Different Ways to Use Cost Elements Sub Elements

Different Ways to Use Cost Elements, Sub. Elements & Cost Allocation Methods OAUG Cost Mgmt SIG Meeting April 19, 2011 Douglas Volz Consulting doug@volzconsulting. com Sharon Widmer Independent Consultant s_widmer@comcast. net Helping people using Oracle Applications since 1990 Slide

Introduction p Learn about the structural basics for cost elements and subelements with Oracle EBS for Discrete Costing p Understand the differences for the various classifications of cost elements and sub-elements p See examples for how these have been used in different industries Helping people using Oracle Applications since 1990 2

Agenda p Welcome to Our Session! p Cost Management SIG Business p 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 p Examples p Conclusions Helping people using Oracle Applications since 1990 3

OAUG Cost Management SIG Business p Next OAUG Cost Management Session § May 17, 2011 October 2 -6, 2011 § R 12: Tracing a sale of inventory through Oracle p Open vacancy for OAUG Cost SIG Membership Chairperson p 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 Helping people using Oracle Applications since 1990 4

Different Ways to Use Cost Elements, Sub-Elements & Cost Allocation Methods Helping people using Oracle Applications since 1990 5

Structural Basics p Legal Entities, Ledgers, Operating Units, Organizations p Items and Costs p Cost Elements p Sub-Elements p Cost Allocation Methods or Basis Types Helping people using Oracle Applications since 1990 6

Ledgers, Legal Entities, OUs, Orgs Helping people using Oracle Applications since 1990 7

Costing Concepts – Quick Run-Through p Costing Methods § Average Costing § Standard Costing § Periodic Costing § FIFO Costing § LIFO Costing Helping people using Oracle Applications since 1990 8

Costing Methods p 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 p 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 Helping people using Oracle Applications since 1990 9

Other Costing Methods (Continued) p 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 p 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 p 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 p Periodic Costing – Process Costing § Different from Discrete Periodic costing, similar concepts, month-end costing Helping people using Oracle Applications since 1990 10

Item Types – How Might You Allocate Costs? p Oracle Item Types § ATO Option Class § ATO Model § FG Finished Good § Inventory Type § Kit § Model § Option Class § Outside Operation § Outside Processing Item § Purchased item p Oracle Item Types § Product Family § Phantom item § Planning § PTO Option Class § PTO model § Reference item § Subassembly § Supply item Helping people using Oracle Applications since 1990 11

Factors to Think About p 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 Helping people using Oracle Applications since 1990 12

Cost Elements p Five, Count’em Five … § Material Overhead § Resources § Outside Processing § Overheads (Production Overheads) p Can Account by Cost Element (R 12 distributions always by cost element …) p Valuation Accounts by Cost Element p Valuation Reporting by Cost Element Helping people using Oracle Applications since 1990 13

Sub-Elements Material p What Types p How Many? Material Overhead p Limitations? p What For? Resources Outside Processing Overhead Helping people using Oracle Applications since 1990 14

Cost Elements - Material Cost Element p Direct cost of procurement p Or MFG or buy costs from previous levels p Usefulness depends on costing method p Can be negative or positive Sub-Element p Standard cost examples § Types of metals • Composite • Steel • Aluminum § Type of ingredient • API • Reagent § Intercompany profit § Frequently just “Material” Helping people using Oracle Applications since 1990 15

Cost Elements – Material Overhead Cost Element p Indirect procurement costs § Purchasing department § Incoming inspection & QA § Vendor site QA p Receipt and warehouse cost § Receivers § Warehouse expense § Supervisory expense p Earned at: § PO receipt § Inter-org transfer § WIP assembly completion Sub-Element p Broad use across costing methods § § § Material overhead Freight Duty Customs Supplier discounts (*negative material overheads) § Warehouse § Etc… * Only partial support for negative material overheads Helping people using Oracle Applications since 1990 16

Cost Elements – Resource Cost Element p Direct cost of production p Any factor of production § § § Labor Machine time Work center Square feet Anything considered a resource p Earned at: § During operation move § Manual charges to an operation Sub-Element p Broad use across costing methods § § § Labor classifications Labor skill groups Machine types Work centers Major facilities or equipment used in production • • Ovens Wafer fabs Paint lines Chemical treatments Helping people using Oracle Applications since 1990 17

Cost Elements – Outside Processing Cost Element p Direct cost of production p Sub-contract or service from a Supplier p Typically set up an OSP item and an OSP resource p Receive OSP item into Receiving p Deliver the resource into WIP p Both a PO receipt and an OSP resource transaction p Earned at: Sub-Element p Broad use across costing methods § Widespread use § Outsourced production § Any service or transformation made by a supplier during the production cycle § But many caveats for using OSP § PO Receipt § Earn at standard or at PO Price Helping people using Oracle Applications since 1990 18

Cost Elements – Overhead (Production Ovhd) Cost Element p p p Indirect costs of production Work center overheads General production overhead Receive OSP item into Receiving Deliver the resource into WIP Both a PO receipt and an OSP resource transaction p Direct cost of production p Earned at: § Operation Move § Resource and OSP charging Sub-Element p Broad Use Across Costing Methods § Frequently by workcenter or flow line § Overhead rates by department § Or you can “spread it like peanut butter” if not materially different § You set up which resources earn which overhead for a given departmental overhead rate Helping people using Oracle Applications since 1990 19

Summary of Cost Allocation Methods / Basis Types Material Overhead Resource OSP Overhead Item Item Lot Lot Lot Total Value Std Costing: Amount per can have Can have resource labor rate OSP PPV unit Variances Amount per resource value Helping people using Oracle Applications since 1990 20

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 made Rate of 0. 10 and $100 received = $10 Resource Units Amount per resource unit or value earned 10 D/L hrs earned with $10 overhead rate = $100 Resource Value Amount per resource unit or value earned $10 D/L with 100% overhead rate = $10 Helping people using Oracle Applications since 1990 21

Item Costing Setup Overview Sub-Element Defaults Org Setup Sub. Elements Cost Method Cost Types Item Costing Helping people using Oracle Applications since 1990 22

Sub-Elements - Material Helping people using Oracle Applications since 1990 23

Sub-Elements – Material Overhead Helping people using Oracle Applications since 1990 24

Sub-Elements - Resource Helping people using Oracle Applications since 1990 25

Sub-Elements – Outside Processing Helping people using Oracle Applications since 1990 26

Sub-Elements – Production Overhead Helping people using Oracle Applications since 1990 27

Sub-Element Item Cost Defaults p Material Overhead Defaults Helping people using Oracle Applications since 1990 28

Basic Accounting for Sub-elements – Matl & Matl Ovhd Sub-Elements Transaction PO Receipt Delivery to Stock Mat’l Ovhd Absorption Receiving Value Inventory A/P Accrual 100 100 Stock Value 120 Matl Ovhd Absorption 20 Helping people using Oracle Applications since 1990 29

Basic Accounting for Sub-elements – Resource & Resource Ovhd Sub-Elements Transaction Res. Absorption Resource Ovhd WIP Value Resource Absorption 100 50 100 (50% dept Rate) Dept. Overhead Absorption Dept. Ovhd Absorption 50 Helping people using Oracle Applications since 1990 30

Basic Accounting for Sub-elements – OSP and OSP Ovhd Sub-Elements Transaction PO Receipt Delivery to WIP OSP Dept. Ovhd Absorption Receiving Value Inventory A/P Accrual 100 100 WIP Value 120 Dept. Ovhd Absorption 20 Helping people using Oracle Applications since 1990 31

Underlying Table Structures p Cost Elements § CST_COST_ELEMENTS (you cannot access this table using a form) p Sub-Elements § § § BOM_RESOURCES CST_RESOURCE_COSTS CST_RESOURCE_OVERHEADS BOM_DEPARTMENTS CST_DEPARTMENTAL_OVERHEADS p Cost Allocation Methods / Basis Types § MFG_LOOKUPS - CST_BASIS_TYPES Helping people using Oracle Applications since 1990 32

Caveats p 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 Helping people using Oracle Applications since 1990 33

Cost Element vs. Sub-Element Reporting p Cost Elements § Valuation reporting available by cost element § Standard, Average, FIFO, LIFO costs held by cost element p 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) Helping people using Oracle Applications since 1990 34

Month-End Absorption Analysis p General Ledger – holds the actuals § Typically Departmental or Cost Center Expenses p 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 p Compare the Two § G/L Budget Vs. Actuals Report § Excel analysis Helping people using Oracle Applications since 1990 35

Causes for Over/Under Absorption? p Volume variances p Rate variances p Sometimes hard to distinguish Helping people using Oracle Applications since 1990 36

Does Oracle Landed Cost Management Help? p Useful for items where in bound freight or shipping costs such as tariff's are an significant part of item costs. p Used to update item costs with P. O. header costs. § Allocates these to the line level of the P. O. p Useful for comparing landed product costs between two different warehouse locations including shipping costs p Can be used to update the material cost element or to manage costs that would other wise be stored as material cost overheads Helping people using Oracle Applications since 1990 37

More About OLCM p Oracle Landed Cost Management is a new product p Not a lot of users yet p As transportation costs become a more important component of item costs this is an area that will continue to get more attention. Helping people using Oracle Applications since 1990 38

Summary – Cost Elements and Sub-Elements p Cost Elements § Five § Write accounting entries by valuation account § Standard inventory valuation reports by cost element p 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 Helping people using Oracle Applications since 1990 39

Summary – Cost Allocation Methods p p p Item Lot Total Value Resource Units Activity Helping people using Oracle Applications since 1990 40

Summary of Cost Allocation Methods / Basis Types Material Overhead Resource OSP Overhead Item Item Lot Lot Lot Total Value Std Costing: Amount per can have Can have resource labor rate OSP PPV unit Variances Amount per resource value Helping people using Oracle Applications since 1990 41

Conclusions p Better understanding for the cost structures in Oracle p Perhaps gained ideas on changes you may wish to make p 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 p Supply Chain Cost Rollup does not keep sub-element details Helping people using Oracle Applications since 1990 42

Where to get more information p Douglas Volz Consulting § Overview of Discrete Costing for Manufacturing http: //www. volzconsulting. com/resources. html p Oracle Cost Management SIG Minutes § April 2010: Release 11 i & 12: Major Tables & Relationships for Costing, Part I § May 2010: Release 11 i & 12: Major Tables & Relationships for Costing, Part II p Oracle Corporation § Metalink: Cost Management White Papers [ID 157326. 1] § Oracle Cost Management User Guide Helping people using Oracle Applications since 1990 43

Acknowledgements § You, the OAUG Cost Mgmt SIG, thanks for attending this session § Oracle Cost Development § Partners in crime at my clients over the years Helping people using Oracle Applications since 1990 44

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 p p Clients Served: Ø Form Factor Ø Stryker Endoscopy Ø Qualcomm Ø USG Ø Toshiba America Business Systems Ø Amkor Technology Ø JDS Uniphase Data Conversion – Data Cleansing Standard Costing Manufacturing Processes Ø Cost Management Ø Inventory Ø Warehouse Management Ø WIP Ø Bills of Material Helping people using Oracle Applications since 1990 45

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 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 p Multi-organization, Multi-currency ERP Implementations p Project Management and Senior Project Advisor p Core manufacturing processes 4 Cost Management 4 Inventory 4 Bills of Material 4 WIP p Systems Integration and Data Conversions p Sample of clients served: Ø Beckman Coulter (US) Ø Matsushita (UK, Mexico) Ø Logitech (US, Taiwan, P. R. C. ) Ø Celgene Corporation (US, Switzerland) Ø NTL (UK, now Virgin Media) Ø TCI International (US) Ø Onninen AS (Norway) Helping people using Oracle Applications since 1990 46

Thank You for Your Attendance and Participation Helping people using Oracle Applications since 1990 47