Overview of Discrete Costing for Manufacturing OAUG MFG Discrete SIG

Overview of Discrete Costing for Manufacturing OAUG MFG Discrete SIG Meeting November 10, 2010 Douglas Volz Douglas Volz Consulting [email protected]

Agenda Inventory Structure High Level Review of Oracle Cost System Capabilities Costing Methods Oracle Cost Management Structure Discrete MFG and Costing Setting Standard Costs Setting Average, FIFO, LIFO Costs Month-End Accounting Close Helping people using Oracle Applications since 1990 Slide 2

Agenda (Continued) Release 12 Cost Improvements Flexible Account Number Assignment Little Known Cost Features Helping people using Oracle Applications since 1990 Slide 3

Inventory Structure Global Organization (Item Master) Global Organization (Item Master) Inventory Organization Inventory Organization Subinventory HDQTRS Location Locators FG Subinventory STORES Subinventory Locators Locators MRB Subinventory Helping people using Oracle Applications since 1990 WIP Subinventory Slide 4

Complex Financial Entities Corporate Consolidated Ledger Corporate Consolidated Ledger (USD) Secondary Ledger European LSP’s SLs LSP’s Switzerland (CHE) Korea (KRW) Asia-Pac LEs Swiss PL (USD) European PL (USD) Legal Entity Korea LE Asia-Pac LEs Swiss LE Other European LEs Operating Unit Korea OU Asia-Pac OUs Switzerland OU Other European OUs US OU Asia-Pac Dist. Centers Swiss Dist. Center Europe LSP Orgs US LSP Orgs Switzerland Org Europe Dist. Centers US Dist. Centers Primary Ledger Inventory Orgs Item Master (ZZZ) ORG Korea Helping people using Oracle Applications since 1990 USA PL (USD) CORP LE Other LEs Slide 5

Costing Concepts Costing Methods Average Costing Standard Costing Periodic Costing FIFO Costing LIFO Costing Helping people using Oracle Applications since 1990 Slide 6

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 All issues occur at the existing average costs Assembly costs come from the cost of your assemblies built in WIP You may have indirect costs (material overheads, etc.) as well Helping people using Oracle Applications since 1990 Slide 7

Standard Costing The primary objective of standard costing is to provide a performance measurement system 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, depending on how quickly your costs change All manufacturing and distribution activities are measured against the expected costs Typical variances include: Purchase Price Variance, Invoice Price Variance Manufacturing Variances (material usage, resource efficiency, etc.) Helping people using Oracle Applications since 1990 Slide 8

Other Costing Methods 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 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 Helping people using Oracle Applications since 1990 Slide 9

Cost Structure Global Organization (Item Master) Inventory Cost Organization Sub-elements Matl Cost Element Matl 1 Matl 2 Matl O/H Cost Element Matl O/H 1 Matl O/H 2 Resource Cost Element Res 1 Res 2 Overhead Cost Element O/H 1 O/H 2 Helping people using Oracle Applications since 1990 Outside Processing Cost Element OSP 1 OSP 2 Slide 10

Organizational Costing Costing is by Plant or Warehouse (called an inventory organization) Each inventory organization has its own item material, labor, outside processing, and overhead costs Each inventory organization may have multiple cost versions, called Cost Types You can have any number of cost types that are not active (unimplemented costs) Each inventory organization can have its own costing method There is only one “Active” cost type that is used to record your Subledger Transactions Standard costing uses the Frozen cost type, and average costing uses the Average cost type Within an inventory organization, all items have the same costing method, Average, or Standard or FIFO or LIFO or Periodic Helping people using Oracle Applications since 1990 Slide 11

Cost Elements You have five available cost elements for each cost type Material (supplier purchase costs) Material Overhead (freight in, material handling, etc.) Resource (labor, machines, other factors of production) Outside Processing (subcontracting or outsourcing) Overhead (Resource and Outside Processing Overhead) Only use the cost elements you need But you can have an unlimited number of sub-elements Material (metal, plastic, etc.) Material overhead (inter-co profit, in-bound freight, etc.) Resources (labor, machine groups, etc.) Outside Processing (subcontract vendor service1, service2, etc.) Production Overheads (Factory Burdens, etc.) Helping people using Oracle Applications since 1990 Slide 12

Oracle Cost Management Interaction PUR provides PO's and Receipts BOM's/Routings for Roll Up ACCOUNTS PAYABLE PURCHASING Invoices/ INV Receipt Payments Trans & Exp Accr Asset Additions Delivery Trans FIXED ASSETS Asset Cost Accum Depr Depr Exp GENERAL LEDGER Inventory/ WIP Trans Values Trans Values INV Stds Adj COST MANAGEMENT Costs ENGINEERING Items Values Trans BOM's INVENTORY ENG Items planned in MRP WIP Consumption & WIP Completions Invoices/ Cash Receipt Trans CASH MANAGEMENT (Bank Recon) WORK IN PROCESS Shipment Transactions Matl Requirements BILL OF MATERIAL ACCOUNTS RECEIVABLE Misc Trans for Warranty Repair Parts Invoice Info ORDER ENTRY WIP Supply to MRP MRP Release to WIP Items from BOM's MRP S/O Requirements Repair RMA's SERVICE Helping people using Oracle Applications since 1990 Slide 13

Inventory Costing Costs Into Inventory/Stores Purchase costs into Inventory: Material, Material Overhead, etc. costs For Standard Costing: Purchase Price Variances More Costing for Inventory Movement Misc. Account Receipt / Issue Physical Inventory, Cycle Counts Consignment (WIP/OSP, purchase consignment) Subinventory and location transfers Customer shipments Internal orders Project shipments and transfers (PJM) Logical Transactions (extended supply chain network) Supports many intercompany scenarios Internal orders Internal shipping and billing Helping people using Oracle Applications since 1990 Slide 14

Discrete MFG and Costing All of the Costing Methods support WIP Costing Timing varies by how your charge to WIP Backflush, Assembly Pull, etc. Push Costs into WIP: Material Issues Material Overhead Earning Resources, Outside Processing and Overheads Costs out of WIP Scrap Assembly Completion Job Close Variances Only for Standard Costing Helping people using Oracle Applications since 1990 Slide 15

Manufacturing Variance Summary Costs-Incurred Costs-Relieved Variances Previous-level costs @ actual usage - Previous-level costs @ standard Material usage variance Resource - Resource Resource efficiency Outside processing - Outside processing Outside processing efficiency Overhead - Overhead Overhead efficiency Sources of: Components issued Resources earned OSP earned Overheads earned WIP completions @ standard rolled up costs Helping people using Oracle Applications since 1990 Slide 16

Cost Reports and Inquiries Material Distribution Detail/Summary Reports WIP Account Detail/Summary Reports Discrete Job Value Expense Job Value Report WIP Value Report WIP Value Inquiries Helping people using Oracle Applications since 1990 Slide 17

Setting Standard Costs Cost Mass Edits Item Cost Copies Cost Rollups (also across the Supply Chain) Standard Cost Updates Bills of Material Cost Inquiries and Reports Pending and Standard Cost Adjustment Reports Helping people using Oracle Applications since 1990 Slide 18

Setting Average, FIFO, LIFO Costs Simulation Costing with Cost Rollups and Mass Edits Transaction-based updates of Average, FIFO, LIFO costs Manual cost updates PO retroactive price adjustments And if you are clever, using open interfaces for custom updates Helping people using Oracle Applications since 1990 Slide 19

Month-End Accounting Close Close by Inventory Organization Month-End Inventory, Receiving, WIP Value Reports Release 12, close in Inventory Transfer to G/L using Subledger Accounting (Create Accounting) Closing Inventory closes Receiving and WIP Purchasing has its own close (and also closes off Receiving) Helping people using Oracle Applications since 1990 Slide 20

Month-End Inventory Value Reports Inventory Value Report Intransit Value Report Subinventory Account Value Report (disabled in Release 12) All Inventories Value Report Receiving Value Report Receiving Value by Destination Report (disabled in Release 12) WIP Value Report Period Close Value Summary Report Period Close Reconciliation Report (11.5.10 and 12) Helping people using Oracle Applications since 1990 Slide 21

R12 Improvements Period Close Diagnostics Forms Drilldown Using the same Inventory Accounting Periods form you can drilldown to associated forms to view the problem transactions New workflow to notify of failing transactions Period Close Pending Transactions Report Report for transactions holding up the inventory accounting period Helping people using Oracle Applications since 1990 Slide 22

Reconciliation Improvements in R12 Inventory Value Reports have an “as of date” Inventory Value Report Receiving Value Report Intransit Value Report All Inventories Value Report Helping people using Oracle Applications since 1990 Slide 23

Flexible Account Number Assignment Release 12 Subledger Accounts allows you to extend the standard oracle setups (all costing methods except periodic) Subledger Accounting rules govern how the final accounting entries are created and sent to the G/L Subledger Accounting Offers Major Improvements Subledger Accounting Comes with Default Rules Helping people using Oracle Applications since 1990 Slide 24

SLA for Product Line Accounting, Variance Recognition Accounting Configurations Subledger Journal Entries Transactions GL Journal Entries and Balances Accounting Program Subledger Balances Accounting Events Journal Entry Setup Cost Management SLA Helping people using Oracle Applications since 1990 Slide 25

Basic Table Structure for SLA Enter Transaction(s) Accounting Processor Transaction Accounting Tables Receiving Material WIP Create Accounting Module Specific Transaction Accounting Tables One Common Accounting Subledger Table SLA Accounting Tables G/L Tables XLA EVENTS GL LEDGERS XLA AE HEADERS GL INTERFACE XLA AE LINES XLA DISTRIBUTION LINKS Helping people using Oracle Applications since 1990 GL JE BATCHES GL JE HEADERS GL JE LINES Slide 26

More Release 12: COGS Recognition In R12 the customer shipment entries go to deferred COGS Automates the matching of Cost of Goods Sold (COGS) for a sales order line to the revenue that is billed for that sales order line. Inventory 1. Customer Shipment 2. COGS Recognition 10 Deferred COGS “True” COGS 10 10 Helping people using Oracle Applications since 1990 10 Slide 27

Related R12 BOM Features Fixed Component Usage Support: Support for lot-based materials that have a fixed usage regardless of the job size for discrete WIP jobs, OSFM lot-based jobs and Flow Manufacturing Component Yield Support: Flexibility to control the value of component yield factors at WIP job level. The transaction logic now considers pre-yield BOM quantity per assembly rather than the quantity inflated by shrinkage. Helping people using Oracle Applications since 1990 Slide 28

Standard Features You May Not Be Using Currency setup Period open and close by organization hierarchy Material overhead absorption rules Transaction Value Historical Summary Report Period close snapshots Helping people using Oracle Applications since 1990 Slide 29

Standard Features: Currency Setup You can change your item cost decimal precision at any time Helping people using Oracle Applications since 1990 Slide 30

Standard Features: Period Open/Close by Org Hierarchy You can open and close multiple inventory periods by organization hierarchy Define your organization hierarchy using an Human Resources, Purchasing or Inventory responsibility Using the Inventory Organization Parameters, Costing tab, make sure your “Transfer to GL” settings are all the same for all orgs in the same organization hierarchy Helping people using Oracle Applications since 1990 Slide 31

Standard Features: Period Open/Close by Org Hierarchy Open Period Control request Helping people using Oracle Applications since 1990 Slide 32

Standard Features: Period Open/Close by Org Hierarchy Close Period Control request Helping people using Oracle Applications since 1990 Slide 33

Standard Features: Mat’l Overhead Absorption Rules Explicitly say which ones do and do not earn material overhead Helping people using Oracle Applications since 1990 Slide 34

Standard Features: Transaction Value Historical Summary Report Rollback inventory value to any date you choose Choose which columns of information to view You have four columns to select The fifth column on the report is everything else Useful as a “roll-forward” audit report Useful to verify month-end inventory value report balances Two reports: Transaction Value Historical Summary (for Standard Costing) Transaction Value Historical Summary – Average Costing Helping people using Oracle Applications since 1990 Slide 35

Standard Features: Transaction Value Historical Summary Helping people using Oracle Applications since 1990 Slide 36

Standard Features: Period Close Snapshot Period close snapshots (Release 11.5.10 onward) Prior to Release 11.5.10, the inventory period close only stored summary values by inventory organization and subinventory (blank subinventories are for intransit) When you close inventory you automatically store period-end inventory values and costs by organization, subinventory and item Helping people using Oracle Applications since 1990 Slide 37

Desired Enhancements Multi-Org Reporting Multi-Org Multi-Org Multi-Org Multi-Org numbers) Multi-Org Multi-Org Multi-Org Multi-Org Material Account Summary Report Receiving Account Summary Report WIP Account Summary Report All Inventories Value Report (with account Inventory Value Report (with account numbers) Receiving Value Report (with account numbers) Expense Value Report (with account numbers) WIP Value Report (R12 still has account numbers!) Helping people using Oracle Applications since 1990 Slide 38

Summary Oracle Discrete Costing offers robust, flexible costing Multiple costing methods are supported Powerful mass edits, item cost copies and cost update capabilities Account classification is much better with Subledger Accounting As you transact your cost accounting happens automatically Multi-org reporting is a continuing area of concern Helping people using Oracle Applications since 1990 Slide 39

Acknowledgements Oracle Cost Development Partners in crime at our clients Helping people using Oracle Applications since 1990 Slide 40

Thank You for Your Attendance and Participation Douglas A. Volz Slide 41

Douglas Volz ([email protected]) 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 and Germany. Doug leads the OAUG Cost 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) NTL (now Virgin Media) Logitech (US, Taiwan, P.R.C.) Celgene Corporation (US) NTL (UK, now Virgin Media) TCI International (US) Onninen AS (Norway) Helping people using Oracle Applications since 1990 Slide 42

End of Presentation Helping people using Oracle Applications since 1990 Slide 43