Different Ways To Use Cost Elements, Sub-Elements & Cost Allocation Methods

Different Ways to Use Cost Elements,
Sub-Elements & Cost Allocation Methods
OAUG Cost Mgmt SIG Meeting

April 19, 2011
Douglas Volz
Douglas Volz Consulting
doug@volzconsulting.com
Sharon Widmer
Independent Consultant
s_widmer@comcast.net
Introduction
 Learn about the structural basics for cost elements and sub-
elements with Oracle EBS for Discrete Costing
 Understand the differences for the various classifications of

cost elements and sub-elements
 See examples for how these have been used in different

industries
Helping people using Oracle Applications since 1990 Slide 2

Agenda
 Welcome to Our Session!
 Cost Management SIG Business
 Structural Basics / Refresher Course

 Basic Inventory Structures: Ledgers, OUs, Orgs, Items
 What is a Cost Element? Versus a Sub-Element?
 Available Cost Allocation Methods
 Differences Across Costing Methods
 Examples
 Conclusions
OAUG Cost Management SIG Business
 Next OAUG Cost Management Session
 May 17, 2011 October 2-6, 2011
 R12: Tracing a sale of inventory through Oracle
 Open vacancy for OAUG Cost SIG Membership

Chairperson
 Questions, concerns, ideas for the OAUG Cost Mgmt

SIG:
 Doug Volz doug@volzconsulting.com
 Jerry Devore jerry.devore@gmail.com
 Sharon Widmer s_widmer@comcast.net

Different Ways to Use Cost Elements,
Sub-Elements & Cost Allocation Methods

Structural Basics
 Legal Entities, Ledgers, Operating Units, Organizations
 Items and Costs
 Cost Elements
 Sub-Elements
 Cost Allocation Methods or Basis Types

Ledgers, Legal Entities, OUs, Orgs
General Ledger
Legal Entity
Operating Unit
The Global Org can be

Global across OUs
Organization
(Item Master)
Inventory Inventory
Organization Location
FG STORES MRB
Subinventory Subinventory Subinventory

Costing Concepts – Quick Run-Through
 Costing Methods
 Average Costing
 Standard Costing
 Periodic Costing
 FIFO Costing
 LIFO Costing

Costing Methods
 Standard Costing
 Unit costs are set up in advance as an expected cost
 Component costs (material costs) are defined using the projected
average acquisition costs, plus any associated indirect costs
 Assembly costs are rolled up using bills of material and routings
 Standards are reset periodically
 Average Costing
 Oracle supports a moving or weighted average cost
 The unit cost changes with each receipt transaction
 Unit costs reflect the average of the incoming receipts from:
– purchase order receipts,
– purchase order returns
– inter-organization receipts
– and for manufacturing, for WIP assembly completions
– miscellaneous issues may or may not affect the unit cost
 Assembly costs come from the cost of your assemblies built in WIP
 You may have indirect costs (material overheads, etc.) as well
Other Costing Methods (Continued)
 FIFO Costing
 FIFO costing values inventory by assuming that the oldest inventory (first in) is the first
to be used or sold (first out), but there is no necessary relationship to the physical
movement of specific items
 FIFO supports WIP costing
 LIFO Costing
 LIFO costing values inventory by assuming that the most recently received item (last
in) is the first to be used or sold (first out), but there is no necessary relationship to the
physical movement of specific items
 LIFO supports WIP costing
 Periodic Costing – Discrete Costing

 Periodic has dual costing capabilities, using Periodic Costing at month-end and using
transaction-based “real-time” costing prior to month-end
 Periodic supports WIP costing
 Periodic Costing – Process Costing

 Different from Discrete Periodic costing, similar concepts, month-end costing

Item Types – How Might You Allocate Costs?
 Oracle Item Types  Oracle Item Types

 ATO Option Class  Product Family
 ATO Model  Phantom item
 FG Finished Good
 Planning
 Inventory Type
 PTO Option Class
 Kit
 Model
 PTO model
 Option Class  Reference item
 Outside Operation  Subassembly
 Outside Processing Item  Supply item
 Purchased item

Factors to Think About
 Different Cost Allocation Concepts to consider:
 Fixed vs. variable costing
 Cost tracing or allocation methods
 Cost Drivers
 Variations by industry
 Folded vs. costing by cost element
 Materiality

Cost Elements
 Five, Count’em Five …
 Material
 Material Overhead
 Resources
 Outside Processing
 Overheads (Production Overheads)
 Can Account by Cost Element

(R12 distributions always by cost element …)
 Valuation Accounts by Cost Element
 Valuation Reporting by Cost Element

Sub-Elements
Material
 What Types
 How Many? Material Overhead
 Limitations?
Resources
 What For?
Outside Processing
Overhead

Cost Elements - Material
Cost Element Sub-Element
 Direct cost of procurement  Standard cost examples

 Types of metals
 Or MFG or buy costs from • Composite
previous levels • Steel
• Aluminum
 Usefulness depends on costing
method  Type of ingredient
• API
 Can be negative or positive • Reagent
 Intercompany profit
 Frequently just “Material”

Cost Elements – Material Overhead
 Indirect procurement costs  Broad use across costing

 Purchasing department methods
 Incoming inspection & QA  Material overhead
 Vendor site QA  Freight
 Receipt and warehouse cost  Duty
 Receivers
 Customs
 Warehouse expense
 Supplier discounts
 Supervisory expense
(*negative material overheads)
 Earned at:
 PO receipt  Warehouse
 Inter-org transfer  Etc…
 WIP assembly completion * Only partial support for
negative material overheads

Cost Elements – Resource
 Direct cost of production  Broad use across costing methods

 Labor classifications
 Any factor of production  Labor skill groups
 Labor  Machine types
 Machine time  Work centers
 Work center  Major facilities or equipment
 Square feet used in production
 Anything considered a resource • Ovens
• Wafer fabs
• Paint lines
 Earned at:
• Chemical treatments
 During operation move
 Manual charges to an operation

Cost Elements – Outside Processing
 Direct cost of production  Broad use across costing

 Sub-contract or service from a methods
Supplier  Widespread use
 Typically set up an OSP item and  Outsourced production
an OSP resource  Any service or transformation
 Receive OSP item into Receiving made by a supplier during the
 Deliver the resource into WIP production cycle
 Both a PO receipt and an OSP  But many caveats for using
resource transaction OSP
 Earned at:
 PO Receipt
 Earn at standard or at PO Price

Cost Elements – Overhead (Production Ovhd)
 Indirect costs of production  Broad Use Across Costing

 Work center overheads Methods
 General production overhead  Frequently by workcenter or
 Receive OSP item into Receiving flow line
 Deliver the resource into WIP  Overhead rates by department
 Or you can “spread it like
 Both a PO receipt and an OSP peanut butter” if not
resource transaction materially different
 Direct cost of production  You set up which resources
 Earned at: earn which overhead for a
 Operation Move given departmental overhead
rate
 Resource and OSP charging

Summary of Cost Allocation Methods / Basis Types
Material Material Resource OSP Overhead

Overhead
Item Item Item Item Item
Lot Lot Lot Lot Lot
Total Value Std Std Amount per
Costing: Costing: resource
can have Can have unit
labor rate OSP PPV
Variances
Amount per
resource
value

Cost Allocation Method Examples
Basis Type Meaning Example

Item So much per item $10 per item
Lot Amount per lot $1000 for a lot size of 100
= $10/item
Total Value Rate per value received or Rate of 0.10 and $100
made received = $10
Amount per resource unit 10 D/L hrs earned with
Resource Units or value earned $10 overhead rate = $100
Amount per resource unit $10 D/L with 100%

Resource Value or value earned overhead rate = $10

Item Costing Setup Overview
Sub-Element
Defaults
Org Sub-
Setup Elements
Cost Method
Cost Item Costing

Types

Sub-Elements - Material

Sub-Elements – Material Overhead

Sub-Elements - Resource

Sub-Elements – Outside Processing

Sub-Elements – Production Overhead

Sub-Element Item Cost Defaults
 Material Overhead Defaults

Basic Accounting for Sub-elements
– Matl & Matl Ovhd Sub-Elements
Transaction Receiving Value Inventory A/P

PO Receipt Accrual
Delivery to Stock 100 100
100
Delivery to Stock Stock Value Matl Ovhd Absorption

Mat’l Ovhd 120
Absorption 20

– Resource & Resource Ovhd Sub-Elements
Transaction WIP Value Resource Absorption

Res. Absorption 100 100
Resource Ovhd 50
(50% dept Rate)
Dept. Ovhd Absorption

Dept. Overhead 50
Absorption

– OSP and OSP Ovhd Sub-Elements
Transaction Receiving Value Inventory A/P

PO Receipt Accrual
Delivery to WIP 100 100
100
Delivery to WIP WIP Value Dept. Ovhd Absorption

OSP Dept. Ovhd 120
Absorption 20

Underlying Table Structures
 Cost Elements
 CST_COST_ELEMENTS
(you cannot access this table using a form)
 Sub-Elements
 BOM_RESOURCES
 CST_RESOURCE_COSTS
 CST_RESOURCE_OVERHEADS
 BOM_DEPARTMENTS
 CST_DEPARTMENTAL_OVERHEADS
 Cost Allocation Methods / Basis Types

 MFG_LOOKUPS - CST_BASIS_TYPES
Caveats
 Like many things in life you can have too much of a good thing:
 Be judicious in use of sub-elements
 Try to have no more than 3 material overhead sub-elements per org
 But … OSP and Resources
• OSP - may require OSP resources for each item/supplier
• Resources for labor may be very detailed
 OSP requires significant training

• All sorts of transaction processing issues
– Received in Receiving but not delivered
– Insufficient “To Move” quantities
– Close WIP job and inventory period with open OSP balances
(patches for this)
– Receive to a closed job

Cost Element vs. Sub-Element Reporting
 Cost Elements
 Valuation reporting available by cost element
 Standard, Average, FIFO, LIFO costs held by cost element
 Sub-Elements
 No valuation reporting by sub-element
 Only Standard Costing holds item costs by sub-element
(but not if using Supply Chain Cost Rollup across organizations)
 Using AVG, LIFO, FIFO:
• You can update your material overhead amounts differently
from your material overhead rates
• There are no sub-element resource names (ids) in your cost
details information (CST_ITEM_COST_DETAILS)

Month-End Absorption Analysis
 General Ledger – holds the actuals

 Typically Departmental or Cost Center Expenses
 Absorption Actuals
 By Sub-Element, by Absorption Account
 Get from your material and wip accounting
 Material transactions for material overheads
 WIP transactions for resource overheads
 Compare the Two
 G/L Budget Vs. Actuals Report

 Excel analysis
Causes for Over/Under Absorption?
 Volume variances
 Rate variances
 Sometimes hard to distinguish

Does Oracle Landed Cost Management Help?
 Useful for items where in bound freight or shipping costs

such as tariff's are an significant part of item costs.
 Used to update item costs with P.O. header costs.
 Allocates these to the line level of the P.O.
 Useful for comparing landed product costs between two
different warehouse locations including shipping costs
 Can be used to update the material cost element or to
manage costs that would other wise be stored as material cost
overheads

More About OLCM
 Oracle Landed Cost Management is a new product
 Not a lot of users yet
 As transportation costs become a more important

component of item costs this is an area that will continue to
get more attention.

Summary – Cost Elements and Sub-Elements
 Cost Elements
 Five
 Write accounting entries by valuation account
 Standard inventory valuation reports by cost element
 Sub-Elements
 Only accounting absorption entries have a sub-element
(resource_id)
 No standard valuation reports by sub-element
 Standard costing maintains costs by sub-element; other
Costing Methods do not do this

Summary – Cost Allocation Methods
 Item
 Lot
 Total Value
 Resource Value
 Resource Units
 Activity

Summary of Cost Allocation Methods / Basis Types
Material Material Resource OSP Overhead

Overhead
Item Item Item Item Item
Lot Lot Lot Lot Lot
Total Value Std Std Amount per
Costing: Costing: resource
can have Can have unit
labor rate OSP PPV
Variances
Amount per
resource
value

Conclusions
 Better understanding for the cost structures in Oracle
 Perhaps gained ideas on changes you may wish to make
 Generally flexible with the following limitations:

 Multi-org mass edits for material overhead rates
 Mass edits for departmental overhead rates, resource &
overhead associations and resource rates
 No valuation reporting by sub-element
 Supply Chain Cost Rollup does not keep sub-element details

Where to get more information
 Douglas Volz Consulting
 Overview of Discrete Costing for Manufacturing
http://www.volzconsulting.com/resources.html
 Oracle Cost Management SIG Minutes

 April 2010: Release 11i & 12: Major Tables & Relationships for
Costing, Part I
 May 2010: Release 11i & 12: Major Tables & Relationships for
Costing, Part II
 Oracle Corporation
 Metalink: Cost Management White Papers [ID 157326.1]
 Oracle Cost Management User Guide

Acknowledgements
 You, the OAUG Cost Mgmt SIG, thanks for attending this session
 Oracle Cost Development
 Partners in crime at my clients over the years

Sharon Widmer (s_widmer@comcast.net)
Professional Background
.
With over 25 years total work experience, Sharon Widmer is an accomplished Oracle Functional
Consultant and Accounting Manager, specializing in manufacturing and distribution companies. She has
14 years experience implementing Oracle Applications, and over 10 years in Accounting for
Manufacturing and Distribution companies.
Sharon has helped clients with Oracle implementations (Release 11.0.3 through Release 12.1) and
process reengineering for Inventory Control and Accounting. Industries she has worked in include High
Tech, Building Construction & Industrial Products, Telecommunications, and Life Sciences.
In a recent consulting role Sharon helped a Chip Test Equipment manufacturer and their Cost
Management team get to the next level. As a SME for Inventory Control and Cost Accounting, she
helped them achieve significant process redesign and Oracle configuration changes, which resulted in
more accurate Inventory Control and a streamlined, faster Cost Month End Close.
Core Expertise Experience
 Data Conversion – Data Cleansing  Clients Served:
 Standard Costing  Form Factor
 Manufacturing Processes  Stryker Endoscopy
 Cost Management  Qualcomm
 Inventory  USG
 Warehouse Management  Toshiba America Business Systems
 WIP  Amkor Technology
 Bills of Material  JDS Uniphase

Douglas Volz (doug@volzconsulting.com)
Professional Background
Doug Volz is a Senior Architect and Advisor for Oracle Application projects, with a particular interest in
Cost and Project Management. He has 30 years accumulated experience, including 5 years in Oracle
Development (co-designing Oracle Cost Management) and 12 years in industry in Cost and
Accounting Management positions. His Manufacturing and Cost systems experience covers project
management, software design/development, delivery and consulting services, for both Oracle
Corporation, and multiple international consulting firms. Prior to his systems career, Mr. Volz also held
numerous management accounting positions for telecommunications, defense, and electronics
companies.
In his consulting roles Doug has served over 100 clients. Many of these were multi-org, multi-currency
with global footprints. Countries include US, Mexico, UK, Netherlands, Belgium, Taiwan, P.R.O.C.,
Norway, Japan, Italy, Switzerland and Germany.
Doug leads the OAUG Cost Management Special Interest Group. He also advises and participates on
the Oracle Customer Advisory Board for Fusion Costing.
Core Expertise Experience

 Multi-organization, Multi-currency ERP  Sample of clients served:
Implementations  Beckman Coulter (US)
 Project Management and Senior Project Advisor
 Core manufacturing processes  Matsushita (UK, Mexico)
4 Cost Management  Logitech (US, Taiwan, P.R.C.)
4 Inventory  Celgene Corporation (US, Switzerland)
4 Bills of Material
4 WIP
 NTL (UK, now Virgin Media)
 Systems Integration and Data Conversions  TCI International (US)
 Onninen AS (Norway)

Thank You for Your Attendance and Participation

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Different Ways to Use Cost Elements,

Sub-Elements & Cost Allocation Methods

OAUG Cost Mgmt SIG Meeting

 Understand the differences for the various classifications of

 See examples for how these have been used in different

Helping people using Oracle Applications since 1990 Slide 2

 Cost Management SIG Business

 Structural Basics / Refresher Course

 Open vacancy for OAUG Cost SIG Membership

 Questions, concerns, ideas for the OAUG Cost Mgmt

Helping people using Oracle Applications since 1990 Slide 4

Helping people using Oracle Applications since 1990 Slide 5

 Legal Entities, Ledgers, Operating Units, Organizations

 Items and Costs

 Cost Allocation Methods or Basis Types

Helping people using Oracle Applications since 1990 Slide 6

The Global Org can be

Helping people using Oracle Applications since 1990 Slide 7

Helping people using Oracle Applications since 1990 Slide 8

 Periodic Costing – Discrete Costing

 Periodic Costing – Process Costing

Helping people using Oracle Applications since 1990 Slide 10

 Oracle Item Types  Oracle Item Types

Helping people using Oracle Applications since 1990 Slide 11

 Fixed vs. variable costing

 Cost tracing or allocation methods

 Folded vs. costing by cost element

Helping people using Oracle Applications since 1990 Slide 12

 Can Account by Cost Element

 Valuation Accounts by Cost Element

 Valuation Reporting by Cost Element

 How Many? Material Overhead

Helping people using Oracle Applications since 1990 Slide 14

 Direct cost of procurement  Standard cost examples

Helping people using Oracle Applications since 1990 Slide 15

 Indirect procurement costs  Broad use across costing

Helping people using Oracle Applications since 1990 Slide 16

 Direct cost of production  Broad use across costing methods

Helping people using Oracle Applications since 1990 Slide 17

 Direct cost of production  Broad use across costing

Helping people using Oracle Applications since 1990 Slide 18

 Indirect costs of production  Broad Use Across Costing

Helping people using Oracle Applications since 1990 Slide 19

Material Material Resource OSP Overhead

Helping people using Oracle Applications since 1990 Slide 20

Basis Type Meaning Example

Amount per resource unit $10 D/L with 100%

Helping people using Oracle Applications since 1990 Slide 21

Cost Item Costing

Helping people using Oracle Applications since 1990 Slide 22

Helping people using Oracle Applications since 1990 Slide 23

Helping people using Oracle Applications since 1990 Slide 24

Helping people using Oracle Applications since 1990 Slide 25

Helping people using Oracle Applications since 1990 Slide 26

Helping people using Oracle Applications since 1990 Slide 27

 Material Overhead Defaults

Helping people using Oracle Applications since 1990 Slide 28

Transaction Receiving Value Inventory A/P

Delivery to Stock Stock Value Matl Ovhd Absorption

Helping people using Oracle Applications since 1990 Slide 29

Transaction WIP Value Resource Absorption

Dept. Ovhd Absorption

Helping people using Oracle Applications since 1990 Slide 30