Create Overhead Cost Pools Through Oracle’s MassBudgets & AutoAllocations

Create Overhead Cost Pools Through Oracle’sMassBudgets & AutoAllocations Atlanta - OAUG November 21, 2003 Presenters: Michael Anenen & Paul Kraskiewicz

Presentation Agenda • Assess & Design • Overhead Allocation Methods • Standard Cost Overhead Sub-elements • Oracle’s Overhead Application Basis Types • Cost Pool Allocation Process • Using Oracle’s MassBudgets & AutoAllocations • Questions & Answers

Assess & Design Start with the End in Mind • Determine your Allocation Method • Traditional • Activity-Base Costing • Overhead Sub-Elements • Material Overhead • Resource / Department Overhead

Assess & Design • Determine your Allocation Method • Traditional • Activity-Base Costing • Overhead Sub-Elements • Material Overhead • Resource / Department Overhead

Basic Principals Estimate overhead costs for the coming year Estimate activity for the coming year Calculate application rate as Estimated Overhead Costs / Estimated Activity Apply overhead using actual activity and the application rate. If actual overhead > applied overhead, the difference is under-applied. Under-applied overhead reduces income Overhead Allocation Methods

Activity-Based Costing Multiple Activity Based Rates Per Department Traditional Single Plant-Wide Rate Single Rate Per Department Overhead Allocation Methods

Traditional Allocation All overhead costs are applied using the same rate. Activity is measured with a single concept, such as: Direct labor hours Direct labor dollars Machine hours Advantages: Simple Arithmetic Easy to understand Disadvantages: Little relationship between costs and activities Can lead to poor business decisions Overhead Allocation Methods

Activity Based Allocation Overhead costs are divided into cost pools. Each cost pool has its own activity measure (cost driver). Number of purchase orders Number of setups Advantages: Closer causal links between costs and activity Better cost allocations Disadvantages: Complex calculations High start-up costs Overhead Allocation Methods

APPLICABILITY OF OVERHEAD ALLOCATION METHODS

Assess & Design • Determine your Allocation Method • Traditional • Activity-Base Costing • Oracle Overhead Sub-Elements • Material Overhead • Overhead

Material Overhead Resource Overhead Oracle’s Cost Elements Material Outside processing Resource

Oracle Cost ElementsMaterial Overhead & Overhead • Overhead (Resource): • This is the overhead cost of resource and outside processing. Overhead is used as a means to allocate indirect production costs. • Material Overhead: • This is the overhead cost of material, calculated as a percentage of the material cost or as a fixed charge per item, lot, or activity.

Overhead Cost Elements Materialoverhead Resource overhead Material Mgmt Facility Freight-In Benefits Overhead Cost Sub-Elements Production Control MFG Engn’g Indirect Overhead Sub-Elements

OracleApplication Basis Types • Activity:Directly associate the activity cost with the item. • Item:Assign a fixed cost per item. • Lot:Assign a lot charge to items and operations. • Resource units:Charge overhead by multiplying the overhead amount by the number of resource units earned in the routing operation. • Resource value:Charge overhead by multiplying the overhead rate by the resource value earned in the routing operation. • Total value:Charge overhead by multiplying the total cost of the item by the material overhead rate.

Overhead Cost Elements MaterialOverhead Resource Overhead Mat’l Mgmt: Activity: PO Process Facility: Resource Value Overhead Cost Sub-Elements And Application Basis Types Benefits: Resource Value Freight-In: Total Value (Buy Items) MFG Engn’g: Resource Units Prod. Control Activity: Planning Process Indirect: Resource Value Overhead ApplicationBasis Type (Example)

Oracle’s OverheadApplication Method (Example)

Overhead Rates Assigned

Overhead Cost AppliedTo Item (Example)

Need Overhead Cost Pools

Administration Budget Facility Budget Finance & IS Budget Manufacturing Organization Departmental Budget Material Overhead Cost Element Pools Overhead Cost Element Pools Facility Benefits MFG Engn’g Indirect Material Mgmt Freight-In Production Control Cost Pool AllocationStep-Down AllocationIndirect Overhead

Cost Pool AllocationMany Departments

Facility Benefits MFG Engn’g Indirect Cost Pool AllocationIndirect OverheadWhat Is The Process? Administration Budget Facility Budget Finance & IS Budget Manufacturing Organization Departmental Budget Material Overhead Cost Element Pools Overhead Cost Element Pools Material Mgmt Freight-In Production Control

SummarizeAgenda Items 1-2-3 • Assess & Design • Overhead Allocation Methods • Standard Cost Overhead Sub-elements • Oracle’s Overhead Application Basis Types • Cost Pool Allocation Process • Using Oracle’s MassBudgets & AutoAllocations • Questions & Answers

Summary - Agenda Items 1-2-3 • Design assessment > Keep the End in Mind • Overhead allocation principles • Allocation Methods: Traditional vs. Activity and the advantages and disadvantages • The applicability of overhead allocation methods • Oracle’s cost elements: MOH & ROH • Oracle’s application Basis Types • Step-down allocation process

Oracle’s MassBudgetsDefinition • A feature that allocates expenses across a group of cost centers, departments, divisions, and so on. It allows you to build a complete budget/Cost Pool using simple formulas based on actual results, other budget amounts, and statistics. • For example, you might want to allocate your facility overhead costs to each of your departments based on the square footage in each department.

MassBudgets vs. MassAllocationsWhat is the Difference? • Same Functionality • MassAllocation’s Balance Types: • Actual • Encumbrance • MassBudget’s Balance Type • Budget only

MassBudget’s Major Features • Allocate cost pools to many accounts using a single formula • Base your allocations on Current Period, Previous Period, or Year Ago, Same Period • Base your allocations on monetary or statistical account balances • Define your allocation formulas once, and use them as frequently as needed • Run MassBudgets multiple times without reversing the outdated amounts • Use MassBudgets to do rate-based, usage-based and step-down allocations • Include summary accounts or foreign currency amounts in your allocations

MassBudgeting Process Step 1: Define Cost Pool Budget Step 5: Create MassBudget batches Step 2: Copy Operating Budget to Cost Pool Budget Step 6: Define aMassBudget formula per batch Step 3: Gather Allocation Bases (Statistical Data) Step 7: Validate MassBudget Batch formulas Step 4: Review and determine Allocation formulas Step 8: Generate MassBudget journals and Post

Step 1:Define Cost Pool Budget Create a budget to represent a collection of estimated amounts for a range of accounting periods. You can use AutoCopy to create a new budget from an existing budget.

Step 2:Copy Operating Budget Amounts • Hit AutoCopy Button • SelectSource Budget

Step 3:Gather Allocation Bases (Statistical Data) • Review all required statistical accounts and enter additional values into the Account Segment. For example Headcount, Production Hours, Resource $ Value, etc. • Enter Budget amounts/journals for each account combination for all statistical data.

Step 4:Determine Allocation Formulas • Review your requirements and determine the allocation formulas. For example determine your allocation basis to allocate IS overhead to other departments. • Define Rollup Groups and Summary Accounts for allocation purposes. • List the required MassBudget batches in sequence.

Step 5:Create MassBudget Batches for Each Step-Level Group MassBudget batches by allocation level This assures accurate cost pools

Step 6:Define MassBudget Formulas

Step 7:Validate MassBudget Batch Formulas • After you define a new allocation batch, or change an allocation formula, you must validate the batch by running the MassBudget Validation program. The program verifies that your allocation formulas conform to the allocation formuladefinition rules.

Step 8:Generate MassBudget Journals • Using budget journals maintain an audit trail for your budget balances. • Generate MassBudget Journals to create unposted budget journal batches based on your validated MassBudget formulas. The generated journal batch contains an entry for every allocation formula in the batch.

UnderstandingOracle’s Formula Syntax Budget Pool (A)* [Usage Factor (B) / Total Usage (C)] OR Segment Assignments Types: - Looping >(Parent values only) - Summing >(Sum child values) - Constant >(Child Value or Parent with Summary Account) Target Account (T) Offset Account (O)

Presentation Agenda • Assess & Design • Overhead Allocation Methods • Standard Cost Overhead Sub-elements • Oracle’s Overhead Application Basis Types • Cost Pool Allocation Process • Using Oracle’s MassBudgets& AutoAllocations • Questions & Answers

Oracle’s AutoAllocation Definition • AutoAllocations is a powerful feature to automate journal batch validation and generation for MassBudgets. • Two types of AutoAllocation • Parallel AutoAllocation: Validates and generates all the journal batches in your AutoAllocation set simultaneously. • Step–Down:Create journal batches in a specific sequence. Order your journal batches so that the posted results of one step are used in the next step of the AutoAllocation set.

Step 1: Define AutoAllocation Set Step 2: Submit AutoAllocation Step 3: Review Status of AutoAllocation Step 4: Post Generated Journals AutoAllocation Process

Step1Define AutoAllocation Set

Step 2:Submit AutoAllocation Set

Step 3:View Status of AutoAllocation Set View Status for each Step

Create Overhead Cost Pools Through Oracle’s MassBudgets & AutoAllocations