SCM Presentation 22 Costing

8/9/2019 SCM Presentation 22 Costing

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perform extensive cost simulations using unlimited cost types determine profit margin using expected product costs

update standard costs from any cost type revalue onhand inventories, intransit inventory, and discrete work inprocess jobs when updating costs

record variances against expected product costs measure your organizations performance based on predefined product

costs

If standard costs is shared across multiple organizations, all reports,inquiries, and processes use those costs and no need to enter duplicatecosts. The cost master organization can be a manufacturing organization

that uses Work in Process or Bills of Material.

Cost management uses product costs to value inventory and determineprofitability. Generally accepted methods for setting product costs are

Standard Costing Average Costing FIFO (First In First Out) Costing Periodic Average Costing Incremental LIFO (Last In First Out) Costing

Standard Costing :

Standard costing uses predefined costs that are fixed for a specified periodof time and it is used for performance measurement and control.

In standard costing component costs (material costs) can be defined andalso associated with indirect costs (material overhead )

Can Roll up assembly costs using BOM and routings, where as BOM is

used to determine the component cost of an assembly and routings areused to apply both internal (resource) and external (outside processing)conversion costs as well as indirect costs (overhead) to assemblies.

Differences between standard costs and actual costs are recorded as variances.

Value is maintained by cost elements (Ex. material, material overhead,resource, outside processing, and overhead).

Cost Management can be used for:Value inventory and work in process on a perpetual basis Value inventory and work in process on a perpetual basisChoose a perpetual costing method, including standard costing orChoose a perpetual costing method, including standard costing or

average costing, for each organizationaverage costing, for each organizationSimulate, analyze, and forecast product costsSimulate, analyze, and forecast product costsEasily update and manage item unit costsEasily update and manage item unit costsFlexibly define the inventory structure and cost controls that areFlexibly define the inventory structure and cost controls that are

important to your businessimportant to your businessView and report item costs, inventory and work in process values, View and report item costs, inventory and work in process values,

accounting entries, and gross marginsaccounting entries, and gross margins

Role of Cost Management :Role of Cost Management :Cost management can be used to implement operational control andCost management can be used to implement operational control and

analysis for an organization.analysis for an organization.Establish product costsEstablish product costsControl and value inventory Control and value inventory Formulate budgets and plansFormulate budgets and plansAnalyze profitability Analyze profitability

Generate management reportsGenerate management reportsForecast profitability Forecast profitability


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T ransactions in Standard Costing

Examples of Inventory transactions using standard costs:

Purchase Order Receipt to Receiving InspectionSales Order ShipmentsMiscellaneous TransactionsInter-Organization Transfers

Examples of WIP transactions using standard costs:

Component Issue and Return TransactionsMove TransactionsOutside Processing ChargesOverhead Charges

O racle Cost ManagementO racle Cost Management helps to manage and control business. Costhelps to manage and control business. CostManagement is used for:Management is used for:

Product costing Inventory valuationWIP valuationCost simulationMargin analysis


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A cost type is a set of costs uniquely identified by name. Two costtypes are predefined, Frozen (for standard costs) and Average.Y ou can define and update an unlimited number of additionalsimulation or unimplemented cost types. Each cost type has its ownset of cost controls.


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Cost ElementsProduct costs are the sum of their elemental costs. Cost elements aredefined as follows:

Material: This is the raw material/component cost at the lowest level of the BOM determined from the unit cost of the component item.

M aterial Overhead: The overhead cost of material which is attributed todirect material costs, is calculated as a % of the total cost, or as a fixedcharge per item, lot, or activity.

Resource: Resource is the direct costs, such as people (labor), machines,space, or miscellaneous charges, required to manufacture products.

Overhead: The overhead cost of resource and outside processing,calculated as % of the resource or outside processing cost, as a fixedamount per resource unit, or as a fixed charge per item.

Outside Processing: This is the cost of outside processing purchasedfrom a supplier. Outside processing may be a fixed charge per item or lotprocessed, a fixed amount per OSP resource unit.

Subelements Y ou can use subelements as smaller classifications of the cost elements.Each cost element must be associated with one or more subelements.Define subelements for each cost element and assign a rate or amountto each one.

Material subelements: Classify your material costs, such as plastic, steel,or aluminum. Define material subelements and assign them to item costs.Determine the basis type (allocation charge method) for the cost andassign an appropriate amount.

M aterial Overhead subelements: Material overhead subelements are assigned toitem costs also basis type should be determined for the cost. Define anappropriate rate or amount, such as purchasing, freight, duty, or materialhandling.

Resource subelements: After define resource subelements, for cost determinebasis type and define an appropriate rate or amount. Each resourcesubelement, can be set up to charge actual or standard costs, and may generate a rate variance when charged.

Overhead subelements: Overhead subelements to be assigned to item costs.Determine the basis type for the cost and define an appropriate rate oramount. Overhead subelements are applied in the routing and usually represent production overhead.

Outside Processing subelements: Define outside processing subelements.Determine the basis type for the cost and define an appropriate rate oramount. This subelement is associated with the outside processing costelement and represents service provided by suppliers. Each outsideprocessing resource you define is a subelement, may be set up to chargeactual or standard costs, and may generate a purchase price variance whencharged.


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Enter a material sub element name. Select the default activity which isdefaulted each time the sub element is used to define an item cost.

Activities are processes or procedures that consume costs and time. In

addition to the cost element and sub element, all costs are associated withan activity.

Select the default basis for the material sub element.. Basis is the methodused to determine how to charge a transaction or apply product costs.Item: Y ou charge a fixed amount per item.Lot: The item cost is calculated by dividing the order cost by the lot size.

Subelements for Cost element Material are defined here. Material subelements classify material costs. A material sub element has a defaultactivity and a default basis type assigned to it.

Subelements for Cost element Overhead and Material Overhead aredefined here. Y ou can use material overhead and overhead cost subelements to addindirect costs to item costs on either a percentage basis or as a fixedamount Y ou can base the overhead charge on the number of resource units orpercentage of resource value earned in the routing operation. Y ou canalso set up movebased overheads where the rate or amount is chargedfor each item moved in an operation. To do this, use the Item or Lot basis

types.


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To define or view item cost information, you must first select an item /cost type association. Item costs are always associated with a cost type.

In the Item Costs Details window, Indicate whether to use default costcontrols from the default cost type or those you define for the currentcost type. If you turn this on, you cannot modify the cost controls orcreate userentered costs for this item.

Turn Inventory Asset on to indicate that for this cost type the item is anasset and has a cost. Turn Inventory Asset off to indicate that for thiscost type the item is an inventory expense item and cannot have a cost.

Indicate whether costs are based on a rollup of the items BOM &

routing. This determines if the structure of the item is exploded during the cost rollup process. Turn this off if the assembly for which you donot want to change the cost. Generally, assemblies (make items) have thiscontrol turned on, and buy items have this turned off.


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Select the cost element & subelement. For material cost elements, thedefault is the material subelement you defined for the currentorganization.

Rate or Amt: Enter a percentage rate or a fixed amount, as appropriate forthe basis. Cost information for the current item and cost typecombination is displayed:

Basis: Basis types determine how costs are assigned to the item. These areassigned to subelements, which are then assigned to the item. Eachsubelement must have a basis type.Item wise or Total value wise in which the cost would be total cost of item multiplied by the Rate value.

Basis factor: is the amount or quantity the rate/amount is multiplied by tocalculate the unit cost of the subelement.

The manufacturing shrink factor (the multiplier used in the unit costcalculation), which uses the following equation: 1/ (1 manufacturing shrinkage)

Activity: Activity is an action or task you perform that uses a resource orincurs cost. Activities can be associated with all product costs. Activities ucan be defined and assigned to any subelements. Activites can also beassigned to costs and build the costs based on activities.


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Define costs for buy items or enter additional costs for assemblies withcosts generated from the cost rollup.If you share costs, you can only define costs in the cost masterorganization. When you define an item, the system creates a costrecord according to the costing method, the Frozen or Average costtype.

Item costs details include cost control information and basic costinformation.


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BO M and Cost Rollups :BOM and routings define the foundation for cost and all relatedmanufacturing costing functions.

Rolling Up Assembly Costs : A full cost rollup or a singlelevel cost rollup can be done based on therequirement.

Buy assembly : The total cost consists of the material and materialoverhead cost elements only Make assembly : The total cost consists of the material, resource,overhead, and outside processing cost elements

The primary bill for an assembly determines the standard material andmaterial overhead costs of that assembly.

The primary routing for the assembly determines the standard resource,

outside processing, and resource overhead costs of that assembly. Forphantom assemblies, the cost rollup includes the material costs and therouting costs in the cost of higher level assemblies.

Full cost rollup first performs a BOM explosion for assemblies. Therollup process builds the cost of assemblies, starting with the lowest level,and works up the structure to top level assemblies. This method gives youthe most current bill of material structure and component costs.

A singlelevel rollup only looks at the first level of the bill structure foreach assembly in the rollup, and rolls the costs for the items at this levelinto the parent. This method does not reflect structure or cost changesthat have occurred at a level below the first level of your assemblies.

The cost rollup includes the material costs and the routing costs of phantom assemblies in the cost of higher level assemblies as this levelcosts.

Use a single level rollup to assign new standard costs to the topassembly, but not to the lowerlevel assemblies. A single level rollupallows you to generate costs on new assemblies without changing costs onexisting subassemblies.


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The standard cost update procedure will help to define and roll uppending costs, simulate changes to standard costs for analysis, andthen update pending costs to the Frozen standard cost type.

To update standard costs define costs and rates, and follow thefollowing procedures:

Define a cost type for pending standard costs.Define pending costs for each of the cost elements: material

(inventory items, both components and assemblies), materialoverhead, resources, overhead, and outside processing. Y ou can also define pending rates for resources and overhead.

Roll up pending costs. This adds up pending costs for all costelements of an assembly and creates a new pending cost for theassembly.

Print and review preliminary adjustment reports to see potentialchanges to the frozen standard costs.

Update pending costs to frozen standard costs.Optionally, print new standard cost reports.


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Purge cost types and all costs within the cost type, purge only partof the cost information, such as make or buy items, resource andoutside processing costs, overhead rates and amounts, or resourceand overhead associations.Cannot purge frozen costs in standard costing or average costs inaverage costing.Purge permanently removes the selected cost type information from

the database. These records are not retrievable. Can safeguardselected cost types from inadvertent purging by disabling the Allow Updates check box when defining cost types.


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The costing organization that controls the costs in your currentorganization and the costing method are displayed.For standard costing, select a material sub-element that thisorganization uses as a default when you define item costs.


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Oracle Average CostingOracle Standard Costing

Unit cost of item is average value of all receipts of that item toinventory, on a per unit basis.

Unit cost of item is a Standard Value irrespective of value of a receiptof that item to inventory.

Each receipt of material to inventory updates the unit cost of the item

received.

Unit Cost of Item is not updated upon Receipt of Item.

Issues from inventory use the current average cost as the unit cost.Issues from inventory use the pre-determined standard cost as theunit cost.

For buy items, it is weighted average of the actual procurement costFor buy items, it is pre-determined, irrespective of actualprocurement cost

For make items, it is weighted average of the cost of all resources andmaterials consumed.

For make items, it is pre-determined, irrespective of cost of allresources and materials consumed.

Standard vs. Average Costing

Oracle Average Costing Oracle Standard Costing

Value inventory and transact at a moving average cost Value inventory and work in process balances at apredetermined cost

Maintains the average unit cost with each transactionMoving average cost is not maintained

Perform extensive cost simulations using unlimited cost types

Determine profit margin based on an "actual" cost methodDetermine profit margin based on projected costs

Measure the organization's performance against historical costsMeasure the organization's performance based on predefinedproduct costs

Perform extensive cost simulations using unlimited cost types


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D river Gear: Component 1 Manufactured

Pump Assembly

Driver Gear Driven GearGear Body

D riven Gear: Component 2 Manufactured

Gear B ody: Component 3 Purchased

Pump Assembly: Finished Goods Assembly Manufactured

Items, Driver Gear, Driven Gear, Gear Body, Pump Assly are defined.


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Defining of Resources, assiging the resource unit cost and assigning theOverhead to that resource.


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Defining the Deparments and assiging the resources to thosedepartments.

Also assiging the rates to the overheads defined in the Resources.


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Defining the Routing for the manufactured items and assiging resourceused to manufactured this item.

D river Gear: Component 1 ManufacturedRouting Resource D epartmentOp1 Turning Lathe 1 Turning Op2 Milling Milling M/c Milling


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D riven Gear: Component 2 ManufacturedRouting Resource D epartmentOp1 Turning Lathe 1 Turning Op2 Milling Milling M/c Milling


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Pump Assembly: Finished Goods Assembly ManufacturedRouting Resource D epartmentOp1 Assembly Assembly Assembly Op2 Testing Test Rig Testing


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Defining the Bill of Material for the Finished Goods Assembly

Pump Assembly: Finished Goods Assembly Manufactured

B ill of Material QtyDriver Gear 1Driven Gear 1Gear Body 1


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Defining Material cost and Material Overhead cost for the purchased ItemGear Body


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Item cost for manufactured item, Driver Gear. Here Material andMaterial Overhead costs are defined. The Resource cost and the overheadcost will be included during Cost Roll up, from the cost defined in theResource and Department respectively.


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Item cost for manufactured item, Driven Gear. Here Material andMaterial Overhead costs are defined. The Resource cost and the overheadcost will be included during Cost Roll up, from the cost defined in theResource and Department respectively.


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Item cost for manufactured item and Final Assembly, Pump Assly. Hereonly Material Overhead cost is defined. The Components cost, Resourcecost and the overhead cost will be included during Cost Roll up, from thecost defined in the Resource and Department respectively and cost rolledup for the Components.


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Running the Full cost Roll up concorent request

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Cost Roll up report

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Cost Roll up report


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SCM Presentation 22 Costing

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