Enhanced Cost Processing

For
Discrete Manufacturing
Tom Marik
April 2002
Enhanced Cost Processing For Discrete Manufacturing
The cost processor has several new features that will make cost accounting straightforward and more
accurate. These features help in all four perpetual costing methods; Standard Costing, Average
Costing, FIFO Costing, and LIFO Costing. This functionality is available in Oracle Applications
Release 11.i.7 also known as Family Pack G.

The changes in cost processing have three primary goals:

Make changing resource and overhead rates uncomplicated
Make the Standard Cost Update clear and faster
Improve the performance of Standard Costing

Business need: Regardless of the costing method, many businesses want to change their labor and
overhead rates at the beginning of an accounting period. Standard costing businesses often want to
change their standard costs at the beginning of the year or quarter. The same accountants that should
be effecting the changes for the new period are busy closing the previous period. All these tasks are
best performed at the stroke of midnight on New Years Eve, not a convenient time.

Enhanced Cost Processing For Discrete Manufacturing addresses this dilemma by stopping the cost
processing for the new accounting period while accountants are closing the previous period. After the
close, the new costing is set up and costing for the new period is started. Here is how it works.

The most obvious change is in all organizations, a new field was added to the Costing Information tab of
the Organization Parameters form. This form is in the Setup menu of the Inventory Function. There is a
new field: Cost Cutoff Date. If this field is left blank, the cost processor behaves as it did before. If a
date is entered, no cost processing will be performed for transactions on that date or later dates.

For example, January 1, 2003 is entered in this field for each inventory organization. It is anticipated
that new standard cost will be set for 2003 in standard cost organizations. Average, FIFO, and LIFO
organizations will use new labor, resource, and overhead rates.

In Standard Costing Organizations, during December new standards can be developed in a user defined
cost type such as “First Quarter 2003.” Work in this user defined cost type has no effect on December
transactions. It is desirable but not necessary to complete the new standards in December.

In the actual cost organizations (Average, FIFO, or LIFO), a new rates cost type such as “First Quarter
2003 Rates” is created and the old rates are copied. The new rates cost type can be adjusted based on
next year’s budget and forecast. Since this rates cost type is not yet in the Rates Cost Type field in the
Organization Parameter form, the new rates do not affect current transaction costing.

On January 2, transactions are continuing but only transactions back-dated to December are costed.
For each inventory organization, corrections to December transactions are made and they are soon
costed. Each organization’s December period can be closed normally. You can run all your inventory
value reports. However, no January transactions are costed.

For each Standard Cost organization, as you close December, you can next perform a Standard Cost
Update using your new user defined cost type such as “First Quarter 2003”. The Update will update
the cost of the costed items as of mid night, December 31, 2002. You can run your inventory value
reports again with the same quantities but the new costs. No January transactions will be costed. Now,
change the Cost Cutoff Date in the Costing Information tab of the Organization Parameters form. You
can put in February 1, 2003 or the date at the beginning of the next quarter or year, depending on how
often you change rates and standards. Soon, all the January transactions will be costed using the new
standard costs and rates.

For each actual cost organization, as you close December, you can change the Rates Cost Type to your
new user defined cost type such as “First Quarter 2003 Rates. This will have no immediate effect until
you change the Cost Cutoff Date in the Costing Information tab of the Organization Parameters form.
You can put in February 1, 2003 or the date at the beginning of the next quarter or year, depending on
how often you change the rates. Soon, all the January transactions will be costed using the new rates.

In the standard costing organizations, the inventory was immediately revalued at the new standard costs.
In the actual cost organizations, the inventory slowly changed in cost as transactions were costed with
the new rates. The change in the Cost Cutoff Date could take place at any time in January. Some
companies are ready by noon on January 2, and some companies may want a whole week. However,
no January transactions are costed until the Cost Cutoff Date is changed for that organization.

If an organization ships after the Cost Cutoff Date, the shipment is uncosted. If another organization
receives that shipment, the receipt will not be costed because the receiving transaction requires the
accounting distribution of the sending organization. In an actual cost organization, the first uncosted
transaction stops all costing for that organization. When the Cost Cutoff Date is changed, first the
shipment is costed and then the receipt is costed. If the receiving organization is an actual cost
organization, the subsequent transactions will also be costed.

The Standard Cost Update can now run in one organization while other organizations are costing
transactions. This change plus some tuning has sped up the Standard Cost Update by as much as ten
times. Standard Cost Workers are now launched on an organization basis, speeding ongoing cost
processing.

The Cost Cutoff Date can be at any time, however, accounting periods change at midnight and
inventory quantity is recorded at mid night. It is recommended that the first day of an accounting period
be the Cost Cutoff Date.

With the enhanced cost processing, you can close periods, change rates, and update standards with
precision and still not interrupt business operations.