Douglas Volz Douglas Volz Consulting doug@volzconsulting

1. Different Ways to Use Cost Elements, Sub-Elements & Cost Allocation MethodsOAUG Cost Mgmt SIG MeetingApril 19, 2011 Douglas Volz Douglas Volz Consulting doug@volzconsulting.com Sharon WidmerIndependent Consultant s_widmer@comcast.net

2. Introduction Learn about the structural basics for cost elements and sub-elements 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

3. 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 Helping people using Oracle Applications since 1990

4. 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

5. Different Ways to Use Cost Elements, Sub-Elements & Cost Allocation Methods Helping people using Oracle Applications since 1990

6. Structural Basics Legal Entities, Ledgers, Operating Units, Organizations Items and Costs Cost Elements Sub-Elements Cost Allocation Methods or Basis Types Helping people using Oracle Applications since 1990

7. Ledgers, Legal Entities, OUs, Orgs Helping people using Oracle Applications since 1990

8. Costing Concepts – Quick Run-Through Costing Methods Average Costing Standard Costing Periodic Costing FIFO Costing LIFO Costing Helping people using Oracle Applications since 1990

9. 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 Helping people using Oracle Applications since 1990

10. 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 Helping people using Oracle Applications since 1990

11. 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 Helping people using Oracle Applications since 1990

12. 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 Helping people using Oracle Applications since 1990

13. 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 Helping people using Oracle Applications since 1990

14. Sub-Elements What Types How Many? Limitations? What For? Material Material Overhead Resources Outside Processing Overhead Helping people using Oracle Applications since 1990

15. Cost Elements - Material Cost Element Sub-Element • Direct cost of procurement • Or MFG or buy costs from previous levels • Usefulness depends on costing method • Can be negative or positive • Standard cost examples • Types of metals • Composite • Steel • Aluminum • Type of ingredient • API • Reagent • Intercompany profit • Frequently just “Material” Helping people using Oracle Applications since 1990

16. Cost Elements – Material Overhead Cost Element Sub-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 • Broad use across costing methods • Material overhead • Freight • Duty • Customs • Supplier discounts (*negative material overheads) • Warehouse • Etc… * Only partial support for negative material overheads Helping people using Oracle Applications since 1990

17. Cost Elements – Resource Cost Element Sub-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 • 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 Helping people using Oracle Applications since 1990

18. Cost Elements – Outside Processing Cost Element Sub-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: • PO Receipt • Earn at standard or at PO Price • 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 Helping people using Oracle Applications since 1990

19. Cost Elements – Overhead (Production Ovhd) Cost Element Sub-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 • 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

20. Summary of Cost Allocation Methods / Basis Types Helping people using Oracle Applications since 1990

21. Cost Allocation Method Examples Helping people using Oracle Applications since 1990

22. Item Costing Setup Overview Sub-Element Defaults OrgSetup Sub-Elements Cost Method CostTypes Item Costing Helping people using Oracle Applications since 1990

23. Sub-Elements - Material Helping people using Oracle Applications since 1990

24. Sub-Elements – Material Overhead Helping people using Oracle Applications since 1990

25. Sub-Elements - Resource Helping people using Oracle Applications since 1990

26. Sub-Elements – Outside Processing Helping people using Oracle Applications since 1990

27. Sub-Elements – Production Overhead Helping people using Oracle Applications since 1990

28. Sub-Element Item Cost Defaults • Material Overhead Defaults Helping people using Oracle Applications since 1990

29. Basic Accounting for Sub-elements– Matl & Matl Ovhd Sub-Elements Receiving Value Inventory A/P Accrual 100 100 100 Stock Value Matl Ovhd Absorption 120 20 Transaction PO Receipt Delivery to Stock Delivery to Stock Mat’l Ovhd Absorption Helping people using Oracle Applications since 1990

30. Basic Accounting for Sub-elements– Resource & Resource Ovhd Sub-Elements WIP Value Resource Absorption 100 100 50 Dept. Ovhd Absorption 50 Transaction Res. Absorption Resource Ovhd(50% dept Rate) Dept. Overhead Absorption Helping people using Oracle Applications since 1990

31. Basic Accounting for Sub-elements– OSP and OSP Ovhd Sub-Elements Receiving Value Inventory A/P Accrual 100 100 100 WIP Value Dept. Ovhd Absorption 120 20 Transaction PO Receipt Delivery to WIP Delivery to WIP OSP Dept. Ovhd Absorption Helping people using Oracle Applications since 1990

32. 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 Helping people using Oracle Applications since 1990

33. 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

34. 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

35. 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 Helping people using Oracle Applications since 1990

36. Causes for Over/Under Absorption? Volume variances Rate variances Sometimes hard to distinguish Helping people using Oracle Applications since 1990

37. 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

38. 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

39. 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

40. Summary – Cost Allocation Methods Item Lot Total Value Resource Value Resource Units Activity Helping people using Oracle Applications since 1990

41. Summary of Cost Allocation Methods / Basis Types Helping people using Oracle Applications since 1990

42. 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

43. Where to get more information Douglas Volz Consulting Overview of Discrete Costing for Manufacturinghttp://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 Helping people using Oracle Applications since 1990

44. Acknowledgements • You, the OAUG Cost Mgmt SIG, thanks for attending this session • Oracle Cost Development • Partners in crime at my clients over the years Helping people using Oracle Applications since 1990

45. 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

46. 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 andCost 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 • Cost Management • Inventory • Bills of Material • 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) Helping people using Oracle Applications since 1990

47. Thank You for Your Attendance and Participation Helping people using Oracle Applications since 1990