MFG CST Advisor Webcast 2013 0423

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Average Costing Principles

Marcia Lucas, Principal Technical Support Engineer
Jose Ojeda, Senior Technical Support Engineer
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Average Costing Principles

Marcia Lucas, Principal Technical Support Engineer
Jose Ojeda, Senior Technical Support Engineer
Agenda
1.
How to Define a Cost?
2.
Why Using Cost Management.
3.
Why Valuation is Required?
4.
Accounting Purpose & Margin Calculation.
5.
Budget and Preparing the Future.
6.
How to do Costing?
7.
Main Costing Methods.
8.
Cost Organizations and Shared Costs.
9.
Cost Elements/Cost Sub-Elements.
10. Cost Types.

11. What is Average Cost Method?
12. Average Costing.
Agenda
13. How to Check an Organization with Average Cost Method.
14. The Test Case.
15. Reviewing TXN.SQL Script.
16. References.
17. Q&A.
How to Define Cost?

Costs are bad things endured or good things lost.
Cost Estimation:
Economists define cost in terms of the opportunities that are
sacrificed when a choice is made. Hence, under the economist's
definition, costs are simply benefits lost (Subjective)
Cost Measurement:
Accountants define cost in terms of resources consumed.
(Objective)
Why using Cost Management?
Many reasons exist to do Cost Management, and each enterprise has

more than one, when not all:
To value inventories and work in progress.

For accounting purpose.
For margin calculation.
To prepare budgets.
To measure variance.
Cost Management aims

to give companies
control on their activities
and tailor their strategy
Why valuation is required?

?? ??
For Legal Reasons (inventories valuation is part of General Ledgers a

company must provide)
But also, for many Operational Decisions regarding the stock.
10
Accounting Purpose & Margin

Calculation
For Purchased Items:

For operational control, Account Payables need to match
purchasing invoices with stock valuation.
For Sold Items:

Gross Margin results from the sales minus the inventory value sold
(Cost Of Goods Sold).
Stocks of products represent assets for the enterprise. Such fixed
asset turnover impact company profitability.
11
Budget and Preparing the Future

Cost Management is also used to plan future activities as
determining:
Sale Price and Planned Margin.
Asset Investment.
For such objectives, companies need to elaborate for each
product how much it will cost. Each product may have several
costs. For example, but not limited to:
Outsourced Cost (Production Cost where production is
outsourced).
Engineering Cost (as calculated by Engineering
Department).
Next Year Cost (could be based on Current Cost *
Projected Inflation Factor).
12
13
How to do Costing?
Several methods exist to do costing, the method used will depend on

the following:
Objectives in doing costing differ.
Valuation and cost elaboration are different topics, even if a simple
relation exists between both :
At a given moment: Cost = Valuation / Quantity
A costing method always is compromising between:
Information comprehensiveness (all invoices taken in account,
all encumbrances, way to determine them, etc.)
Time (on which period analysis/calculation is done)
Complexity in calculation
There are different Legal Requirements to do such calculations.
14
Main Costing Methods

A Costing Method is used to determine the cost to be used for
valuation purpose.
Oracle ERP the costing methods are :
Standard Costing
Average Costing
Perpetual
FIFO Costing
LIFO Costing
Periodic Average Costing (PAC)
Incremental LIFO (iLIFO)
Actual Costing
Periodic
Anticipated cost is determined based on raw material costs, routings

and bill of material. Overheads also complement the anticipated cost.
Actual Costs are the actual cost that was used at the moment of
generating the accounting.
Each costing method will generate different values between the
anticipated cost and the actual costs.
Comparison between actual cost and anticipated cost is used to
measure variance
15
Cost Organizations and Shared Costs

You can share costs across Standard Cost Organizations as long as
the child Cost Organizations have not enabled WIP. You cannot
share costs across Average Costing Organizations.
The Organization that holds the costs is called the Cost Master
Organization.
Costs are maintained by the Cost Master Organization and shared by
the child Cost Organizations. All reports, inquiries, and processes use
the Shared Costs. You cannot enter costs into the child Cost
Organizations.
The Cost Master Organization can be a Manufacturing Organization
using Work in Process.
The Average and Standard Costing Organizations can share the same
Item Master Organization. However, the Average Cost Organization
does not share costs.
Even if each Organization holds its own costs, they can share the
same common item master.
16
Cost Elements
In order to provide detail information from Direct and Indirect
Cost, the Cost of an Item can be broken down into the Cost
Elements which will hold the information for each item and
provide the visibility:
Product costs are the sum of their Elemental Costs. Cost
Elements are defined as follows:
Material.
Material Overhead (MOH).
Resource.
Overhead.
Outside Processing (OSP).
17
Cost Sub-Elements
You can use sub-elements as smaller classifications of the cost
elements. Each cost element must be associated with one or
more sub-elements.
The default sub-element for some of the cost elements can be
defaulted.
When you define sub-elements for each cost element you
should assign a rate or amount to each one. You can define as
many sub-elements as needed.
Basis types determine how costs are assigned to the item.
Basis types are assigned to sub-elements, which are then
assigned to the item. Each sub-element must have a basis
type. Examples: one hour of outside processing per basis item,
two quarts of material per basis lot.
18
Cost Types
A Cost Type is a set of costs uniquely identified by name.
Some Cost Types are predefined by the system:
Frozen (for Standard Costs)
Average.
FIFO.
LIFO.
You can define and update an unlimited number of additional
simulation or unimplemented cost types.
Each Cost Type has its own set of cost controls.
19
What is Average Cost Method?

By definition, Average Costing is a Perpetual Average Cost for a single Inventory
Organization. Under Average Cost systems, the Unit Cost of an Item is the Average
Value of all Receipts of that Item to Inventory, on a per unit basis. Each Receipt of
Material to Inventory, updates the Unit Cost of the Item Received. Issues from
Inventory use the current Average Cost as the Unit Cost.
Using Average Costing Method, customer can perpetually value Inventory at an
Average Cost, weighted by quantity (Inventory Value = Average Unit Cost *
Quantity).
For Purchasing Transactions, Average Cost is the weighted Average of the Actual
procurement cost of an Item.
For Manufacturing Transactions, Average Cost is the weighted Average of the
cost of all resources and material consumed.
20
Average Costing
21
Average Costing
In Average Costing there are two Cost Types:
Average: This cost type holds the current average unit cost of
items on hand, and is used to value transactions such as issues
and transfers out.
Average Rates : This user-defined cost type holds resource to
overhead associations and current overhead rates, and any other
userdefined sub-element rates to be used in cost rollups and to
cost applicable transactions. You must define an Average Rates
cost type to hold sub-element rates/amounts.
22
Average Costing
In Average Costing, Item Cost must be defined for an Item before you transact
it, even if the Item Cost is zero, Cost is defined at the Organization level. Shared
Costing is only enabled between Standard Costing Organizations. For Average
Cost we must ensure the cost is enabled and the Item has a defined Cost.
Average Costing calculates inventory valuation based on weighted (by
quantities) values
Receipt Entry Value is added to current quantity at current average cost
and result is divided by new quantity to determine new average cost.
Calculation is done for each receipt, assembly completion or any transaction
that carries its own cost, these transactions will trigger re-averaged.
For a period of time, all receipts are summed, and calculation is done at
end of period for remaining quantity in stock (periodic average costing).
Average Costing is well appropriated for accounting purpose. Average costing is
usually used in distribution industries when manufacturing is not used. Also used
in production when tracking absolute variance is mandatory.
Balance sheets reflects as accurate as possible valuation.
23
Average Costing
No need to manage Purchase Variances.
This same Average Cost is used to value transactions. You can
reconcile inventory and work in process balances to your accounting
entries.
Note: Under average costing, you cannot share costs; average
costs are maintained separately in each organization.
Average Costing enables you to:
Approximate actual Material Costs.
Value Inventory and Transact at Average Cost.
Maintain Average Costs.
Reconcile Inventory Balances with General Ledger.
Analyze Profit Margins using an Actual" Cost Method.
24
Average Costing
Charge Resources to Work in Process at Actual Cost

You can charge work in process resources at an actual rate. You can
charge the same resource at different rates over time. You can also
charge outside processing costs to a job at the purchase order unit
cost.
Complete Assemblies at an Average Cost
When you complete assemblies into inventory, costs are relieved
from work in process, and inventory is charged using a cost that is
calculated based upon a combination of several options.
Inventory Valued at Average Cost
Under average costing, all asset purchased items in inventory are
valued based on their purchase order cost. This results in item unit
costs that reflect the weighted average of the purchase order unit
costs for all quantity on-hand. There is only one average unit cost for
each item in an organization. The same item in multiple
subinventories within the same organization has the same unit cost.
25
Average Costing
Perpetual Recalculation of Unit Cost.

For the transactions listed below, the transaction unit cost may be
different from the current unit cost for an item. In such cases, after
the transaction has been processed, the item's unit average cost is
automatically recalculated. As a result, at any time, inventory is
valued at a current, up-to-date average unit cost.
Purchase order 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.
26
Average Costing
Cost Element Visibility
For tracking and analysis purposes, you can see cost details by cost
element in two ways:
For unit costs, as a breakout of the total unit cost into each of the
five cost elements. From this detail, you can determine the value
of labor, overhead, and material components in inventory.
For work in process, as all job charges (including previous level
subassemblies) and relief in cost element detail.
27
Average Costing
Average Cost Update Process
The Average Cost Update feature is intended to be used for correcting
a transaction costing Error affecting Items in subinventory. If the cost
Error is in WIP, the impacted quantities will need to be returned to
subinventory, corrected there, then reissued to WIP after the update
has been completed.
Average Cost Updates
(N) Cost > Item Costs > Average Cost Update > Update Costs
The Update Average Cost form is displayed.
When you update average costs, items in all asset subinventories in
your organization and inventory, in in-transit that is owned by your
organization, are updated (revalued) by changing the unit cost to the
new specified cost.
28
Average Costing
Average Cost Update Process
You can change costs by cost element and can choose one, several,
or all cost elements at the same time. The offset to the change in
inventory value resulting from a cost update, is posted to the average
cost adjustment account(s). Items in work in process are not revalued
by an average cost update, nor are expense items or any item in an
expense sub-inventory. See: Updating Average Costs at the User
Guide.
29
Average Costing
Material Overhead Application
You can add costs (receiving, stocking, material movement, and
handling) using material overhead. You can define as many material
overheads as required and have that additional cost be included in the
average unit cost.
Material overheads are associated to items on an item-by-item basis.
As under standard costing, you can define default material overheads
to apply to selected categories of items or all items in your
organization.
Specifically, you can charge material overhead when you perform any
of the following three transactions:
Deliver Purchased items to sub-inventory
Complete Assemblies from WIP to sub-inventory
Receive items being transferred from another organization

and deliver to subinventory.
Material overhead is applied at the rate or amount in effect at the time
of the transaction. On-hand balances are not revalued when the rate
or amount of a material overhead is redefined.
30
Average Costing
Transfers between Organizations

You can transfer items in inventory to a sub-inventory in a
different organization. This is done using a direct transfer or
through an in-transit transfer, just as in standard or inventory
average costing. Because item unit costs are held elementally,
like standard costs, elemental detail is available for items being
transferred whether they are in sub-inventory or in in-transit.
When such an item is received into an average costing
organization and delivered to the destination sub-inventory, all of
its cost elements from the shipping organization, plus freight, plus
transfer charges, if any, are combined into the material cost
element in the receiving organization.
Attention: All cost elements are combined into the material cost element so the receiving
organization does not have another organization's overhead (over which they have no control and
for which they have no absorption) combined with their own. You can earn material overhead on
the delivery as stated above. That amount goes into the material overhead cost element.
Attention: If either freight or transfer charges are expressed as a percent of the transaction value,
this amount is calculated based on the average cost at the time the change-of-ownership
transaction is costed and not when the transaction actually occurs.
31
How to check an Organization with

Average Cost Method
Here we have a couple of options
Via Application, customer Defines and updates Organizations
parameters as follow:
Connect to Inventory Responsibility.
Go to Organization Parameters Form>Costing Information.
32
How to check an Organization with

Average Cost Method
Via Script, from Doc ID 378348.1:
This is a Data Collection Script for Cost Management, from this
Document there is an specific script CstCheck.sql. This is a script
that shows the Cost Setup by Organization from here we can
check the Organization Structure as we see:
Show File CSTDIAGM3.txt
33
Test Case
Test Instance: celalnx40.us.oracle.com
Organization: M3 Dallas Manufacturing.
Create New Item: TestItem
Complete a Misc. Receipt Transaction (Qty = 10, Unit Cost = 10)
34
Test Case
Review the Item Cost, Unit Cost = 10.00000
Check Item Cost Details Form (Extended Value = Qty * Cost =>10 * 10 = 100)
35
Test Case
Complete a second Misc. Receipt Transaction (Qty = 10, Unit Cost = 5)
From Item Cost the Item Cost summary will show Unit Cost = 10+5=15/2=7.5
36
Test Case
Check Item Cost Details Form (Extended Value = Qty * Cost =>20 * 7.50 =
150)
37
Test Case
Complete an Average Cost Update (New Average Cost = 7.00000)
38
Test Case
Check Item Cost Details Form (Extended Value = Qty * Cost =>20 * 7.00 =
140)
39
Reviewing Txn.SQL Script

Description: Collector script for a specific item (inventory_Item_id) in
a specific organization (organization_id). The output will be spooled
into a file named diag.lst. Via Script, from Doc ID 378348.1:
Show File DIAG.LST
Output:
Get org parameters; Organization parameters for inputted

oraganization_id
Inter Organization Parameters; Organization Inter-org parameters from
MMT data; Material transactions
CQL data; Average cost information by cost layer
CLCD data; Detailed cost information by element and level
MCTCD data; Transaction cost by element and level
MCACD data; Transaction actual cost, prior cost, and new cost
MTA data; Accounting information for each transaction
CIC Data; Item cost control information by cost type
CICD Data; Detailed item cost information by cost type
MOQ Data; On hand quantity by Subinventory and Cost Group
40
References
Relevant Notes:
Inventory Period Close Issues For Average Costing Organization
(Doc ID 785146.1).
What Report Provides Average Cost History For Items (Doc ID
200278.1).
How To Determine the Average Cost Based On The Transaction
History (Doc ID 309515.1)
Inventory Period Close Issues For Average Costing Organization
(Doc ID 785146.1)
How To Determine the Average Cost Based On The Transaction
History (Doc ID 309515.1)
41
References
User Guides:
Oracle Cost Management
Users Guide
Release 11i
Part No. A7508804 (Chapter 5 Average Costing)
Oracle Cost Management
User's Guide
Release 12.1
Part No. E13635-02(Chapter 5 Average Costing)
More Information about Average Cost. (From the link, go to Index
and find the Average Cost Information)
http://docs.oracle.com/cd/A60725_05/html/comnls/us/cst/gls.htm
42
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Copyright 2013, Oracle and/or its affiliates. All rights reserved.

Future Advisor Webcasts

Upcoming live webcasts and recent recordings..

VCP Webcast Calendar/Archive

What Cost Management advisor webcast topics do YOU

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

<Insert Picture Here>

Average Costing Principles

Safe Harbor Statement

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

<Insert Picture Here>

Average Costing Principles

How to Define a Cost?

Why Using Cost Management.

Why Valuation is Required?

Accounting Purpose & Margin Calculation.

Budget and Preparing the Future.

Main Costing Methods.

Cost Organizations and Shared Costs.

Cost Elements/Cost Sub-Elements.

10. Cost Types.

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

How to Define Cost?

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

Why using Cost Management?

Many reasons exist to do Cost Management, and each enterprise has

To value inventories and work in progress.

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

Cost Management aims

Why valuation is required?

For Legal Reasons (inventories valuation is part of General Ledgers a

But also, for many Operational Decisions regarding the stock.

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

Accounting Purpose & Margin

For Purchased Items:

For Sold Items:

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

Budget and Preparing the Future

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

Several methods exist to do costing, the method used will depend on

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

Main Costing Methods

Anticipated cost is determined based on raw material costs, routings

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

Cost Organizations and Shared Costs

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

What is Average Cost Method?

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

Approximate actual Material Costs.

Value Inventory and Transact at Average Cost.

Maintain Average Costs.

Reconcile Inventory Balances with General Ledger.

Analyze Profit Margins using an Actual" Cost Method.

Copyright 2013, Oracle and/or its affiliates. All rights reserved.

Charge Resources to Work in Process at Actual Cost