Costing by Acquisition: A Brief Guide to Periodic Average Costing (PAC) for Purchased Items

An Oracle White Paper April, 2003

Costing by Acquisition: A Brief Guide to Periodic Average Costing (PAC) for Purchased Items

ABSTRACT Periodic Costing is relevant for customers with fiscal inventory reporting requirement as it is invoice-based and also allows you to include additional invoiced charges in the cost of the item. It is used also by customers who want invoice-price based valuation of their inventory to set standards or to update their perpetual costs. Thus periodic costing helps report the actual cost or the total acquisition cost of an item at the end of a fiscal period. This paper takes a close look at transactions in the procurement process to understand how Periodic Costing picks up the acquisition cost or the landed cost of an item. Periodic Costing shares that cost at the organization cost group level that can span across inventory organizations. These inventory organizations might be following different perpetual costing methods. Thus Periodic Costing is compatible with simultaneous perpetual costing. Periodic Costing requires a perpetual costing method. SCOPE & APPLICATION Periodic Costing comprises Periodic Average Costing (PAC) and Periodic Incremental LIFO Costing. This paper explores Periodic Average Costing. Within PAC, this paper delves into the procurement process to provide the best possible view of how actual costs for items are derived by the Periodic Cost Processors based on the acquisition cost. The steps in matching an invoice have been covered in some detail to familiarize audience from manufacturing and costing with the points to keep in mind for successful processing of transactions by periodic costing and for correct calculation of item costs. Audience from Purchasing and Accounts Payable may already be familiar with the invoice matching methods and steps. This paper does not elaborate on PAC topics, which are already documented in adequate detail in the existing literature, but they do get mentioned where required. Repetition has been carefully avoided without sacrificing continuity of the subject matter. The new process in Release 11i.9, Acquisition Cost Adjustment is beyond the scope of this paper. SOME CONCEPTS IN PERIODIC AVERAGE COSTING (PAC) Periodic Average Costing meets the fiscal reporting and government needs in Spain, France, Italy and Brazil. It was introduced as a new feature in Release 11i. Before the introduction of periodic costing, average costs could not be recalculated. Now, you can average your costs for activities for an entire period. This way, the order of transactions has no bearing on the valuation. Cost Owned Transactions These are transactions that carry their own costs e.g. PO Receipt, WIP Completion Transactions, transfers across organization cost groups, to name a few. These transactions are used to calculate the average unit cost, which is applied to cost derived transactions. Cost Derived Transactions These transactions are transacted at the newly computed weighted average cost of the period e.g. material issues, issues to WIP, to name a few. Sequence for calculating Transaction Costs

The designed logic works as follows the cost owned transactions are processed first. This is followed by the calculation of the weighted average cost for the period. Finally the cost derived transactions are processed. This process is repeated for each level of the bill of material (BOM) across the organization cost group. Organization Cost Group This is a cost group defined in Periodic Costing. It groups one or more inventory organizations that share periodic item costs. The periodic item cost is held at the cost type/organization cost group/period combination. CREATING THE PERIODIC COST SETUP

Fig 1. PAC Testing Environment For the test cases in this paper, that would demonstrate how PAC works, we need to create a basic setup for PAC. This has been done using the Vision database. We have used Vision Operations as our Legal Entity and Vision Operations as our Set Of Books (refer Fig 1). The steps taken are detailed below. Step 1: Define two organizations following different perpetual costing methods. The two organizations defined are: C1 Camelot Manufacturing This organization follows Average Costing as the perpetual costing method. This organization is attached to a newly defined location C1-Camelot. C1 is its own Costing Organization, with Costing Method = Average. Vision Operations (V1) is the Item Master Organization for C1 and Vision01 is the organization Calendar.

Defined subinventory Stores under C1. X1 Xanadu Manufacturing This organization follows Standard Costing as the perpetual costing method. This organization is attached to a newly defined location X1-Xanadu. X1 is its own Costing Organization, with Costing Method = Standard. Vision Operations is the Item Master Organization for X1 and Vision01 is the organization Calendar. Defined subinventory Stores under X1. Step 2: Define an Organization Cost Group and attach this cost group to a Legal Entity and an Item Master Organization Cost: Periodic Costing > Setup > Organization Cost Group Org Cost Group = CG01 Description = Vision Organization Cost Group Legal Entity = Vision Operations Item Master Organization = Vision Operations Step 3: Create a Cost Type and a Periodic Rates Cost Type Select any one of the two orgs - C1 or X1. Cost: Setup > Cost Types Define a Cost Type PAC01 for Periodic Costing. This cost type must be multi-org and not updateable. Define a Cost Type PACRates01. This is the periodic rates cost type. This cost type is multi-org and updateable. This cost type is used to hold Resource and Overhead rates. Step 4: Associate the inventory organizations with the Organization Cost Group and the Cost Type with the Legal Entity Cost: Periodic Costing > Setup > Org Cost Group/Cost Type Association Select Legal Entity Vision Operations from the drop-down list. The screen opens to display the Org Cost Group CG01 Cost: Periodic Costing > Setup > Org Cost Group/Cost Type Association > (T) Org Cost Group Associations Attach organizations X1 and C1 to CG01 as shown in Fig 2. Save your work. Cost: Periodic Costing > Setup > Org Cost Group/Cost Type Association > (T) Cost Type Associations Cost Type = PAC01 Select Cost Method as Periodic Average. (The drop down list here will display the other periodic costing method Periodic Incremental LIFO). Set Of Books = Vision Operations (USA) Periodic Rates Cost Type = PACRates01, as shown in Fig 3. Save your work.

Fig 2. Attaching organizations to the Org Cost Group Step 5: Setting Accounting Options (Optional and not used in this paper) This is set by clicking on the Accounting Options button under the Cost Type Associations tab (see Fig 3). This is an optional step that is required if we need to create accounting entries (cost distributions) and post (transfer them) to the General Ledger. If we do not create accounting entries, we cannot post to the GL and therefore, General Ledger options will not be available to us under Accounting Options. Under this option you get to select the Accounting Library as either US GAAP or as PAC Brazil. For the test case demonstration in this paper, we do not need this setup. We will not be creating cost distributions for Periodic costing. So this option has been ignored. Step 6: Closing and Opening Periodic Accounting Periods Cost: Periodic Costing > Periodic Close Cycle > Periodic Accounting Periods Periodic Accounting Periods display accounting periods for the legal entity and the cost type. Unopened periods are labeled as Future. The period statuses of Open and Closed are among the similarities Periodic Costing shares with perpetual costing methods. There is however, a striking difference. Unlike perpetual costing, Periodic Costing permits only one period to be kept open at any given time for each cost type. Since, for our investigation in this paper, we will begin with transactions in March-03, we will need to ensure that for Legal Entity = Vision Operations and Periodic Cost Type = PAC01, all periods prior to Mar-03 are closed one at a time. For a Periodic Accounting Period to be closed successfully, there should be no pending transactions for the period in Inventory, WIP or Receiving for the cost group. The perpetual periods in the respective organizations (C1 and X1) also need to be closed.

Fig 3. Associating Cost Type with Legal Entity To close each Periodic Accounting Period, the periodic cost processors that need to be run are the Periodic Acquisition Cost processor followed by the Periodic Cost processor. This is done to process the cost group CG01 till the last phase (either the cost processing phase or the distribution phase, as the case may be). Only when all the cost groups have been successfully processed, can the period be closed. The Periodic Cost Distributions processor needs to be run (after the Periodic Cost processor completes successfully) only if Create Accounting Entries has been enabled in Accounting Options. Once each processor completes its run, you can check the status by clicking on the Process Status button in the Periodic Accounting Periods screen (as shown in Fig 4 for the period closure of Feb-03). The Organization Cost Group CG01 is linked to the Set Of Books Vision Operations (USA) which is associated with the calendar Accounting. The length of the periods in this calendar will determine the length of the periodic accounting periods for Legal Entity = Vision Operations and Cost Group = CG01. A word on Partial Period Runs You can run the Acquisition Cost processor and the Periodic Cost processor for the whole period or a partial period, called a partial period run. In the course of our investigation, we would be running the two processors every time we perform a transaction that would impact the periodic cost. This would help us study the change in item cost at every stage as we go along.

Fig 4. Process status of the periodic cost processors at the close of the Feb-03 period. PAC TEST CASES IN PURCHASING We shall demonstrate six test cases. Each case would highlight certain points that would provide us with an understanding of how the PAC algorithm works. Case 1 Here, we shall raise a Purchase Order with the Invoice Match Option set to PO. We shall receive the entire consignment in one single receipt. (1) Create an item. This item will be used throughout this paper for our investigation. Inventory: Items > Master Items Create Item = 20GBHDD (using the Purchased Item Template) Description = 20GB Hard Drive Assign the item to C1 and X1. There is a requirement for 100 units of 20GBHDD in org C1. Create the first Purchase Order for this item. Purchasing: Purchase Orders > Purchase Orders Type = Standard Purchase Order Supplier = Advanced Network Devices Site = SANTA CLARA-ERS Ship-To = C1-Camelot Bill-To = V1-New York City Buyer = Stock, Ms. Pat Item = 20GBHDD, Quantity = 100, Price = $50 Promised By = Need By = 28-Mar-2003 Purchasing: Purchase Orders > Purchase Orders > (B) Shipments

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Ensured that the values are Org = C1, Ship-To = C1-Camelot Purchasing: Purchase Orders > Purchase Orders > (B) Shipments > (T) More Let the Invoice Match Option be set to PO. Purchasing: Purchase Orders > Purchase Orders > (B) Shipments > (B) Receiving Controls Receipt Routing = Direct Delivery Save your work. Noted the PO Number (3599). Purchasing: Purchase Orders > Purchase Orders > (B) Approve The PO status changes to Approved. (3) The consignment of 100 units of 20GBHDD arrives the same day (28-Mar-2003). Receive the same into C1. Purchasing: Receiving > Receipts We are in organization C1. Select Subinventory = Stores Receive the entire Qty = 100 units. Destination Type is Inventory since we are following Receipt Routing as Direct Delivery. Save your work. Note the Receipt Number (Receipt No 1). We shall be following up on this PO in Case 3. Case 2 This time, we shall raise a PO with Invoice Match Option set to Receipt. The consignment will be dispatched and received in two batches. (1) There is a requirement for another 100 units of 20GBHDD in organization C1. Create another PO for 20GBHDD. Type = Standard Purchase Order Supplier = Advanced Network Devices Site = SANTA CLARA Ship-To = C1-Camelot Bill-To = V1-New York City Buyer = Stock, Ms. Pat Item = 20GBHDD, Quantity = 100, Price = $50 Promised By = Need By = 28-Mar-2003 Purchasing: Purchase Orders > Purchase Orders > (B) Shipments > (T) More Ensure this time that Invoice Match Option is set to Receipt. Save your work and note the PO Number (3609). (2) Again, the consignment of 100 units of 20GBHDD arrives but in two different batches of 40 units and 60 units respectively. Receive the same into C1, Stores subinventory. Purchasing: Receiving > Receipts Create two separate receipts as follows: First receive 40 units. This is Receipt Number 4. Next receive the remaining 60 units. This is Receipt Number 5.

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Three days later (on 31-Mar-2003), the supplier sends an invoice for the first batch of 40 units at $55 per piece. For Periodic Costing to take note of this new price, we need to match this invoice to Receipt Number 4. Payables: Invoices > Entry > Invoices Select Type = PO Default This prompts for the PO Number. Enter PO Number = 3609 This will default the Supplier details. Enter Invoice Date = 31-Mar-2003 Enter Invoice Number = 31030303 Invoice Amount = $2,200 (for 40 units @ $55/unit) Tools > Match to Receipt Enter Quantity Invoiced = 40, Unit Price = $55, tab out Now the field Distribution Total becomes equal to the invoice Amount of $2,200. Click on the Match button. This opens the Invoices form. Click on the button Actions. Validate the Invoice. Once Validation is complete, the Validation status of the invoice changes to Needs Revalidation. This implies there are Holds placed on this invoice that need to be reviewed and addressed. Click on the Holds button. The Invoice Holds form displays: Hold Name = Price Hold Reason = Invoice Price exceeds order price. Click on the Release button. Apply: Release Name = Invoice Quick Released Release Reason = Holds released in Invoice Holds window. Click OK. This populates the Release Name and the Release Reason in the Invoice Holds form. Close this form. Now, we find the Invoice Status = Validated and Approval = Required. Again, click on the button Actions. Perform Force Approval. Thereafter, the Invoice Approval Status becomes Manually Approved. Save your work. For the last time click on the button Actions. Perform Create Accounting. This will create accounting lines for the Invoice. Note: Without this step (create accounting lines) Periodic Costing will not be able to incorporate the invoice matched price.

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The time has come to launch the periodic cost processors. Cost: Periodic Costing > Periodic Acquisition Cost Launch the Acquisition Cost Processor. Cost: Periodic Costing > Periodic Cost Once the Acquisition Cost Processor completes successfully, Launch the Periodic Cost Processor. Now check the periodic item cost. Cost: Periodic Costing > Item Cost Inquiry Enter Legal Entity = Vision Operations Cost Type = PAC01 Cost Group = CG01

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Period = Mar-03 Item = 20GBHDD Click Find. In the Item Cost Inquiry form, the Item Cost for 20GBHDD displays as $51.

Reason: We must take note of the rule that if no invoice is matched to the receipt then for that PO Receipt transaction, Periodic Costing will consider the PO price, provided the Invoice Match Option in the PO had been set to Receipt. This happened with PO Number 3609 for the 60 units that have been received but not yet matched to any invoice. However, if an invoice has been matched to the receipt then Periodic Costing will look at the invoice price. This happened with PO Number 3609 for the 40 units received (Receipt Number 4). Therefore, Periodic Cost = (Acquisition cost of the PO Receipt Transactions)/(Total quantity received) = [(100 * PO Price) + (40 * Invoice Price) + (60 * PO Price)]/(100 + 40 + 60) = [(100 * $50) + (40 * $55) + (60 * $50)]/(100 + 40 + 60) = $10,200/200 = $51 Note: Why PAC will always look at only the PO Price for PO No. 3599 will become clear in Case 3. (6) Now, for the receipt of 60 units (Receipt No. 5), the supplier sends an Invoice charging $60 per unit. Payables: Invoices > Entry > Invoices Select Type = PO Default This prompts for the PO Number. Enter PO Number = 3609 This will default the Supplier details. Enter Invoice Date = 31-Mar-2003 Enter Invoice Number = 31030304 Invoice Amount = $3,600 (for 60 units @ $60/unit) Tools > Match to Receipt Enter Quantity Invoiced = 60, Unit Price = $60 The Distribution Total becomes equal to the Invoice Amount = $3,600. Now, match this invoice. Then validate, remove the hold applied (Invoice Price exceeds order price). Manually approve the invoice and then create accounting entries. (7) Run the periodic cost processors. Cost: Periodic Costing > Periodic Acquisition Cost Launch the Acquisition Cost Processor. Cost: Periodic Costing > Periodic Cost Once the Acquisition Cost Processor completes successfully, Launch the Periodic Cost Processor. Check the item cost Cost: Periodic Costing > Item Cost Inquiry Enter Legal Entity = Vision Operations Cost Type = PAC01 Cost Group = CG01 Period = Mar-03 Item = 20GBHDD Click Find.

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In the Item Cost Inquiry form, the Item Cost for 20GBHDD displays as $54. Reason: On the same lines as explained above, this time Periodic Costing will take note of the invoice price of $60 matched against the 60 received units belonging to Receipt Number 5. Therefore, Periodic Cost = (Acquisition cost of the PO Receipt Transactions)/(Total quantity received) = [(100 * PO Price) + (40 * Invoice Price) + (60 * Invoice Price)]/(100 + 40 + 60) = [(100 * $50) + (40 * $55) + (60 * $60)]/(100 + 40 + 60) = $10,800/200 = $54 Case 3 We will now create and match an invoice for PO Number 3599. This time the supplier has sent an invoice for 100 units @ $50/unit. However, there is an additional freight charge of $200 to be borne by the buyer. Let us consider three alternate scenarios, Option 1, Option 2 and Option 3. Option 1: Creating Freight Charge by Allocation (this will demonstrate the difference between Invoice Match Option on the PO being set to PO or Receipt) (1) Payables: Invoices > Entry > Invoices Select Type = PO Default This prompts for the PO Number. Enter PO Number = 3599 This will default the Supplier details. Enter Invoice Date = 31-Mar-2003 Enter Invoice Number = 31030308 Invoice Amount = $5,200 (for 100 units @ $50/unit plus $200 for freight charges) Tools > Match to Purchase Order We cannot match to Receipt here because the invoice Match Option for PO 3599 was set to PO. Enter Quantity Invoiced = 100, Unit Price = $50 and tab out. The next field Match Amount gets populated with the value $5000 and so does the Distribution Total field. However, the Invoice Amount shows $5,200. Now 'check' the Allocate checkbox. This opens the Allocate window. Check the Freight checkbox, and enter the Freight Amount = $200. Click OK. The Allocated region would now display Freight = $200. Still, Distribution Total = $5,000 while Invoice Amount = $5,200. Now click on the Match button. In the Invoices form, we find that the Distribution Total = Invoice Amount = $5,200. Now Validate the Invoice. You will find that no holds will be placed as the Invoice Price = PO Price (=$50). Approve the invoice and run Create Accounting entries. Now click on the Distributions button. The Invoice Distributions screen shows: Item Amount = $5,000 Freight Amount = $200. Now, if we run the two Periodic Processors, we find that the Periodic cost has remained as $54.

This is not because the Unit Price entered in the invoice was the same as the PO price. This happened because of two reasons. Reason1- the Invoice Match Option on the PO was set to PO. With this setting, even if the Invoice Price were different from the PO Price, PAC would still look at the PO Price. Reason2 due to the Invoice Match Option being set to PO, the Freight charge introduced into the invoice by Allocation is ignored by PAC. Periodic Cost = (Acquisition cost of the PO Receipt Transactions)/(Total quantity received) = [(100 * PO Price) + (40 * Invoice Price) + (60 * Invoice Price)]/(100 + 40 + 60) = [(100 * $50) + (40 * $55) + (60 * $60)]/(100 + 40 + 60) = $10,800/200 = $54 Option 2: What would have happened if PO No. 3599 had Invoice Match Option set to Receipt At this point, this is only a hypothetical option, as we can no longer change the Invoice Match Option of PO No. 3599, since a receipt has already been made against this PO. But the explanation tries to show the difference it would have made! In this case, PAC would have looked at the Invoice Price of $50 for an Invoice Quantity of 100 units of 20GBHDD (Invoice amount = $5,000). PAC would then have added $200 Freight charge to this amount. This way, the acquisition cost would amount to ($5,000 + $200)/100 = $52. Therefore, Periodic Cost = [(100 * Acquisition Cost) + (40 * Invoice Price) + (60 * Invoice Price)]/(100 + 40 + 60) = [(100 * $52) + (40 * $55) + (60 * $60)]/(100 + 40 + 60) = $11,000/200 = $55 Option 3: To use the Match Type for matching Freight Charges This option would be explored in Case 6. Recapitulation of key points from Case 3: PO Price versus Invoice Price Allocation of Tax, Freight or Miscellaneous charges Invoice Match Option: PO PAC picks up the PO price even if the Invoice Price is different. PAC ignores Tax, Freight or Miscellaneous Amounts if entered in the same invoice by checking the Allocation checkbox. Invoice Match Option: Receipt PAC picks up the Invoice Price. PAC includes Tax, Freight or Miscellaneous Amounts in the acquisition cost when using the Allocation checkbox.

Special Note: The Organization Cost Group that we have defined for Periodic Costing (CG01) is above the Inventory organizations C1 and X1. Periodic costing shares costs not at the inventory organization level but at the Organization Cost Group level. The following example from our earlier transactions demonstrates this. In inventory organization C1, we have performed certain transactions with item 20GBHDD, because of which, the Periodic Item Cost = $54 (assuming we followed Option 1 in Case 3 above). What would be the perpetual average cost of 20GBHDD in C1? Cost: Item Costs > Item Costs If we check the Item Cost form for Item 20GBHDD, we find the item has a Material Cost = $50 under the Average Cost Type (C1 has Average Costing as the Perpetual Costing method). Since, Quantity Received = 200 and Extended Value = $10,000. Now change organization to X1. Cost: Item Costs > Item Costs

If we check the Item Cost form for Item 20GBHDD, we find the item has zero cost under the Frozen Cost type (X1 is Standard Costing org). This is because no standard cost has yet been defined for 20GBHDD in X1 and the item is yet to be transacted in X1. Still in X1, navigate to Cost: Periodic Costing > Item Cost Inquiry Legal Entity = Vision Operations Cost Type = PAC01 Cost Group = CG01 Period = Mar-03 Item = 20GBHDD Click Find. The Periodic Item Cost = $54. Thus, the periodic cost for item 20GBHDD is shared across organizations C1 and X1. Closing the Mar-03 periodic cost accounting period The Period end cost and quantity are stored in CST_PAC_ITEM_COSTS table. The cost_layer_id is unique for a period/organization cost group/item combination. SQL> 2 3 4 5 6 7 8 9 select cost_layer_id CL_ID, pac_period_id PERIOD, cost_group_id CG_ID, inventory_item_id ITEM_ID, item_cost COST, total_layer_quantity QTY from cst_pac_item_costs where inventory_item_id = 7864 /* Item 20GBHDD */ and cost_group_id = 1512; /* Org Cost Group CG01 */

CL_ID PERIOD CG_ID ITEM_ID COST QTY ---------- ---------- ---------- ---------- ---------- ---------141 202 1512 7864 54 200 When closing a Periodic Accounting Period of Mar-03 (From 01-Mar-2003 to 31-Mar-2003) on 31-Mar-2003, we get the error "Cannot close a period with end date in future". This means this period can be closed only on 01-Apr-2003. On 01-Apr-2003, when we try to close the Periodic Accounting Period of Mar-03, the system pops an error "Last Cost Manager run was before the period ending date. Rerun cost manager to completely process all proceeding transactions". This is a mandatory system check, even though no transactions were processed after the last run of the Periodic Acquisition and Cost processors. The Periodic Inventory Value Report We shall now run the Periodic Inventory Value Report for the item 20GBHDD for Mar-03 (Refer Fig 5). The Periodic Cost for the item at the close of the Mar-03 period is reflected as the Material Unit Cost.

Fig 5. The Periodic Inventory Value Report for item 20GBHDD for the period Mar-03

Case 4 We would now be carrying the periodic cost over to the next periodic accounting period. Now, the March-03 perpetual costing (for both C1 and X1) and Periodic Cost Accounting periods have been closed. The period for Apr-03 has been opened in perpetual costing (for both C1 and X1) as well as in Periodic Costing. Cost: Periodic Costing > Item Cost Inquiry Legal Entity = Vision Operations Cost Type = PAC01 Cost Group = CG01 Period = Apr-03 Item = 20GBHDD Click Find. The Periodic Item Cost = 0. Run the Periodic Acquisition Processor followed by the Periodic Cost Processor. This will create a new record for our item 20GBHDD (inventory_item_id = 7864) for the new period Apr-03(period_id = 221) and for the Cost Group CG01 (cost_group_id = 1512) into the table CST_PAC_ITEM_COSTS. SQL> 2 3 4 5 6 7 select cost_layer_id CL_ID, pac_period_id PERIOD, cost_group_id CG_ID, inventory_item_id ITEM_ID, item_cost COST, total_layer_quantity QTY from cst_pac_item_costs;

CL_ID PERIOD CG_ID ITEM_ID COST QTY ---------- ---------- ---------- ---------- ---------- ---------161 221 1512 7864 54 200 (Apr-03) 141 202 1512 7864 54 200 (Mar-03) To summarize, on 01-Apr-2003, the costs for item 20GBHDD appear as follows: Periodic Cost (org cost group CG01) = $54 (Both C1 and X1 are sharing the periodic cost of $54 under the org cost group CG01) (Perpetual) Average Cost (C1) = $50 (Perpetual) Standard Cost (X1) = 0 Case 5 Now, we shall bring in the Standard Costing org X1 into the picture. We shall now perform some transactions for 20GBHDD in org X1, and investigate how this impacts the periodic cost. But, first let us create a standard cost for 20GBHDD in X1. (1) Costs: Item Costs > Item Costs Select org X1. In the Item Costs Summary form, create a record for 20GBHDD for Cost Type say Pending. Click on the Costs button. In the Item Costs form enter Cost Element = Material Sub-Element = MATERIAL (previously defined)

Basis = Item Rate or Amount = 50 Save your work. Cost: Item Costs > Standard Cost Update > Update Costs Run the Standard Cost Update for Cost type = Pending and Specific Item 20GBHDD. Once this process completes successfully, the item will have a Material unit cost = $50 in the Frozen Cost Type. (2) 200 units of 20GBHDD are required in X1. Purchasing: Purchase Orders > Purchase Orders Create a PO for 200 units for 20GBHDD at $50 per unit. Ship-To = X1-Xanadu Promised Date = Need By Date = 01-Apr-2003 Purchasing: Purchase Orders > Purchase Orders > (B) Shipment > (T) More Invoice Match Option = Receipt Save your work. PO Number = 3611. Approve the PO. Purchasing: Receiving > Receipts In org X1, receive the entire 200 units into Stores subinventory. Receipt No 2. So we have received 200 units @ $50/unit. (3) Now run the Periodic Acquisition Processor and the Periodic Cost Processor. In the Item Cost Inquiry, check the Periodic Item Cost for 20GBHDD. Periodic Item Cost = $52.

Reason: Periodic Cost = [(Balance Qty from Previous Period * Previous Period Acquisition Cost) + (Received Qty * PO Price)] /(Balance Qty from Previous Period + Received Qty) = [(200 * $54) + (200 * $50)]/(200 + 200) = $20,800/400 = $52 The point to note here is that the balance quantity from the previous period and the previous period's cost of $54 exist due to transactions carried in org C1. However, under Periodic Costing they will impact the periodic cost based on transactions in org X1 as well because both X1 and C1 share the same org Cost Group CG01. This explains why an Organization Cost Group in Periodic Costing can have multiple inventory orgs under it following different perpetual costing methods. Periodic Costing rises above perpetual costing at the inventory org level and functions at the Organization Cost Group level. A Special Note on Cost Layers and Quantity Layers in Periodic Average Costing (PAC): SQL> 2 3 4 5 6 7 8 9 select cost_layer_id CL_ID, pac_period_id PERIOD, cost_group_id CG_ID, inventory_item_id ITEM_ID, item_cost COST, total_layer_quantity QTY from cst_pac_item_costs where cost_group_id = 1512 /* Cost Group = CG01 */ and inventory_item_id = 7864; /* Item = 20GBHDD */

CL_ID PERIOD CG_ID ITEM_ID COST QTY ---------- ---------- ---------- ---------- ---------- ---------181 221 1512 7864 52 400 (Apr-03) 141 202 1512 7864 54 200 (Mar-03) CST_PAC_ITEM_COSTS stores the item cost and quantity in a period and organization cost group. In Periodic Average Costing, the COST_LAYER_ID is unique for a period/organization cost group/item combination. This means that for all transactions performed in the period Mar-03 for the item 20GBHDD in the organization cost group CG01, there will be one unique cost_layer_id in the PAC tables. This is not the case with Periodic Incremental LIFO Costing. Now, consider the quantity layers. SQL> 2 3 4 5 6 7 8 9 10 select quantity_layer_id QTYL_ID, cost_layer_id CL_ID, pac_period_id PERIOD, cost_group_id CG_ID, inventory_item_id ITEM_ID, layer_quantity QTY, begin_layer_quantity BEGIN_QTY from CST_PAC_QUANTITY_LAYERS where cost_group_id = 1512 and inventory_item_id = 7864;

QTYL_ID CL_ID PERIOD CG_ID ITEM_ID QTY BEGIN_QTY --------- ---------- ---------- ---------- ---------- ---------- ---------181 181 221 1512 7864 400 200 (Apr-03) 141 141 202 1512 7864 200 0 (Mar-03) CST_PAC_QUANTITY_LAYERS stores the layer quantity of an item by period. The quantity_layer_id is unique for a period and cost layer combination. In the periodic LIFO method, multiple layers may exist in the same period. In the case of periodic weighted average costing method, only one layer exists in each period. The layer_quantity field stores the period end quantity for an item/cost group combination. The begin_layer_quantity field, stores the opening stock for the period. In Mar-03, there was zero stock for 20GBHDD to begin with. However, at the close of the Mar-03 period we had received 200 units for the item into C1. This became the begin_layer_quantity value for Apr-03. Thereafter, we have received an additional 200 units into X1. Thus at this point of time the layer_quantity for Apr-03 appears as 400. (4) For the 200 units received into X1 we shall now create and match an invoice to complete our investigation on Case 5. For the 200 units of 20GBHDD received into org X1, the supplier sends an invoice for the entire quantity @ $62/unit. He has included the transportation cost as well. Payables: Invoices > Entry > Invoices Invoice Date = 02-Apr-2003 Invoice Number = 02040301 Invoice Amount = $12,400 Match to Receipt. Validate, Release Hold, Approve the invoice and then run Create Accounting.

Now return to Periodic Costing and run the Periodic Acquisition Cost Processor followed by the Periodic Cost Processor. View the Periodic Item Cost in the Item Cost Inquiry. Periodic Item Cost = $58 Reason: Periodic Cost = [(Balance Qty from Previous Period * Previous Period Acquisition Cost) + (Received Qty * Invoice Price)] /(Balance Qty from Previous Period + Received Qty) = [(200 * $54) + (200 * $62)]/(200 + 200) = $23,200/400 = $58 Case 6 Here, in the final case, there is a requirement for 100 units of 20GBHDD in X1. Of these, 30 units are required urgently. Supplier has sufficient stocks to supply the required quantities off the shelf. However, owing to the urgency, management in X1 decides that the supplier arranges to have the 30 units sent by express courier. The courier agency would present the invoice separately to X1. The remaining 70 units would be shipped by the supplier using his own transporter. The freight charges for these 70 units would be included in the same invoice that would contain the billing details of these 70 units. (1) Create a PO for 100 units of 20GBHDD with Ship-To as X1-Xanadu. PO Price = $50 Promised = Need-By Date = 12-Apr-2003. Invoice Match Option = Receipt Save your work. Note the PO Number (3680). Approve the PO. The 30 units arrive by express courier. Receive these into Stores subinventory. Receipt Number 9. This is followed by the remaining consignment of 70 units. Receive these into the Stores subinventory. This is Receipt Number 10. Run the periodic cost processors. Query the item in Item Cost Inquiry. Periodic Item Cost = $56.4

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(3)

Reason: Periodic Cost = [(400 * $58) + (100 * $50)]/(400 + 100) = $28,200/500 = $56.4 (4) The supplier sends an invoice with the following billing details: 30 units charged @ $52/unit 70 units charged @ $55/unit Freight charge worth $250 for the 70 units consignment. Create a single Invoice covering all the above details. Invoice Amount = [(30 * $52) + (70 * $55) + 250] = $1,560 + $3,850 + $250 = $5,660 This invoice amount spread over 100 units would give an Acquisition Cost of $5,660/100 = $56.6 Tools > Match to Receipt Enter the PO Number and click Find.

Fig 6. Allocating Freight Charge in Invoice to Receipt No 10 As shown above, Allocate $250 worth Freight charge for Receipt No 10. Click on the Match button. Validate, remove Holds (due to difference between PO price and Invoice price), Approve and Create Accounting entries for the invoice. (5) Run the Periodic Cost processors. Check the item cost. Periodic Item Cost = $57.72

Reason: Periodic Cost = [(400 * $58) + (100 * Acquisition Cost)]/(400 + 100) = [(400 * $58) + (100 * $56.6)]/(400 + 100) = $28,860/500 = $57.72 (6) Now the courier agency sends the invoice for Freight charges for the 30 units express delivered. Invoice Amount = $300 Create an invoice with Invoice Amount = $300 and Matching Type = Freight (so far we had been using Matching Type = Item). Enter Freight amount = $300. Validate and Approve the invoice. Create Accounting Entries. Run the periodic cost processors. Check the item cost.

(7)

Periodic Item Cost = $58.32 Reason: Periodic Cost = [(400 * $58) + (100 * Acquisition Cost) + $300]/(400 + 100) = [(400 * $58) + (100 * $56.6) + $300]/(400 + 100) = $29,160/500 = $58.32 Now, if we run the Periodic Inventory Value Report the periodic cost of $58.32 is reflected as the Material Unit Cost (Fig. 7).

Fig 7. The Periodic Inventory Value Report for item 20GBHDD for the period Apr-03

CONCLUSION Periodic cost is shared across inventory organizations each of which could be following its own perpetual costing method (Standard, FIFO, LIFO or Average). This arrangement is possible because the periodic cost is held at the periodic cost type/organization cost group/period combination. To ensure that Periodic Average Costing picks up the acquisition cost from the invoice, the purchase order should have the Invoice Match Option set to Receipt. Once this is done, PAC would pick up the invoice price as well as freight or other charges that are levied either on the same invoice (by Allocation) or on a separate invoice (by using the Match Type option). ACKNOWLEDGEMENT I wish to record my sincere appreciation towards Dhriti Kant Pal, for suggesting the topic for this paper in the first place. Tom Marik and Mario Mueller, for their valuable guidance on some specific issues. A special thanks to Tom and his colleagues for reviewing this document and for making it complete with their inputs. Diane Davis, for her invaluable help through the review and the publishing process. ABOUT THE AUTHOR Saumit Mandal CPIM, is a Senior Support Analyst and a BDE for Core Manufacturing at Oracles India Support Center, Bangalore.

White Paper: Costing by Acquisition: A Brief Guide to Periodic Average Costing (PAC) for Purchased Items Author: Saumit Mandal CPIM Contributing Authors: N/A Oracle Corporation World Headquarters 500 Oracle Parkway Redwood Shores, CA 94065 U.S.A. Worldwide Inquiries: Phone: +1.650.506.7000 Fax: +1.650.506.7200 www.oracle.com Oracle is a registered trademark of Oracle Corporation. Various product and service names referenced herein may be trademarks of Oracle Corporation. All other product and service names mentioned may be trademarks of their respective owners. Copyright 2003 Oracle Corporation All rights reserved.