Different Ways to Use Cost Elements,
Sub-Elements & Cost Allocation Methods
OAUG Cost Mgmt SIG Meeting
April 19, 2011
Douglas Volz
Douglas Volz Consulting
doug@volzconsulting.com
Sharon Widmer
Independent Consultant
s_widmer@comcast.net
Introduction
 Learn about the structural basics for cost elements and subelements with Oracle EBS for Discrete Costing
 Understand the differences for the various classifications of
cost elements and sub-elements
 See examples for how these have been used in different
industries
Helping people using Oracle Applications since 1990
Slide 2
Agenda
 Welcome to Our Session!
 Cost Management SIG Business
 Structural Basics / Refresher Course




Basic Inventory Structures: Ledgers, OUs, Orgs, Items
What is a Cost Element? Versus a Sub-Element?
Available Cost Allocation Methods
Differences Across Costing Methods
 Examples
 Conclusions
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Slide 3
OAUG Cost Management SIG Business
 Next OAUG Cost Management Session
 May 17, 2011 October 2-6, 2011
 R12: Tracing a sale of inventory through Oracle
 Open vacancy for OAUG Cost SIG Membership
Chairperson
 Questions, concerns, ideas for the OAUG Cost Mgmt
SIG:
 Doug Volz doug@volzconsulting.com
 Jerry Devore jerry.devore@gmail.com
 Sharon Widmer s_widmer@comcast.net
Helping people using Oracle Applications since 1990
Slide 4
Different Ways to Use Cost Elements,
Sub-Elements & Cost Allocation Methods
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Slide 5
Structural Basics
 Legal Entities, Ledgers, Operating Units, Organizations
 Items and Costs
 Cost Elements
 Sub-Elements
 Cost Allocation Methods or Basis Types
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Slide 6
Ledgers, Legal Entities, OUs, Orgs
General Ledger
Legal Entity
Operating Unit
Global
Organization
(Item Master)
Inventory
Organization
FG
Subinventory
STORES
Subinventory
The Global Org can be
across OUs
Inventory
Location
MRB
Subinventory
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Slide 7
Costing Concepts – Quick Run-Through
 Costing Methods

Average Costing

Standard Costing

Periodic Costing

FIFO Costing

LIFO Costing
Helping people using Oracle Applications since 1990
Slide 8
Costing Methods
 Standard Costing
 Unit costs are set up in advance as an expected cost
 Component costs (material costs) are defined using the projected
average acquisition costs, plus any associated indirect costs
 Assembly costs are rolled up using bills of material and routings
 Standards are reset periodically
 Average Costing
 Oracle supports a moving or weighted average cost
 The unit cost changes with each receipt transaction
 Unit costs reflect the average of the incoming receipts from:
–
–
–
–
–
purchase order receipts,
purchase order returns
inter-organization receipts
and for manufacturing, for WIP assembly completions
miscellaneous issues may or may not affect the unit cost
 Assembly costs come from the cost of your assemblies built in WIP
 You may have indirect costs (material overheads, etc.) as well
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Slide 9
Other Costing Methods (Continued)
 FIFO Costing


FIFO costing values inventory by assuming that the oldest inventory (first in) is the first
to be used or sold (first out), but there is no necessary relationship to the physical
movement of specific items
FIFO supports WIP costing
 LIFO Costing


LIFO costing values inventory by assuming that the most recently received item (last in)
is the first to be used or sold (first out), but there is no necessary relationship to the
physical movement of specific items
LIFO supports WIP costing
 Periodic Costing – Discrete Costing


Periodic has dual costing capabilities, using Periodic Costing at month-end and using
transaction-based “real-time” costing prior to month-end
Periodic supports WIP costing
 Periodic Costing – Process Costing

Different from Discrete Periodic costing, similar concepts, month-end costing
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Slide 10
Item Types – How Might You Allocate Costs?
 Oracle Item Types
 ATO Option Class
 ATO Model
 FG Finished Good
 Inventory Type
 Kit
 Model
 Option Class
 Outside Operation
 Outside Processing Item
 Purchased item
 Oracle Item Types
 Product Family
 Phantom item
 Planning
 PTO Option Class
 PTO model
 Reference item
 Subassembly
 Supply item
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Slide 11
Factors to Think About
 Different Cost Allocation Concepts to consider:
 Fixed vs. variable costing
 Cost tracing or allocation methods
 Cost Drivers
 Variations by industry
 Folded vs. costing by cost element
 Materiality
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Slide 12
Cost Elements
 Five, Count’em Five …
 Material
 Material Overhead
 Resources
 Outside Processing
 Overheads (Production Overheads)
 Can Account by Cost Element
(R12 distributions always by cost element …)
 Valuation Accounts by Cost Element
 Valuation Reporting by Cost Element
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Slide 13
Sub-Elements
Material
 What Types
 How Many?
Material Overhead
 Limitations?
 What For?
Resources
Outside Processing
Overhead
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Slide 14
Cost Elements - Material
Cost Element
 Direct cost of procurement
 Or MFG or buy costs from
previous levels
 Usefulness depends on costing
method
 Can be negative or positive
Sub-Element
 Standard cost examples
 Types of metals
• Composite
• Steel
• Aluminum
 Type of ingredient
• API
• Reagent
 Intercompany profit
 Frequently just “Material”
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Slide 15
Cost Elements – Material Overhead
Cost Element
 Indirect procurement costs
 Purchasing department
 Incoming inspection & QA
 Vendor site QA
 Receipt and warehouse cost
 Receivers
 Warehouse expense
 Supervisory expense
 Earned at:
 PO receipt
 Inter-org transfer
 WIP assembly completion
Sub-Element
 Broad use across costing
methods
Material overhead
Freight
Duty
Customs
Supplier discounts
(*negative material overheads)
 Warehouse
 Etc…





* Only partial support for
negative material overheads
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Slide 16
Cost Elements – Resource
Cost Element
 Direct cost of production
 Any factor of production





Labor
Machine time
Work center
Square feet
Anything considered a resource
 Earned at:
 During operation move
 Manual charges to an operation
Sub-Element
 Broad use across costing
methods





Labor classifications
Labor skill groups
Machine types
Work centers
Major facilities or equipment
used in production
•
•
•
•
Ovens
Wafer fabs
Paint lines
Chemical treatments
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Slide 17
Cost Elements – Outside Processing
Cost Element
 Direct cost of production
 Sub-contract or service from a
Supplier
 Typically set up an OSP item and
an OSP resource
 Receive OSP item into Receiving
 Deliver the resource into WIP
 Both a PO receipt and an OSP
resource transaction
 Earned at:
Sub-Element
 Broad use across costing
methods
 Widespread use
 Outsourced production
 Any service or transformation
made by a supplier during the
production cycle
 But many caveats for using
OSP
 PO Receipt
 Earn at standard or at PO Price
Helping people using Oracle Applications since 1990
Slide 18
Cost Elements – Overhead (Production Ovhd)
Cost Element
Indirect costs of production
Work center overheads
General production overhead
Receive OSP item into Receiving
Deliver the resource into WIP
Both a PO receipt and an OSP
resource transaction
 Direct cost of production
 Earned at:






 Operation Move
 Resource and OSP charging
Sub-Element
 Broad Use Across Costing
Methods
 Frequently by workcenter or
flow line
 Overhead rates by department
 Or you can “spread it like
peanut butter” if not
materially different
 You set up which resources
earn which overhead for a
given departmental overhead
rate
Helping people using Oracle Applications since 1990
Slide 19
Summary of Cost Allocation Methods / Basis Types
Material
Material
Overhead
Resource
OSP
Overhead
Item
Item
Item
Item
Item
Lot
Lot
Lot
Lot
Lot
Total Value
Std
Costing:
can have
labor rate
Variances
Std
Costing:
Can have
OSP PPV
Amount per
resource
unit
Amount per
resource
value
Helping people using Oracle Applications since 1990
Slide 20
Cost Allocation Method Examples
Basis Type
Meaning
Example
Item
So much per item
$10 per item
Lot
Amount per lot
$1000 for a lot size of 100
= $10/item
Total Value
Rate per value received or
made
Rate of 0.10 and $100
received = $10
Resource Units
Amount per resource unit
or value earned
10 D/L hrs earned with
$10 overhead rate = $100
Resource Value
Amount per resource unit
or value earned
$10 D/L with 100%
overhead rate = $10
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Slide 21
Item Costing Setup Overview
Sub-Element
Defaults
Org
Setup
SubElements
Cost Method
Cost
Types
Item Costing
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Slide 22
Sub-Elements - Material
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Slide 23
Sub-Elements – Material Overhead
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Slide 24
Sub-Elements - Resource
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Slide 25
Sub-Elements – Outside Processing
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Slide 26
Sub-Elements – Production Overhead
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Slide 27
Sub-Element Item Cost Defaults
 Material Overhead Defaults
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Slide 28
Basic Accounting for Sub-elements
– Matl & Matl Ovhd Sub-Elements
Transaction
PO Receipt
Delivery to Stock
Delivery to Stock
Mat’l Ovhd
Absorption
Receiving Value
Inventory A/P Accrual
100
100
100
Stock Value
120
Matl Ovhd Absorption
20
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Slide 29
Basic Accounting for Sub-elements
– Resource & Resource Ovhd Sub-Elements
Transaction
Res. Absorption
Resource Ovhd
WIP Value
Resource Absorption
100
50
100
(50% dept Rate)
Dept. Overhead
Absorption
Dept. Ovhd Absorption
50
Helping people using Oracle Applications since 1990
Slide 30
Basic Accounting for Sub-elements
– OSP and OSP Ovhd Sub-Elements
Transaction
PO Receipt
Delivery to WIP
Delivery to WIP
OSP Dept. Ovhd
Absorption
Receiving Value
Inventory A/P Accrual
100
100
100
WIP Value
120
Dept. Ovhd Absorption
20
Helping people using Oracle Applications since 1990
Slide 31
Underlying Table Structures
 Cost Elements
 CST_COST_ELEMENTS
(you cannot access this table using a form)
 Sub-Elements





BOM_RESOURCES
CST_RESOURCE_COSTS
CST_RESOURCE_OVERHEADS
BOM_DEPARTMENTS
CST_DEPARTMENTAL_OVERHEADS
 Cost Allocation Methods / Basis Types
 MFG_LOOKUPS - CST_BASIS_TYPES
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Slide 32
Caveats
 Like many things in life you can have too much of a good thing:
 Be judicious in use of sub-elements
 Try to have no more than 3 material overhead sub-elements per org
 But … OSP and Resources
• OSP - may require OSP resources for each item/supplier
• Resources for labor may be very detailed
 OSP requires significant training
• All sorts of transaction processing issues
– Received in Receiving but not delivered
– Insufficient “To Move” quantities
– Close WIP job and inventory period with open OSP balances
(patches for this)
– Receive to a closed job
Helping people using Oracle Applications since 1990
Slide 33
Cost Element vs. Sub-Element Reporting
 Cost Elements
 Valuation reporting available by cost element
 Standard, Average, FIFO, LIFO costs held by cost element
 Sub-Elements
 No valuation reporting by sub-element
 Only Standard Costing holds item costs by sub-element
(but not if using Supply Chain Cost Rollup across organizations)
 Using AVG, LIFO, FIFO:
• You can update your material overhead amounts differently
from your material overhead rates
• There are no sub-element resource names (ids) in your cost
details information (CST_ITEM_COST_DETAILS)
Helping people using Oracle Applications since 1990
Slide 34
Month-End Absorption Analysis
 General Ledger – holds the actuals
 Typically Departmental or Cost Center Expenses
 Absorption Actuals




By Sub-Element, by Absorption Account
Get from your material and wip accounting
Material transactions for material overheads
WIP transactions for resource overheads
 Compare the Two
 G/L Budget Vs. Actuals Report
 Excel analysis
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Slide 35
Causes for Over/Under Absorption?
 Volume variances
 Rate variances
 Sometimes hard to distinguish
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Slide 36
Does Oracle Landed Cost Management Help?
 Useful for items where in bound freight or shipping costs
such as tariff's are an significant part of item costs.
 Used to update item costs with P.O. header costs.
 Allocates these to the line level of the P.O.
 Useful for comparing landed product costs between two
different warehouse locations including shipping costs
 Can be used to update the material cost element or to
manage costs that would other wise be stored as material
cost overheads
Helping people using Oracle Applications since 1990
Slide 37
More About OLCM
 Oracle Landed Cost Management is a new product
 Not a lot of users yet
 As transportation costs become a more important
component of item costs this is an area that will continue to
get more attention.
Helping people using Oracle Applications since 1990
Slide 38
Summary – Cost Elements and Sub-Elements
 Cost Elements
 Five
 Write accounting entries by valuation account
 Standard inventory valuation reports by cost element
 Sub-Elements
 Only accounting absorption entries have a sub-element
(resource_id)
 No standard valuation reports by sub-element
 Standard costing maintains costs by sub-element; other
Costing Methods do not do this
Helping people using Oracle Applications since 1990
Slide 39
Summary – Cost Allocation Methods






Item
Lot
Total Value
Resource Value
Resource Units
Activity
Helping people using Oracle Applications since 1990
Slide 40
Summary of Cost Allocation Methods / Basis Types
Material
Material
Overhead
Resource
OSP
Overhead
Item
Item
Item
Item
Item
Lot
Lot
Lot
Lot
Lot
Total Value
Std
Costing:
can have
labor rate
Variances
Std
Costing:
Can have
OSP PPV
Amount per
resource
unit
Amount per
resource
value
Helping people using Oracle Applications since 1990
Slide 41
Conclusions
 Better understanding for the cost structures in Oracle
 Perhaps gained ideas on changes you may wish to make
 Generally flexible with the following limitations:
 Multi-org mass edits for material overhead rates
 Mass edits for departmental overhead rates, resource &
overhead associations and resource rates
 No valuation reporting by sub-element
 Supply Chain Cost Rollup does not keep sub-element details
Helping people using Oracle Applications since 1990
Slide 42
Where to get more information
 Douglas Volz Consulting
 Overview of Discrete Costing for Manufacturing
http://www.volzconsulting.com/resources.html
 Oracle Cost Management SIG Minutes
 April 2010: Release 11i & 12: Major Tables & Relationships for
Costing, Part I
 May 2010: Release 11i & 12: Major Tables & Relationships for
Costing, Part II
 Oracle Corporation
 Metalink: Cost Management White Papers [ID 157326.1]
 Oracle Cost Management User Guide
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Slide 43
Acknowledgements
 You, the OAUG Cost Mgmt SIG, thanks for attending this session
 Oracle Cost Development
 Partners in crime at my clients over the years
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Slide 44
Sharon Widmer (s_widmer@comcast.net)
Professional Background
.
With
over 25 years total work experience, Sharon Widmer is an accomplished Oracle Functional
Consultant and Accounting Manager, specializing in manufacturing and distribution companies. She has
14 years experience implementing Oracle Applications, and over 10 years in Accounting for Manufacturing
and Distribution companies.
Sharon has helped clients with Oracle implementations (Release 11.0.3 through Release 12.1) and
process reengineering for Inventory Control and Accounting. Industries she has worked in include High
Tech, Building Construction & Industrial Products, Telecommunications, and Life Sciences.
In a recent consulting role Sharon helped a Chip Test Equipment manufacturer and their Cost
Management team get to the next level. As a SME for Inventory Control and Cost Accounting, she helped
them achieve significant process redesign and Oracle configuration changes, which resulted in more
accurate Inventory Control and a streamlined, faster Cost Month End Close.
Core Expertise



Experience
Data Conversion – Data Cleansing
Standard Costing
Manufacturing Processes
 Cost Management
 Inventory
 Warehouse Management
 WIP
 Bills of Material
 Clients Served:
 Form Factor
 Stryker Endoscopy
 Qualcomm
 USG
 Toshiba America Business Systems
 Amkor Technology
 JDS Uniphase
Helping people using Oracle Applications since 1990
Slide 45
Douglas Volz (doug@volzconsulting.com)
Professional Background
Doug Volz is a Senior Architect and Advisor for Oracle Application projects, with a particular interest in
Cost and Project Management. He has 30 years accumulated experience, including 5 years in Oracle
Development (co-designing Oracle Cost Management) and 12 years in industry in Cost and Accounting
Management positions. His Manufacturing and Cost systems experience covers project management,
software design/development, delivery and consulting services, for both Oracle Corporation, and
multiple international consulting firms. Prior to his systems career, Mr. Volz also held numerous
management accounting positions for telecommunications, defense, and electronics companies.
In his consulting roles Doug has served over 100 clients. Many of these were multi-org, multi-currency
with global footprints. Countries include US, Mexico, UK, Netherlands, Belgium, Taiwan, P.R.O.C.,
Norway, Japan, Italy, Switzerland and Germany.
Doug leads the OAUG Cost Management Special Interest Group. He also advises and participates on
the Oracle Customer Advisory Board for Fusion Costing.
Core Expertise
Experience
 Multi-organization, Multi-currency ERP
Implementations
 Project Management and Senior Project Advisor
 Core manufacturing processes
4 Cost Management
4 Inventory
4 Bills of Material
4 WIP
 Systems Integration and Data Conversions
 Sample of clients served:
 Beckman Coulter (US)
 Matsushita (UK, Mexico)
 Logitech (US, Taiwan, P.R.C.)
 Celgene Corporation (US, Switzerland)
 NTL (UK, now Virgin Media)
 TCI International (US)
 Onninen AS (Norway)
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Slide 46
Thank You for Your Attendance and Participation
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Slide 47