WHAT IS MEANT BY DEFERRED

COGS IN R12
Posted by Raju ERP
The deferred COGS of goods account is the new feature introduced in Release 12. The basic fundamental
behind the enhancement is that the COGS is now directly matched to the Revenue. The same was not
possible till now.
Prior to this enhancement, the value of goods shipped from inventory were expensed to COGS upon ship
confirm, despite the fact that revenue may not yet have been earned on that shipment. With this
enhancement, the value of goods shipped from inventory will be put in a Deferred COGS account. As
percentages of Revenue are recognized, a matching percentage of the value of goods shipped from
inventory will be moved from the Deferred COGS account to the COGS account, thus synchronizing
the recognition of revenue and COGS in accordance with the recommendations of generally accepted
accounting principles.
The Matching Principle is a fundamental accounting directive that mandates that revenue and its
associated cost of goods sold must be recognized in the same accounting period. This enhancement will
automate the matching of Cost of Goods Sold (COGS) for a sales order line to the revenue that is billed
for that sales order line.
The deferral of COGS applies to sales orders of both non-configurable and configurable items (Pick-ToOrder and Assemble-To-Order). It applies to sales orders from the customer facing operating units in the
case of drop shipments when the new accounting flow introduced in 11.5.10 is used. And finally, it also
applies to RMAs that references a sales order whose COGS was deferred. Such RMAs will be accounted
using the original sales order cost in such a way that it will maintain the latest known COGS recognition
percentage.

To set the deferrred COGS account.

Inventory -- Setup -- Organization -- Parameters -- Other Accounts
A new account is added which is referred as the Deffered COGS accounts.
NEW ACCOUNTING :

Release 12 :
When a Sales order is shipped the following accounting takes place:
Inventory Valuation Account : Credit.
Deferred COGS account : Debit
Once the revenue is recognised, you would need to decide the percentage you wish to recognize the
Revenue. A COGS recognition transaction will be created to reflect a change in the revenue recognition
percentage for a sales order line.
The steps to generate such transactions are as follows:
1. Run the Collect Revenue Recognition Information program. This program will collect the change in
revenue recognition percentage based on AR events within the user specified date range.
2. Run the Generate COGS Recognition Events. This program will create the COGS recognition
transaction for each sales order line where there is a mismatch between the latest revenue recognition
percentage and the current COGS recognition percentage.
Note that users can choose how often they want to create the COGS Recognition Events.
Navigation to run the COGS recognition request :
- Cost > COGS Recognition > Collect Revenue Recognition Information
- Cost > COGS Recognition > Generate COGS Recognition Events
- Cost > View Transactions > Material Transactions

The distribution for the COGS Recognition transaction associated with the Sales Order transaction now
would be as follows:
Deffered COGS : Debit y revenue percentage
COGS : Credit (Actual revenue percentage )
Thus, essentially the recognized COGS balance is to move the value from Deferred COGS to COGS.
This particular COGS recognition transaction actually correspond to a revenue recognition percentage
change.

You can view the transactions as :

Navigation:
- Cost > View Transactions > Material Transactions > Distributions
A new COGS Revenue Matching Report shows the revenue and COGS information of sales order that fall
within the user specified date range by sales order line

SIMPLER TERMS ( Table level details ) :

Once the whole cycle is complete we will have 2 transactions lines in mtl_material_transactions.
1. Sales Order
2. COGS Recognition transaction
Accounting will be in mtl_transaction_accounts and the Subledger accounting tables as follows:
Transaction 1:
Inventory Valuation Account : Credit. (item_cost)
Deferred COGS account : Debit (item_cost)
Transaction 2:
Deffered COGS : Credit (Actual revenue percentage)
COGS : Debit (Actual revenue percentage )

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