Cost Management

Cost management is a term that has been popularized by CAM-I (Consortium For Advanced Manufacturing - International). Cost management is said to be a more comprehensive concept than cost accounting in that the emphasis is on managing and reducing costs rather than reporting costs. In other words, it is a long run proactive approach rather than a short run reactive approach. For example, a great deal of attention is given to reducing costs at the design stage of a product's life cycle rather than simply attempting to measure and control cost during the production stage.

Oracle Cost Management is a full absorption, perpetual, and periodic cost system for purchasing, inventory, work in process, and order management transactions. Cost Management supports multiple cost elements, costed transactions, comprehensive valuation and variance reporting, and thorough integration with Oracle Financials.

The four inventory valuation methods that appear in fig.  shown @
are arranged in the order of the amount of cost that is traced to the inventory. The throughput method involves tracing the least amount of cost to the inventory, while the activity based method includes tracing the greatest amount of costs to the inventory. In direct (or variable) costing, a greater amount of cost is traced than in the throughput method, but a lesser amount than in the full absorption method. Direct costing and full absorption costing are the traditional methods, while the throughput and activity based methods are relatively new. These inventory valuation methods are very important because they control the manner in which net income is determined. Oracle provides full absorption method.
Costing Methods
Cost Management supports four perpetual costing methods: Standard Costing, Average Costing, FIFO Costing, and LIFO Costing. You can use the Average Costing method for one organization and the Standard Costing method for another organization.
You can use FIFO Costing, which is based on the assumption that the first inventory units acquired are the first units used. You can use LIFO Costing, which is based on the assumption that the last inventory units acquired are the first units used. Cost Management also supports Periodic Costing.
Oracle Cost Management does not support costing for process inventory organizations.

There are fundamental differences for accounting and reporting merchandise inventory transactions under the periodic and perpetual inventory systems. To record purchases, the periodic system debits the Purchases account while the perpetual system debits the Merchandise Inventory account. To record sales, the perpetual system requires an extra entry to debit the Cost of goods sold and credit Merchandise Inventory. By recording the cost of goods sold for each sale, the perpetual inventory system alleviated the need for adjusting entries and calculation of the goods sold at the end of a financial period, both of which the periodic inventory system requires.

Cost Type
Cost are of 2 Types:
Frozen Cost: Frozen Cost is the cost at which inventory transactions are costed
Simulated Cost: Simulated Costs are used to simulate cost scenarios to arrive at the best estimate of standard cost Oracle provides a seeded simulated cost ‘Pending’. Unlimited number of simulated cost types can be defined in the system

Cost Structure
A cost structure is the collection of definitions and methods used to cost inventory, bills of material, and work in process. The cost structure is composed of:
  • Organizations
  • Cost organizations and shared costs
  • General Ledger accounts
  • Cost elements
  • Subelements
  • Activities
  • Basis types

Basics of Cost Management

The costs associated with a manufacturing firm are separated into two broad categories. These include manufacturing costs and selling & administrative costs (G&A - General and Administrative). This functional separation is important because each category of cost is treated differently in the accounting records. The different treatments are required to obtain proper matching.

Manufacturing Costs
There are three types of manufacturing costs. These include:
1) Direct material or raw material,
2) Direct labor, and
3) Out side processing
4) Indirect manufacturing costs, or factory overhead
Direct material becomes the product, or becomes a part of the product. Direct labor converts the direct material into a finished product. Factory overhead represents all the other factory costs that cannot be directly identified with a particular product. This indirect category includes a variety of costs that are discussed in more detail in subsequent chapters. These three types of costs are also referred to as product costs, or inventoriable costs, because they are capitalized in (or charged to) the inventory, i.e., they become assets.

Accountants capitalize manufacturing costs to obtain proper matching. The matching concept is pervasive in accrual accounting and requires that costs and benefits are matched or brought together on the income statement. In a production setting, the idea is to match the costs of producing a product (or service) against the benefits, i.e., revenue derived from the sale. When the inventory is sold, these costs are charged to an expense account referred to as cost of goods sold. At the end of the accounting period, cost of goods sold is closed to the income summary where, theoretically, matching takes place.

Remember that unexpired costs represent assets. Expired costs represent expenses. When the inventory is sold, we say these costs have expired, i.e., the benefits to be obtained (from the effort that generated the costs) have been recognized. Thus, manufacturing costs become expenses when they reach cost of goods sold, but represent assets until the sale takes place.

Selling and Administrative Costs
In traditional accounting systems , selling and administrative costs are expensed in the period in which they are incurred. Theoretically, if there are future benefits associated with a cost, the cost should be capitalized as an asset rather than expensed. Certainly there are some future benefits associated with costs such as research and development, training, market promotion and advertising. However, these costs are expensed as incurred because it is difficult if not impossible to relate them to the future benefits. As a result, these costs are referred to as period costs.

In addition to separating costs into categories such as direct and indirect and manufacturing and non-manufacturing, costs are also frequently identified by their behavior in relation to changes in an activity level. This separation is helpful for planning and budgeting purposes. The major types of costs, in terms of cost behavior, are:
1) variable costs,
2) fixed costs,
3) semi-variable costs and
4) semi-fixed costs.


A cost accounting system requires five parts that include: 1) an input measurement basis, 2) an inventory valuation method, 3) a cost accumulation method, 4) a cost flow assumption, and 5) a capability of recording inventory cost flows at certain intervals. Note that many possible cost accounting systems can be designed from the various combinations of the available alternatives, although not all of the alternatives are compatible. Selecting one part from each category provides a basis for developing an operational definition of a specific cost accounting system.

The four inventory valuation methods that appear in below fig. are arranged in the order of the amount of cost that is traced to the inventory. The throughput method involves tracing the least amount of cost to the inventory, while the activity based method includes tracing the greatest amount of costs to the inventory. In direct (or variable) costing, a greater amount of cost is traced than in the throughput method, but a lesser amount than in the full absorption method. Direct costing and full absorption costing are the traditional methods, while the throughput and activity based methods are relatively new. These inventory valuation methods are very important because they control the manner in which net income is determined. Oracle provides full absorption method.

Absorption Costing or Full Costing System:
Absorption costing is a costing system which treats all costs of production as product costs, regardless weather they are variable or fixed. The cost of a unit of product under absorption costing method consists of direct materials, direct labor and both variable and fixed overhead. Absorption costing allocates a portion of fixed manufacturing overhead cost to each unit of product, along with the variable manufacturing cost. Because absorption costing includes all costs of production as product costs, it is frequently referred to as full costing method.

Variable, Direct or Marginal Costing:
Variable costing is a costing system under which those costs of production that vary with output are treated as product costs. This would usually include direct materials, direct labor and variable portion of manufacturing overhead. Fixed manufacturing cost is not treated as a product costs under variable costing. Rather, fixed manufacturing cost is treated as a period cost and, like selling and administrative expenses, it is charged off in its entirety against revenue each period. Consequently the cost of a unit of product in inventory or cost of goods sold under this method does not contain any fixed overhead cost. Variable costing is some time referred to as direct costing or marginal costing. To complete this summary comparison of absorption and variable costing, we need to consider briefly the handling of selling and administrative expenses. These expenses are never treated as product costs, regardless of the costing method in use. Thus under either absorption or variable costing, both variable and fixed selling and administrative expenses are always treated as period costs and deducted from revenues as incurred.

A cost flow assumption refers to how costs flow through the inventory accounts, not the flow of work or products on a production line. This distinction is important because the flow of costs is not always the same as the flow of work.

At first glance, you may see no nedd to make an assumption about how costs flow through the inventory account. The cost of each item placed in the physical inventory can be entered into the account, and then, as the item is physically taken from inventory, the cost can be removed from the account.In this way, the cost accumulated in the account can be perfectly match the items physically held, and the cost of goods sold can equal the sum of the cost of each item actually delivered to a customer. Such an inventory system can be identified as a specific identification system.

Specifically identifying each item in inventory is relatively easy if each item is unique, such as an art object or a piece of custom-made furniture, or if each item has an identification number, such as an automobile. However, specific indentification is not practical when inventory items are not individually identifiable. This is the case with bushels of wheat, caseloads of memory chips, and loads of brass hooks like the ones used in Amalgamated's hat racks. In these cases, accountants commonly assume a flow cost through the inventory account that is not necessarily related to the acctual physical flow of goods.

a) Average cost price items in inventory on the basis of the average cost of all similar goods available during the period.
b) Standard Price versus Average Price
With average price control, a new material price is calculatedafter every goods receipt, invoice receipt, and/or order settlement. This material price is an average value calculated from the total inventoryvalue and the total quantity of the material in stock.

With standard price control, goods movements are valuated with a price that remains constant for at least one period. The standard price that is assigned to a material is usually the result of a standard cost estimate.

The main difference between the two valuation procedures is that the average price represents a current delivered price while thestandard price is based on planned values and not actual values. Differencs between the planned price and the actual prices are not assigned to the material stock in Financial Accounting, but rather are assigned to a price difference account. When using the moving average price, however, thematerial stock value in Financial Accounting can reflect the pricesactually incurred.

c) First-In, First-Out (FIFO) assumes that costs are used in the order in which the related goods were purchased. The cost of inventory at hand at the balance sheet date must therefore represent the most current purchase prices.
d) Last-In, Last-Out (LIFO) matches the cost of the last goods purchased against revenue.

The LIFO Reserve
Some companies use LIFO for tax and external reporting purposes, but they maintain a FIFO, average cost, or standard cost system for internal reporting purposes. The difference between the inventory method used for internal reporting purposes and LIFO is often referred to as the LIFO reserve. This is the allowance to reduce inventory to LIFO. The LIFO reserve is a contra-inventory account that must be adjusted to its required balance at the financial statement date.

Inventory records can be maintained on a perpetual or a periodic basis. Conceptually, the perpetual inventory method provides a company with the capability of maintaining continuous records of the quantities of inventory and the costs flowing through the inventory accounts. The periodic method, on the other hand, requires counting the quantity of inventory before inventory records can be updated. In the past, manufacturers tended to keep perpetual inventories, while retailers used the periodic method. However, today a variety of modern point of sale devices and dedicated microcomputer software are readily available to provide any company with perpetual inventory capability.

Cash vs. Accrual Accounting

The cash method and the accrual method (sometimes called cash basis and accrual basis) are the two principal methods of keeping track of a business's income and expenses. In most cases, you can choose which method to use. Learn how they work and the advantages and disadvantages of each so you can choose the better one for your business.

In a nutshell, these methods differ only in the timing of when transactions, including sales and purchases, are credited or debited to your accounts. Here's how each works:

The accrual method.
Under the accrual basis accounting, revenues and expenses are recognized as follows:

Revenue recognition: Revenue is recognized when both of the following conditions are met:
    a. Revenue is earned.
    b. Revenue is realized or realizable.

( Revenue is earned when products are delivered or services are provided. Realized means cash is received.
Realizable means it is reasonable to expect that cash will be received in the future.)

Expense recognition: Expense is recognized in the period in which related revenue is recognized (Matching Principle).

The accrual method is the more commonly used method of accounting. Under the accrual method, transactions are counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them (receivables) is actually received or paid. In other words, income is counted when the sale occurs, and expenses are counted when you receive the goods or services. You don't have to wait until you see the money, or actually pay money out of your checking account, to record a transaction.

Advantages and disadvantages of the accrual method.
While the accrual method shows the ebb and flow of business income and debts more accurately, it may leave you in the dark as to what cash reserves are available, which could result in a serious cash flow problem. For instance, your income ledger may show thousands of dollars in sales, while in reality your bank account is empty because your customers haven't paid you yet.

The cash method.
Under the cash method, income is not counted until cash (or a check) is actually received, and expenses are not counted until they are actually paid.

Advantages and disadvantages of the cash method
Though the cash method provides a more accurate picture of how much actual cash your business has, it may offer a misleading picture of longer-term profitability. Under the cash method, for instance, your books may show one month to be spectacularly profitable, when actually sales have been slow and, by coincidence, a lot of credit customers paid their bills in that month.

To have a firm and true understanding of your business's finances, you need more than just a collection of monthly totals; you need to understand what your numbers mean and how to use them to answer specific financial questions.

Costing Setup

This section contains an overview of each task you need to complete to set up Oracle Cost Management.



Defining Cost Types

A cost type is a set of costs uniquely identified by name. Two cost types are predefined for you, Frozen (for standard costs) and Average. 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.

1. Enter a cost type name.

2. Select the default cost type.
For items where costs have not been defined for the cost type, the default cost type is used as the next source of costs that the cost rollup and the inventory value reports use for items not associated with the cost type being rolled up or reported upon. You can have a cost type default to itself. The default reflects the current organization's costing method: Frozen for standard costing and Average for average costing.

3. Select a date on which to inactivate the cost type. You cannot inactivate the Frozen or Average cost types. You can still inquire (but not change) inactive cost types. Inquiring has no effect on bill assemblies or work in process.

4. Indicate whether the cost type is a multi-organization cost type to share with other organizations.
Note: If disabled, this cost type name is available only to the inventory organization that creates it. If enabled, only the cost type name is shared, not the costs.

5. Indicate whether to allow updates in this cost type.

6. Indicate whether this cost type is available to Oracle Engineering.

7. Select rollup options:
• Indicate whether to include the effect of component yield when rolling up costs for this cost type.
Important: Changing the Include Component Yield flag when there are open WIP jobs in the inventory organization may result in inaccurate cost variances. For example, if the standard cost rollup includes component yield and the Include Component Yield flag is clear, then backflush transactions will no longer factor in component yield and artificial variances will result.
• Indicate whether to save a snapshot of the bill of material structure for items that you roll up. This creates an alternate bill. (This is available only if you have Oracle Bills of Material installed.) Oracle recommends that you use an alternate designator intended for the specific purpose of maintaining a snapshot of the bill being rolled up.
If Snapshot of Bills is enabled, you must select an alternate name. You can then run the Indented Bill of Material Cost report for the alternate, even if the primary bill has changed.

8. Select previous level rollup options. These options determine how much information is generated by the rollup. (These options do not effect the total unit cost.) If all options are not selected (if the options are clear), then the rollup generates one record for all prior level costs and stores the total in the material cost element. The options are as follows:
Element: Indicates that detail cost information by cost element is retained at previous levels. If not selected (cleared), then all prior level costs are stored in the material cost element.
Subelement: Indicates whether to track subelement costs at previous levels. If not selected, then all prior level information does not reference a subelement.
Activity: Indicates whether to track activity costs at previous levels. If not selected, then all prior level information does not reference an activity.
Operation: Indicates whether to track operation costs at previous levels. If not selected, then all prior level information does not reference an operation.


Activities and Activity Costs

Activities are processes or procedures that consume costs and time. In addition to cost elements and subelements, costs may be associated with an activity. Activities may be directly related to building items, such as runtime or setup time; or they may be indirect, such as purchase order generation, payroll, and engineering activities. The goal of activity based cost accounting is to accurately identify your product costs, especially overhead costs.

Use activities to assign indirect costs to items based upon the effort expended to obtain or produce the item, rather than as a percentage of a direct cost or an amount per item.

1. Enter an activity.

2. Check Multi-Org to indicate whether the activity name is a multi-organization activity to share with other organizations. Note: If disabled, the name is only available to the organization that creates it. If enabled, only the activity name is shared, not the activity.

3. Select the activity default basis.
Basis: is the method used to determine how to charge a transaction or apply product costs. The value you select here is defaulted when you define item costs. The activity default basis will override the subelement default basis as long as the basis is valid for the cost element.
Activity: Used to apply activity costs to items. The activity basis type can only be used with the material overhead subelement. The item cost is calculated by multiplying the activity cost by the ratio of the number of times the activity occurs, divided into the cumulative quantity of the item associated with those occurrences.
Item: Used to earn and apply costs for all subelements. For material and material overhead subelements, you charge a fixed amount per item. For resource, outside processing, and overhead subelements, you charge a fixed amount per item moved in an operation.
Lot: Used to earn and apply costs for all subelements. The item cost is calculated the same as an Item basis cost, except the unit cost is divided by the cost type lot size to derive the cost per item.

4. Optionally, select a date to inactivate the activity.

5. Enter the Activity Measure (allocation basis or cost driver) for your activity. For example, if the activity is allocating purchasing costs, the activity measure might be the number of purchase orders generated during a given period.

6. Choose the Activity Costs button and select a cost type to associate with your activity. Each activity can be associated with any number of cost types and each cost type and activity combination can have a different cost.

7. Enter the total cost budgeted for the activity cost pool. This is the total activity cost you expect to incur during a specified time.

8. Enter the total number of times you expect to perform this activity during the budget period.
The system calculates the cost per occurrence by dividing the total cost by the total occurrences. This cost is used when you use a basis type activity for the material overhead subelement.

Defining Subelements

You can define the following subelements in Cost Management:

  • Defining Material Subelements
  • Defining Overhead
  • Defining Material Overhead Defaults
  • You can define Resource subelements in Oracle Bills of Material
Material Subelements
Material subelements classify material costs, such as plastic or metal. A material subelement has a default activity and a default basis type assigned to it.

1. In the Defaults tabbed region, enter a material subelement name.

2. Select the default activity. This activity is defaulted each time the subelement is used to define an item cost.

3. Select the default basis for the material subelement. This basis type is defaulted when you define item costs. Basis is the method used to determine how to charge a transaction or apply product costs. The options are as follows:
Item: Used for all subelements. For material and material overhead subelements, you charge a fixed amount per item. This is the default.
Lot: Used for all cost elements. The item cost is calculated by dividing the order cost by the lot size.

4. Optionally, select a date on which to inactivate the material subelement.


You can use material overhead and overhead cost subelements to add indirect costs to item costs on either a percentage basis or as a fixed amount in both standard and average costing organizations.

Material Overhead is earned by an item during purchase order receipt, inter-organization receipt, and WIP completion transactions. You can choose to decide if material overhead is to be earned during purchase order receipt, inter-organization transactions, and assembly returns and completions for non-standard costing organizations. You have the flexibility to decide if the transaction is going to earn material overhead, depending on the item type. Overhead, based upon resources/deparment, is earned as the assembly moves through operations in work in process.

Note: If you use Oracle Bills of Materials, you must first define the bill of material parameters to use the overhead cost element in the Overhead window. If the bills of material parameters are not set up, you only have access to material overhead cost element.

Each overhead subelement has a default basis, a default activity, and an absorption account.

The overhead absorption account offsets the corresponding overhead cost pool in the general ledger.

You can base the overhead charge on the number of resource units or percentage of resource value earned in the routing operation. You can also set up move-based overheads where the rate or amount is charged for each item moved in an operation. To do this, use the Item or Lot basis types.
You can base the material overhead charge on a percentage of the total value, which is earned when you receive purchase orders or perform WIP completion transactions. You can also use the Item or Lot basis types. You can apply each of these subelements, using different basis types, for increased flexibility.

Defining overhead

1. Enter an overhead name.
2. Select a cost element:
Material Overhead: Define material overhead.
Overhead: Define resource and move-based overhead. This is only available if Bills of Material is installed.

3. Select an overhead absorption account.
This is the offset account for any cost earned to the inventory or work in process value.

4. Select a default basis type to be used as a default for the overhead being defined. This basis type is used to determine how the overhead cost is earned and how it is applied to product costs.

5. Select a default activity to use for this overhead.

6. Select an expenditure type.
If the Project Cost Collection Enabled parameter in the Organization Parameters window is set, you must associate an expenditure type with each subelement. You can only select expenditure types that belong to the Burden Transactions expenditure class.

7. Optionally, select a date on which to inactivate a material overhead or overhead.
An inactive overhead subelement cannot be used to define an overhead cost (when defining item costs) or associated with a resource (when defining a resource). You can continue to use item costs previously defined for and resources previously associated with the inactive overhead subelement. The cost rollup will continue to
roll up previously defined inactive overhead subelements.

8. Do one of the following:
• To earn overheads and material overheads based on resource units or value, you must associate resources to overhead and material overhead for a specific cost type. Choose the Resources button to open the Resource Overhead Associations window.
• To associate department and overhead combinations with a cost type, choose the Rates button to open the Overhead Rates window. This option is available for overheads only.

Associate resources to overhead for a cost type

This is only necessary for material overhead and overhead subelements with a basis type of Resource Value or Resource Units.
Important: You only apply these overheads when they are associated with a resource.

1. Select a cost type to associate resources to overhead with.
2. Select the resource.
Overhead calcualtion due to Resources
Overhead can be associated with a dept or a resource. When we define an overhead associated with resources we attach differnt resources to it. In the Rates we specify the rate/amount against basis for differnt departments.

In the resorce form we can view all the overheads associated with a particular resource.
When we do an operation - All the overheads (OH due to dept + resources) associated with the dept are charged
                                        All the resources attached to the department operations are charged.

Control overheads by resource.
For overheads based on resource units or resource value, you must specify the resources on which the  overhead is based. You can then charge multiple resources in the same department for the same operation, while still earning separate overhead for each resource. If you do not associate your overheads and resources, you do not apply overhead in the cost rollup or charge resource-based overhead in WIP.

 Associate department and overhead combinations with a cost type

1. Select a cost type.
2. Select a department and enter an overhead rate or amount.
The department will be associated with the overhead being defined in the selected cost type. The specified overhead rate or amount will be used for that department.
Rates and amounts are required for both resource and move (item or lot basis type) overheads.
3. Optionally, select an activity. The default is the activity selected as the default in the Overheads window.
4. Select the basis. The default is the basis selected as the default in the Overheads window. 
5. Enter the percentage rate or the fixed amount, as appropriate for the basis. If the basis is resource value, enter a rate in this field. If the basis is resource units, item, or lot, enter an amount in this field.
6. Save your work

Copying Costs

You can copy from one cost type to another and specify an item or a category range. You can copy from the Frozen cost type, but you cannot copy to the Frozen cost type. Under average costing, you can copy from the Average cost type, but you cannot copy to the Average cost type. Under FIFO/LIFO costing, you can copy from the FIFO/LIFO cost type, but you cannot copy to the FIFO/LIFO cost type.

In a standard cost, inventory organization, you can perform a standard cost update from the newly copied costs. In average, FIFO, or LIFO cost, inventory organizations, copied costs are generally used for simulations or comparisons only.
You can copy item costs within an organization or across organizations.

Within an organization, you can also copy resource and overhead costs, or resource and overhead associations. There are three copying options:

  • merge and update existing costs
  • copy over new information only
  • remove and replace all cost information
Across organizations, you have the flexibility to create new sub-elements, if required, or summarize the item costs over all sub-elements into a pre-defined, summary sub-element in the destination organization. You can use interorganizational cost copy to copy item cost information across two different organizations, specifying which items you want to include in the item cost copy.
Interorganizational cost copy supports supply chain cost rollup. Supply chain cost rollup enables you to estimate item costs created within BOM.

Copy Cost Examples: Copy from Cost Type 1 to Cost Type 2
Initial values in Cost Type 1 and Cost Type 2

The results for the Merge and Update Existing Costs option are: A = 20, B = 10, and C = 30. Item C did not exist in Cost Type 1, so C's value in Cost Type 2 does not change.
The results for the New Information Only option are: A = 20, B = 50, and C = 30. Item A did not exist in Cost Type 2, so its value is copied from Cost Type 1. Item B has a cost in Cost Type 2, so it's value does not change. Item C did not exist in Cost Type 1, so C's value in Cost Type 2 does not change.

The results for the Remove and Replace All Cost Information option are: A = 20, B = 10, and item C does not exist. These are the same values found in Cost Type 1; all values in Cost Type 1 replace those in Cost Type 2.
Note: You can also use the Supply Chain Cost Rollup to copy costs for based-on rollup items (assemblies). When the assembly does not exist in the Supply Chain Cost type that you roll up, the rollup copies the assembly information from the default cost type.
Note: For costs that are copied across organizations, the based on rollup flag for all copied costs is set as User-Defined.

Perform Cost Update

The cost update copies all costs from the Pending cost type to the Frozen cost type. Cost adjustments and revaluations are performed automatically. Updates the existing standard costs with the costs created in the pending cost type and
  creates the resulting adjustment accounting entries.

  If you use Work in Process, the cost update revalues discrete job  balances, creates accounting adjustments, and prints the adjustments along with the new job values in its report.

To update standard costs:
Responsibility = Oracle Costing
 Nav=>Item Costs, Standard Costs, Update Costs
 1) Select the pending cost type.

 2) Select an Adjustment Account.
   This account is used to collect the changes in value to each item, and to automatically generate transactions that adjust
    your inventory accounts. Your inventory is adjusted by subinventory and elemental cost account. Your discrete work in
    process is adjusted by job and cost element account. The WIP accounting class defines the adjustment account for your
    discrete jobs.

 3) (Optional)Enter a Description.

 4) Select an Item Range option. The options are as follows:
    All items: This is the default.
    Based on rollup items: Items that have Based on Rollup turned on in the Frozen cost type.
    Category: All items in a selected category.
    Not based on rollup items: Items that have Based on Rollup turned off in the Frozen cost type.
    Range of items: Range of items you specify.
    Specific item: Specific item you specify.
    Zero cost items: Items with zero cost in the Frozen cost type.

 5) Select a Sort Option for the adjustment report. The options  are as follows:
    Item: By item
    Category, Item: By category, then by item within the category
    Subinventory, Item: By subinventory, then by item within the subinventory (Default)

 6) If you selected All Items for Item Range, select an update option: either Overhead, resource, activity, and item costs, or
    Resource,overhead, and item costs. Overhead, resource, activity, and item costs:
    Resource, overhead, and item costs: This is only available if you use Inventory with Bills of Material. If you use Work
          in Process, choose this option to reflect resource and overhead cost changes for actual charges to standard and
          non–standard asset jobs.
    Activity and item Costs:
    Item costs only: This is the default.

 7) If you selected Specific item for the Item Range, select the Specific Item to be updated.

 8) If you selected Category for the Item Range, do one of the following:
    Select a Category Set. The default is the category set defined for the costing functional area.
    Select a specific category.

 9) If you selected Range of items in the Item Range field, select beginning and ending Item From and To values. Standard costs are updated for all items in this range, inclusive.

10) Indicate whether to save details. Selecting Yes saves a snapshot of the inventory and work in process on– hand quantities cost update details. If you select Yes, you can rerun the adjustment reports as long as you choose to maintain the details. You can purge standard cost history to delete these details.

Item Costing

Item costing requires certain associations and settings most of which apply to a perpetual costing method: Standard or Average or FIFO or LIFO. You perform various activities in the perpetual costing methods. These include  viewing, inquiring, purging, and error resubmission activities.

Define/View item cost information
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.

Item Cost form is used to define costs for buy items or enter additional costs for assemblies with costs generated from the cost rollup.
  1. If you share costs, you can define costs only in the cost master organization.
  2. When you define an item, the system creates a cost record according to the costing method, the Frozen or Average cost type. You can modify the Frozen cost type if no inventory transactions have occurred, enabling you to directly set the frozen standard cost for the item. If inventory transactions have occurred, you must define a cost in a cost type other than Frozen and perform a cost update to load a frozen cost for the item.
  3. You cannot use the Item Costs window to edit average costs.
  4. For Bills of Material users, you can use the costs in any cost type for the costed bill of material explosion reports to examine other cost scenarios.

1. To define item costs Navigate to the Item Costs window. Choose the New button from either the Item Costs Summary folder window or from the Item Costs Details window.
Navigate to the Item Costs window.Enter the newly created item and Choose the Find button. Cost of value zero is attached to the new item

2. Navigate to the Item Costs Details window. Do this by choosing the New or Open buttons from the Item Costs Summary folder window.
  • Turn Inventory Asset on to indicate that for this cost type the item is an asset and has a cost. Turn Inventory Asset off to indicate that for this cost type the item is an inventory expense item and cannot have a cost.
  • Indicate whether costs are based on a rollup of the item's bill of material and 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 do not want to change the cost. Generally, assemblies (make items) have this control turned on, and buy items have this control turned off. You can freeze the cost of an assembly (for example, for an obsolete item) for the current cost type by turning this off after performing a cost rollup. Future cost rollups do not change the cost for this item. The default is the value of the MPS/MRP Planning make or buy attribute from the template used to define the item default.
  • Enter the costing lot size for the item. Use this to determine the unit cost of subelements with a basis type of Lot. The costing lot size is separate from the planning lead time lot size. When you define an item cost for the Frozen cost type, the default is either the standard lot size, or 1, if the standard lot size is blank.
  • Enter the manufacturing shrinkage rate. The cost rollup uses the value you enter here to determine the incremental component requirements due to the assembly shrinkage of the current item. You cannot enter shrinkage for items that do not base costs on a rollup of the item's bill of material and routing(buy items). Detailed cost information is displayed for reference.

3. Click on Costs to view or enter the cost information
Select the cost type as frozen and Click on costs Enter the cost element, sub-element, basis and rate
Basis : Enter a percentage rate or a fixed amount, as appropriate for the basis.
The basis factor is the amount or quantity the rate/amount is multiplied by to calculate the unit cost of the subelement. The basis factor for subelements with a basis type of Item is always 1. The basis factor for subelements with a basis type of Lot is the ratio of 1 over the item's standard lot size. The basis factor for subelements with a basis type of Activity is the ratio of activity occurrences over number of items. The basis factor for subelements with a basis type of Resource Units is the number of resource units earned on an assembly routing. The basis factor for subelements with a basis type of Resource Value is the extended value of the resource earned on an assembly routing. The basis factor for subelements with a basis type of Total Value is the total cost of the item, less any this level material overhead.

If you are defining an item cost in a cost type other than Frozen, then the existing cost information is copied from the default cost type to the current cost type. You can use this cost information or modify it to create a new cost for the current cost type. If you use the average cost method, you can create budget or simulation costs here. You cannot edit average costs from this window.

4. View item costs using multiple inquiries. From each inquiry, you can drill down into cost details.

Purging Cost Information

You can purge cost types and all costs within the cost type. Or, you can purge only part of the cost information, such as make or buy items, resource and outside processing costs, overhead rates and amounts, or resource and overhead associations.
You cannot purge frozen costs in standard costing or average costs in average costing.

Based on rollup items, costs and controls: Cost information for based on rollup items, costs and controls associated with the cost type.
Cost type and all costs: The cost type and all associated cost information. This is the default.
Department overhead costs and rates: Department overhead costs and rates associated with the cost type.
Not based on rollup items, costs and controls: Cost information for items not based on the cost rollup, costs and controls.
Resource costs: Resource costs associated with the cost type.
Resource/Overhead associations: Resource/overhead association costs.

Viewing WIP Value Summaries

You can view and analyze the work in process values of a job or repetitive line by cost element, such as material, material overhead, resource, outside processing, and overhead. You can also drill down to detailed accounting transactions. Values are
displayed in your organization's base currency.

Select your search criteria.
Reported variances are recorded variances from closed jobs or schedules.
Potential variances are for jobs or schedules that are not closed or with open balances with unrecognized variances. The calculation is costs incurred minus costs relieved minus variance relieved.
Depending on the timing of issue and completion transactions, this may not represent an accurate variance.
Net activity is the total of the WIP transactions for the selected period range.

To review WIP value summary information,
Navigate to the WIP Value Summary window. Do this by choosing the Value Summary button from the WIP Jobs and Schedules window.


The WIP value results display cost information by cost element and valuation account for the job or repetitive schedule's accounting class. The Summary tabbed region displays the following information for the cost element of the job or repetitive schedule:
Costs Incurred: Costs associated with material issues/returns, resource, and overhead transactions of a job or repetitive schedule.
Costs Relieved: Standard costs relieved by cost element when assemblies from a job or repetitive schedule are completed or scrapped.
Variances Relieved: Variances relieved by cost element when a job or accounting period is closed, or when a repetitive schedule is cancelled.
Net Activity: Cost element net activity, the difference between the costs incurred and the costs and variances relieved


Viewing Material Transactions

You can view detail associated with inventory transactions, including error messages, and resubmit those transactions that have errorred. Search for transaction information by entering a combination of search criteria.
Two drop-down lists, labeled Costed and Transferred to Projects, which enable additional search criteriato find  errorred transactions.


Location: Displays the item, subinventory, locator, revision, transfer locator, transfer subinventory, transfer organization, transaction date, and transaction type information.
Intransit: Displays the item, shipment number, waybill/airbill number, freight code, container, quantity, and transaction type information.
Reason, Reference: Displays the item, reason, reference, costed indicator, transferred to Projects indicator, error code, error explanation, supplier lot, source code, source line ID, and transaction type information.
Transaction ID: Displays the item, transfer transaction ID, transaction header number, receiving transaction ID, move transaction ID, transaction UOM, completion transaction ID, department code, operation sequence number, transaction quantity, transaction ID, transaction date, source, source type, transaction type, source project number, source task number, project number, task number, to project number, to task number, expenditure type, expenditure organization, error code, and error explanation.
Transaction Type: Displays the item, source, source type, transaction type, transaction action, transaction UOM, transaction quantity, transaction ID, and transaction date information.

Error Resubmission
If you are using Standard or Average Inventory Costing, including Project Manufacturing Costing, then you can resubmit cost transactions that have failed to cost, and projects that have failed to transfer.
Standard Costing: Any error occurring during the cost processing of a transaction flags the transaction as errorred. The cost processing of other transactions continues.
Average Costing: Any error during the cost processing of a transaction for a particular organization flags the transaction as errorred and prevents the cost processing of other transactions in that particular organization. Failed cost updates can be resubmitted just like other errors.

It is important that you view Material Transactions from the Cost function, rather than the Inventory function. The following two features are only available from the Cost function:
  • Submit options: allow resubmission of errorred transactions.
  • Display of average cost updates: lists the item with transaction type as cost update.

The Find Material Transactions window includes two drop–down lists:
  • Costed: includes Yes, No, and Error
  • Transferred to Projects: includes Yes, No, Error, and Not Applicable. This list is only applicable to Project Manufacturing Costing.

Viewing Pending transaction

Receving Transaction (PO receving) - Open Interface ---->SO transaction
Material transaction (Mat transaction inside inventory - PO Recipt/Sub inv transafer/Move Order/etc ) - Pending Material transaction
Move Transaction (Move transaction for Operations) - Pending Move transaction
Resource Transaction (Resource transaction in Operations) - Pending Resource transaction

Item cost for MAKE items

Item costs for make items are computed from Based on Rollup feature.

1. Create a new make item and verify its cost line details

2. Create the BOM and routing of the assembly.


3. Create a new job.
Release the job, do move transaction and complete the job.
verify the WIP value summary.


4. Close the Job and verify the variance and net activity in WIP value summary.

5. Run the rollup costs in bill of material for pending cost type.

6. Verify the item cost for pending cost type.

7. Run the item cost update to update the frozen cost of the item.

Standard Costing

Under standard costing, predetermined costs are used for valuing inventory and for charging material, resource, overhead, period close, and job close and schedule complete transactions. Differences between standard costs and actual costs are recorded as variances.

  • Use standard costing for performance measurement and cost control. Manufacturing industries typically use standard costing.
  • If you use Inventory without WIP, you can define your item costs once for each item (in the cost master organization) and share those costs with other organizations. If you share standard costs across multiple organizations, all reports, inquiries, and processes use those costs. You are not required to enter duplicate costs. The cost master organization can be a manufacturing organization that uses WIP or Bills of Material. No organization sharing costs with the cost master organization can use Bills of Material.
  • Inventory and WIP update inventory value and balances with each transaction.
  • Value is maintained by cost elements (Ex. material, material overhead, resource, outside processing, and overhead).
  • Examples of Inventory transactions using standard costs: Purchase Order Receipt to Receiving Inspection, Sales Order Shipments, Miscellaneous Transactions, Inter-Organization Transfers.  Examples of WIP transactions using standard costs: Component Issue and Return Transactions, Move Transactions, Outside Processing Charges & Overhead Charges


Cost Flow

Setting Up Standard Costing

The following steps are required when setting up standard costing. Additional steps follow in the next section for those also using WIP or BOM or both.

  • Define organization parameters:
1. Costing Method is set to Standard.
2. Transfer Detail to GL is appropriately set.
3. Default Material Subelement account (required).
  • Define cost types.
  • Define activities and activity costs.
  • Define material overhead defaults.
  • Define item and item costs, and establish item cost controls.
  • Launch transaction managers.
To set up standard costing with BOM and WIP:
1. Run a summary audit to validate your structures. After you have defined your bill and routing structures, items and unit costs, you should run the summary audits to ensure information integrity. These audits check for bill of material structures with no headers, valued items with no costs, and so
2. Perform cost rollup as appropriate to set initial standard costs.
With the initial cost rollup/update, you complete the setup of the manufacturing cost structure and begin normal processing, including purchase order receipts, material issues, job/schedule creation, shop floor moves, and so on. Later, you analyze, report, and distribute costs through the period close process.
3. Perform a cost update after rolling up assemblies. This revalues inventory and implements new costs.

Phantom Costing
You can cost phantom assemblies in the following:
  • Work in Process
  • Discrete and repetitive manufacturing environments
  • Standard and average organizations
You can set up phantom assemblies just like any other assembly and include resource and overhead costs.

Two BOM parameters control the behavior of phantoms:
Inherit Phantom Operation Sequence: Controls inheritance of the parent's operation sequence.
Note: Inherit Phantom Operation Sequence, previously a WIP parameter, is now a BOM parameter.
Use Phantom Routings: Determines if resources and overheads on phantom routings are recognized for costing and capacity planning purposes.

Accounting Entries


Revenue and COGS Matching

 Financial accounting has two important generally accepted accounting principles (GAAP) that guide the statement of financial earnings:

  • Revenue recognition principle
  • Cost matching principle
The revenue recognition principle requires revenues to be recognized when a firm has performed all, or a substantial portion of services to be provided, and cash receipt is reasonably certain. The matching principle requires that cash outlays associated directly with revenues are expensed in the period in which the firm recognizes the revenue. The Oracle e-Business Suite supports this matching principle by synchronizing the recognition of cost of goods sold (COGS) with the revenue recognized in Oracle Receivables for shipments made in Oracle Order Management, or other order fulfillment systems. With this feature, sales order revenue and the associated COGS are recognized in the same period. In addition, when sales order revenue is only partially recognized, the associated COGS is recognized in the same proportion.

Revenue / COGS Recognition Process Flow
When you ship confirm one or more order lines in Oracle Order Management and then run the applicable Cost Management cost and accounting processes, the cost of goods sold associated with the sales order line is immediately debited to a Deferred COGS account pending the invoicing and recognition of the sales order revenue in Oracle Receivables. When Oracle Receivables recognizes all or part of the sales revenue associated with a sales order line, you run a cost process that calculates the percentage of total billed revenue recognized. Oracle Inventory then creates a cost recognition transaction that adjusts the Deferred COGS and regular COGS amount for the order line. The proportion of total shipment cost that is recognized as COGS will always match the proportion of total billable quantity that is recognized as revenue.

Steps for Deferred COGS
  • Define Deferred COGS Account
  • Define Accounting Rules for Sales Orders
  • Define Transaction Types for Orders

COGS Recognition and Concurrent Processes
The matching and synchronization of the earned and deferred components of sales order revenue and COGS is  ccomplished by running the following COGS recognition concurrent processes at user-defined intervals:
  • Record Order Management Transactions : The Record Order Management Transactions concurrent process picks up and costs all uncosted sales order issue and RMA return transactions and creates a record for each new order line in the costing COGS recognition matching table. This  process is not mandatory. If you don't run this process, then the cost processor will select and cost the uncosted sales order issues and insert them in the COGS matching table. This process can be used if you need to process the COGS recognition transactions at shorter intervals than the cost processor.
  • Collect Revenue Recognition Information: The Collect Revenue Recognition Information concurrent process calls an Oracle Receivables API to retrieve the latest revenue recognition percentage of all invoiced sales order lines in Oracle receivables whose activity date is within a user-specified date range. This process must be run before the Generate COGS recognition Event concurrent process.
  • Generate COGS Recognition Events : The Generate COGS Recognition Events concurrent request compares the COGS recognition percentage for each sales order line and accounting period combination to the current earned revenue percentage. When the compared percentages are different, the process raises a COGS recognition event and creates a COGS recognition transaction in Oracle Inventory that adjusts the ratio of earned and deferred COGS to match that of earned and deferred revenue. You must run this process after completion of the Collect Revenue Recognition Information concurrent process.

Business Flows Across Inventory Organizations

Inter-Organization Transfers

You can transfer items directly from one organization to another, or transfer items through intransit inventory. You can also use internal requisitions to replenish inventory to another organization; however, internal requisitions do not support freight charges. You can also transfer inventory between discrete and process organizations. As a result, you must properly handle the costing and accounting of transfers between process and discrete organizations. Transfers  between discrete and process organizations use a transfer price that is set up between the organizations.

Inter-organizational transfers use the following functionality:
Intransit inventory
Intransit inventory represents inventory items that have not arrived at the receiving organization. You can move items from the shipping organization to intransit inventory using the Inter-organization Transfer window. Use the Receipts window to move items to the receiving organization.

Direct Inter-Organization transfer

When the inter-organization relationship is set to direct transfer in the Shipping Networks window, an issue and receipt transaction are performed in one step.

Inter-Organization receipt
Inventory creates the following calculation for material received intransit and material received directly from another organization:
Current average or standard cost from shipping organization multiplied by transaction quantity plus freight charges and transfer credit charges.
For a direct receipt, the organization that receives the material does not perform a transaction. The shipping organization performs a ship transaction to the receiving organization. Inventory considers the transfer a receipt in the receiving organization and updates the cost.

Elemental cost visibility
You can set elemental cost visibility during inter-organization transfers either to preserve the shipping organization's elemental costs or to summarize all elemental costs into the material cost element. Enable this option using the Elemental Visibility Enabled check box on the Main tab in the Shipping Networks window. This option is available for each line in the shipping network, regardless of direction. Combining all cost elements into the material cost element assures that the receiving organization does not have another organization's overhead in its calculation.

Expense subinventories and expense items

When you receive an inter-organization transfer into an expense subinventory, or receive an expense inventory item, set the Oracle Inventory INV: Allow Expense to Asset Transfer profile option is set to Yes. This issues the material from the expense subinventory. When you receive to expense locations or receive expense inventory items, the subinventory expense account is debited for the receiving organization instead of the valuation accounts. The subinventory expense account is charged the total transaction value from the other organization.

Inter-Organization transfers and ledgers
The Inter-Organization Direct Transfer transaction supports transfers from any ledger, including ledgers in different currencies.

Freight transactions

The Free on Board (FOB) point influences the accounting entries generated for the shipment to intransit inventory. The FOB point is determined by how the inter-organization shipping network is defined in the Shipping Networks window. In addition to accounting for the movement of the items, these transactions also update the inter-organization receivable and payable accounts. The FOB point changes the accounting for freight. When FOB is receipt, freight is accrued on the receipt transaction by the shipping organization. When FOB is shipment, freight is accrued on the shipment transaction by the receiving organization. For direct transfers, the receipt and shipment transactions occur at the same time.

Inter-Organization Transfer Accountings

Freight and Transfer Charges

Material Overhead and Inter-Organization Transfers

If your item has material overhead, you can earn material overhead in the receiving organization as part of the receipt

Material overhead

MOH are defined in the same way as OHs are defined.

  1. In case of MOH the rates button is disabled
  2. MOH defaults & MOH absorption rules needs to be defined.
Define material overhead absorption rules
You can decide if material overhead is to be earned during purchase order receipt and inter-organization transactions. You have the flexibility to decide if the transaction is going to earn material overhead, depending on the item type. The rules you define override the default material overhead absorption for purchase order receipt, assembly completion and return, and inter-organization transfers for Standard, Average, FIFO, and LIFO, costing organizations. The rules you define will not override material overhead absorption for work in process completion transactions in standard costing organizations.
Defining Material Overhead Defaults
You can define and update default material overhead subelements and rates. These defaults speed data entry when defining items. When you define items, these material overheads are defaulted into the Frozen cost type under standard costing, and into the cost type you defined to hold average rates under average costing.

For buy items, enter material costs. For make items, roll up costs. You can specify an organization and category default for the same material overhead subelement. When you have multiple defaults for the same subelement, the category default takes precedent over the organization default. If you have two category level defaults, the
default that matches the item's planning code takes precedence.

Cost Flow in WIP

The WIP valuation accounts are charged when material is issued to a job or schedule, or when resources, outside processing, or overhead is earned by a job or schedule. The same accounts are relieved when assemblies are completed from a job or schedule.

 The following graphic displays that variance accounts are charged upon job or period close, depending on how the WIP parameters are set (for repetitive schedules) or the type ofjob, asset, or expense.

Account Summarization
If you assign the same account to more than one cost element, you can choose to have the values of these cost elements summarized or to maintain their elemental visibility before transferring them to the General Ledger, depending on how you set the
CST:Account Summarization profile option.
                Yes: Cost elements summarized
                No: Elemental visibility maintained

The following transfers illustrate the effect of summarization vs. elemental account visibility.
You have transferred Item A (Total cost = $25) from your Finished Goods to your Stores inventory, and the elemental accounts and costs associated with both subinventories are as follows: