQ TC NOQ -2 20 -2 30 -4
This is a mirror image of Scenario1.
. TQ<0.14 Material Transaction Distributions
In this case. Hence COQ<0.
Fig. NAC = (COQ*CAC + TQ*TC)/(NOQ) = [(-2*20)+(-2*30)] / (-4) = 25 The first line of the Item Cost History displays this cost as follows:
This is a mirror image of Scenario 3 as far as the accounting implications are concerned. NOQ<0 where COQ -4
In this case we are driving quantity upwards from a negative number. TQ>0. Dr = TQ*CAC = 25 Cr = TQ*TC = 40 ACV = Abs (Cr) – Dr = 15 The Distributions created are as follows:
Fig.18 Item Cost History
. This scenario can be represented as follows: COQ<0.NOQ -4
Scenario 6: Now.17 Material Transaction Distributions
Here NAC = CAC Item Cost History represents this new average cost as 25
Fig. we will receive quantities in such a way that the onhand of ITEM increases but still remains negative.
TQ>0.20 Material Transaction Distributions
. Dr = ABS (COQ*CAC)+(NOQ*TC) = 135 Cr = TQ*TC = 150 ACV = Abs (Cr) – Dr = 15 These accounting entries are represented as follows:
Fig. NOQ>=0 where COQ CAC TQ TC NOQ -3 25 5 30 2
This is an extension of the previous case and a mirror image of Case3.
NOQ and NAC as a result of this scenario are: NOQ -3
Scenario 7: In this last scenario.
Fig. The following accounting entries are arrived at.19 Unit Cost of Item in Item Costs Form. we will drive the onhand quantity upward so that it results in a positive value by receiving a quantity of 5 at a unit cost of 30 as represented by COQ<0.The Item Costs form still displays a unit cost of ‘0’.
RESOURCE_COST res. OUTSIDE_PROCESSING_COST osp. the Item Costs form displays the new cost of 30 and not the earlier cost of ‘0’.
Fig.21 Item Cost History
Now.Here NAC = TC.
Fig. the final NOQ and NAC are as represented below: NOQ NAC 2 30
This NAC can be retrieved from the CST_ITEM_COSTS table using the following SQL query: Select MATERIAL_COST mat. OVERHEAD_COST ovhd.22 Unit Cost of Item in Item Costs Form.
Hence it can be concluded that the Item Costs form displays the current average cost of an item when the current onhand of the item is positive. we would need to refer to the Item Cost History form. The first line of the Item Costs History form displays the new cost as 30 for a quantity of 2. In order to know the average cost of an item when the onhand is driven negative. ITEM_COST cst from CST_ITEM_COSTS where inventory_item_id = 11626 and cost_type_id=2 and organization_id=606.
. MATERIAL_OVERHEAD_COST matovhd. Thus.
The following table summarizes all the 7 scenarios in a serial order: S. MTL_MATERIAL_TRANSACTIONS The following SQL statement captures the required information: Select TRANSACTION_ID tranid. cost under Material (MAT) column is shown as 30. TRANSACTION_SOURCE_TYPE_ID srcid. The output of the query is as follows: TRANID TYPEID ACTID SRCID 11377152 42 27 13 11377378 32 1 13 11377539 32 1 13 11378135 32 1 13 11378287 32 1 13 11378365 42 27 13 11378443 42 27 13
QTY 10 -5 -3 -4 -2 1 5
VARAMT 0 0 -50 -40 0 15 15
ACTCST 30 40 50 20 30 40 30
PCST 0 30 20 0 20 25 25
NEWCST 30 20 0 20 25 25 30
PCSTQTY 0 10 5 2 -2 -4 -3
. TRANSACTION_TYPE_ID typeid. VARIANCE_AMOUNT varamt. NEW_COST newcst. PRIOR_COSTED_QUANTITY pcstqty from MTL_MATERIAL_TRANSACTIONS where inventory_item_id=11626 order by transaction_id. PRIOR_COST pcst. ACTUAL_COST actcst.No 1 2 3 4 5 6 7
COQ 0 10 5 2 -2 -4 -3
CAC 0 30 20 0 20 25 25
TQ 10 -5 -3 -4 -2 1 5
TC 30 40 50 20 30 40 30
NOQ 10 5 2 -2 -4 -3 2
NAC 30 20 0 20 25 25 30
ACV 0 0 -50 -40 0 15 15
Let us now look at the way in which 2 important tables get updated and thereby store the related information of the above transactions. TRANSACTION_ACTION_ID actid. TRANSACTION_QUANTITY qty.The output of the above query is: MAT 30
As unit cost of ITEM is entirely represented by the Material sub-element. which is picked up by the Item Costs form.
This table stores actual cost. Similarly the TC. This information obtained from the table is a subset of the information got from mtl_material_transactions table. prior_cost (PCST) and new_cost (NEWCST) columns of the mtl_material_transactions table. TRANSACTION_ACTION_ID actid from MTL_CST_ACTUAL_COST_DETAILS where inventory_item_id=11626 order by transaction_id. The output of the above SQL is: TRANID ACTCST 11377152 30 11377378 40 11377539 50 11378135 20 11378287 30 11378365 40 11378443 30
PCST 0 30 20 0 20 25 25
NEWCST 30 20 0 20 25 25 30
VARAMT 0 0 -50 -40 0 15 15
ACTID 27 1 1 1 1 27 27
These column names carry the same meaning as the corresponding ones in the mtl_material_transactions table. Variance_amount column (VARAMT) of mtl_material_transactions table is the column that stores the Actual Cost Variance (ACV) caused by each of the 7 transactions. Another table that can be used to retrieve similar information is MTL_CST_TXN_COST_DETAILS
. CAC and NAC columns of Table 15 contain data that is in tandem with the actual_cost (ACTCST). prior cost and new cost information for a transaction. transaction_action_ids of 27 and 1 represent actions of ‘Receipt into Stores’ and ‘Issue from Stores respectively. Similarly. The SQL query used to get the information is as follows: Select TRANSACTION_ID tranid. NEW_COST newcst. Transaction_type_ids of 42 and 32 represent miscellaneous receipt and miscellaneous issue transactions respectively. The COQ column in Table 15 has data that is same as the one in Prior_costed_quantity (PCSTQTY) of mtl_material_transactions table. This is another way of retrieving similar information from the table level. ACTUAL_COST actcst. VARIANCE_AMOUNT varamt. PRIOR_COST pcst.A transaction_source_type_id of 13 represents inventory transactions. A close look at the transaction_quantity (QTY) column of the mtl_material_transactions table shows that the values in this column are same as the ones in the TQ column of Table 15.
Points that can be drawn in summary from the above: • • • If the TQ > 0 then the Cr = TQ*TC always. • Santhi Kaza and Nilesh Padwankar for their encouragement and constant support on this piece of work. All other product and service names mentioned may be trademarks of their respective owners. The variance generated is always posted to the Average Cost Variance account for the organization. Copyright © 2004 Oracle Corporation All rights reserved.650.com Oracle is a registered trademark of Oracle Corporation.
. Various product and service names referenced herein may be trademarks of Oracle Corporation.S.506.A.
ACKNOWLEDGEMENT =================== My heartfelt thanks to: • Barry Kuntz for the prompt and valuable review in all aspects which helped making this document a complete one. If the TQ < 0 then the Dr = TQ*TC always. • Diane Davis for the comprehensive review and publication. Worldwide Inquiries: Phone: +1.650.7200 www.
White Paper: Average Costing – Unit Cost Calculation Logic for Buy Items January 2004 Author: Dhannawada Sreenivasa Rao Contributing Authors: N/A Oracle Corporation World Headquarters 500 Oracle Parkway Redwood Shores. The debit varies depending on the relative values/sign of COQ and NOQ.506. CA 94065 U. The credit varies depending on the relative values/sign of COQ and NOQ.oracle.7000 Fax: +1.This concludes the discussion on the seven scenarios.