Different Ways to Use Cost Elements, Sub-Elements

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Different Ways to Use Cost Elements, Sub-Elements
Cost Allocation MethodsOAUG Cost Mgmt SIG
MeetingApril 19, 2011
Douglas Volz Douglas Volz Consulting doug_at_volzcons
ulting.com
Sharon WidmerIndependent Consultant s_widmer_at_c
omcast.net
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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

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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

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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_at_volzconsulting.com
• Jerry Devore jerry.devore_at_gmail.com
• Sharon Widmer s_widmer_at_comcast.net

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Different Ways to Use Cost Elements, Sub-Elements
Cost Allocation Methods
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Structural Basics

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

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Ledgers, Legal Entities, OUs, Orgs
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Costing Concepts Quick Run-Through

• Costing Methods
• Average Costing
• Standard Costing
• Periodic Costing
• FIFO Costing
• LIFO Costing

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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

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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

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Item Types How Might You Allocate Costs?

• Oracle Item Types
• ATO Option Class
• ATO Model
• FG Finished Good
• Inventory Type
• Kit
• Model
• Option Class
• Outside Operation
• Outside Processing Item
• Purchased item

• Oracle Item Types
• Product Family
• Phantom item
• Planning
• PTO Option Class
• PTO model
• Reference item
• Subassembly
• Supply item

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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

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Cost Elements

• Five, Countem 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

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Sub-Elements
Material

• What Types
• How Many?
• Limitations?
• What For?

Material Overhead
Resources
Outside Processing
Overhead
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Cost Elements - Material
Cost Element
Sub-Element

• Direct cost of procurement
• Or MFG or buy costs from previous levels
• Usefulness depends on costing method
• Can be negative or positive

• Standard cost examples
• Types of metals
• Composite
• Steel
• Aluminum
• Type of ingredient
• API
• Reagent
• Intercompany profit
• Frequently just Material

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Cost Elements Material Overhead
Cost Element
Sub-Element

• Indirect procurement costs
• Purchasing department
• Incoming inspection QA
• Vendor site QA
• Receipt and warehouse cost
• Receivers
• Warehouse expense
• Supervisory expense
• Earned at
• PO receipt
• Inter-org transfer
• WIP assembly completion

• Broad use across costing methods
• Material overhead
• Freight
• Duty
• Customs
• Supplier discounts
• (negative material overheads)
• Warehouse
• Etc

Only partial support for negative material
overheads
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Cost Elements Resource
Cost Element
Sub-Element

• Direct cost of production
• Any factor of production
• Labor
• Machine time
• Work center
• Square feet
• Anything considered a resource
• Earned at
• During operation move
• Manual charges to an operation

• 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

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Cost Elements Outside Processing
Cost Element
Sub-Element

• Direct cost of production
• Sub-contract or service from a Supplier
• Typically set up an OSP item and an OSP resource
• Receive OSP item into Receiving
• Deliver the resource into WIP
• Both a PO receipt and an OSP resource transaction
• Earned at
• PO Receipt
• Earn at standard or at PO Price

• 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

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Cost Elements Overhead (Production Ovhd)
Cost Element
Sub-Element

• 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
• Direct cost of production
• Earned at
• Operation Move
• Resource and OSP charging

• 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

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Summary of Cost Allocation Methods / Basis Types
Material Material Overhead Resource OSP Overhead
Item Item Item Item Item
Lot Lot Lot Lot Lot
Total Value Std Costing can have labor rate Variances Std Costing Can have OSP PPV Amount per resource unit
Amount per resource value
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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
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Item Costing Setup Overview
Sub-Element Defaults
OrgSetup
Sub-Elements
Cost Method
CostTypes
Item Costing
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Sub-Elements - Material
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Sub-Elements Material Overhead
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Sub-Elements - Resource
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Sub-Elements Outside Processing
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Sub-Elements Production Overhead
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Sub-Element Item Cost Defaults

• Material Overhead Defaults

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Basic Accounting for Sub-elements Matl Matl
Ovhd Sub-Elements

• Receiving Value Inventory A/P
  Accrual
• 100
  100
• 100
• 
  
• Stock Value Matl Ovhd
  Absorption
• 120
• 
  20

Transaction PO Receipt Delivery to Stock
Delivery to Stock Matl Ovhd Absorption
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Basic Accounting for Sub-elements Resource
Resource Ovhd Sub-Elements

• WIP Value Resource
  Absorption
• 100
  100
• 50
• 
  
• Dept. Ovhd Absorption
• 50

Transaction Res. Absorption Resource Ovhd(50
dept Rate) Dept. Overhead Absorption
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Basic Accounting for Sub-elements OSP and OSP
Ovhd Sub-Elements

• Receiving Value Inventory A/P
  Accrual
• 100
  100
• 100
• 
  
• WIP Value Dept. Ovhd
  Absorption
• 120
• 
  20

Transaction PO Receipt Delivery to WIP
Delivery to WIP OSP Dept. Ovhd Absorption
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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

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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

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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_DETAI
  LS)

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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

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Causes for Over/Under Absorption?

• Volume variances
• Rate variances
• Sometimes hard to distinguish

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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

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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.

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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

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Summary Cost Allocation Methods

• Item
• Lot
• Total Value
• Resource Value
• Resource Units
• Activity

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Summary of Cost Allocation Methods / Basis Types
Material Material Overhead Resource OSP Overhead
Item Item Item Item Item
Lot Lot Lot Lot Lot
Total Value Std Costing can have labor rate Variances Std Costing Can have OSP PPV Amount per resource unit
Amount per resource value
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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

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Where to get more information

• Douglas Volz Consulting
• Overview of Discrete Costing for
  Manufacturinghttp//www.volzconsulting.com/resour
  ces.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

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Acknowledgements

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

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Sharon Widmer (s_widmer_at_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
• Standard Costing
• Manufacturing Processes
• Cost Management
• Inventory
• Warehouse Management
• WIP
• Bills of Material

• Clients Served
• Form Factor
• Stryker Endoscopy
• Qualcomm
• USG
• Toshiba America Business Systems
• Amkor Technology
• JDS Uniphase

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Douglas Volz (doug_at_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
  Implementations
• Project Management and Senior Project Advisor
• Core manufacturing processes
• Cost Management
• Inventory
• Bills of Material
• WIP
• Systems Integration and Data Conversions

• Sample of clients served
• Beckman Coulter (US)
• Matsushita (UK, Mexico)
• Logitech (US, Taiwan, P.R.C.)
• Celgene Corporation (US, Switzerland)
• NTL (UK, now Virgin Media)
• TCI International (US)
• Onninen AS (Norway)

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• Thank You for Your Attendance and Participation