Periodic Actual Cost Processing Logic

An Oracle White Paper June 2003

Periodic Actual Cost Processing Logic

Table of Contents 1.0 Executive Overview ................................................................................... 1 2.0 Introduction................................................................................................. 2 3.0 FUNCTIONAL ASPECTS ...................................................................... 2 4.0 PRE-REQUISITE...................................................................................... 2 4.1 Item Master & Item Validation Org:............................................................ 2 4.2 Cost Master: ................................................................................................ 3 4.3 Transaction Types in PAC logic: ................................................................. 3 4.3.1 Cost Owned Transactions: ................................................................... 3 4.3.2 Cost Derived Transactions ................................................................... 3 5.0 PERIODIC COST PROCESSING LOGIC......................................... 3 6.0 SET UP ........................................................................................................ 5 6.1 Some Basic Setups ...................................................................................... 5 6.2 Organization Cost Groups And Cost Types Matrix: .................................... 5 6.3 SETUPS...................................................................................................... 6 6.3.1 Basic Assumptions: .............................................................................. 6 6.3.2 Periodic Costing Setup ......................................................................... 6 6.3.3 BOM STRUCTURE: ........................................................................... 9 6.3.4 WORK CENTRE STRUCTURE: ....................................................... 9 6.3.5 RESOURCE / OVERHEAD SETUP ................................................ 9 7.0 BUSINESS SCENARIOS....................................................................... 10 8.0 WATCH OUT FOR...................................................................................... 27 9.0 Conclusion: ................................................................................................ 28

Periodic Actual Cost Processing Logic

1.0 EXECUTIVE OVERVIEW
Oracle Cost Management provides the functionality of Periodic costing in which users can maintain the cost of the item at fiscal cost group / Legal Entity level. The objective of this paper is to analyze in detail the functionality of periodic actual cost processing logic and the basic setup required for implementing periodic average costing. This analysis will be presented in the form of a lab exercise. This paper is intended for users who already have basic knowledge of Oracle Cost Management functionality.

2.0 INTRODUCTION
Periodic Costing is an option that enables customers to value inventory on a periodic basis. As an option to the mandatory perpetual costing system, which uses either the standard or average or FIFO or LIFO costing methods, Oracle Cost Management provides support for two methods of Periodic Costing: - Periodic Average Costing (PAC) - Periodic Incremental LIFO (Last In First Out) This paper describes in detail the Periodic costing setup and the cost processing logic for transactions in following scenarios: Cost for the Buy Item with invoice Match Option set as At Receipt and with allocated freight Charges. Cost for the Buy Item with invoice Match Option set as At PO and with allocated freight and miscellaneous charges. Periodic Cost for Assembly Item covering different costing scenarios in WIP like having Assembly Return, Assembly scrap transactions, partial completion etc in a period. Moreover in this paper we will basically analyze costing of various transactions in a period and how the cost processor sequence these transactions while calculating the Periodic average cost for the Items.

3.0 FUNCTIONAL ASPECTS

There are three principal objectives of Periodic Costing: To capture actual acquisition costs based on supplier invoiced amounts plus other direct procurement charges required by national legislation or company policy To capture actual transaction costs using fully absorbed resource and overhead rates To average inventory costs over a prescribed period, rather than on a transactional basis Customers having Inventory organizations that are the same fiscal entity (have the same tax inscription number) need to have the same average cost (legal requirement). This means that to calculate the average cost of an item that belongs to more than one inventory organization, the average cost calculation algorithm has to work across all organizations belonging to the Fiscal Cost Group. The inventory organizations belonging to the same Fiscal Cost Group will then share the costing structure and accounts. Periodic Costing is used by the customers who: Want to incorporate acquisition costs in your inventory valuation, possibly to set standards or update perpetual standard costs. Are in a country with a fiscal requirement to transact and/or report on inventory costs using one or both Periodic Costing methods. Note: Periodic Actual Costing is done at the Fiscal Cost Group level.

4.0 PRE-REQUISITE
4.1 Item Master & Item Validation Org: Item Master Org is the item definition org. All the new organization get its item definitions from Item Master Org. It is possible to have a common item master organization across set of books/ Legal Entity / Operating Unit structure since Inventory does not fall within the multi-org structure (data identification, security, etc is by inventory Organization, not Operating Unit). Also it is possible to assign any item from the Item Master org to the new org & then change any org-controlled attributes separately in the new org. In our setup we will be using M_O as the Item Master Organization. When you define a multi-org enabled function - i.e. one where the data is segregated & secured by Operating Unit - you have to tell it which items are visible to it. This is achieved by referencing an organization in the set up of the function within the Operating Unit. For AP & PO this is via the Financial Options form. The module (AP, PO, OM etc) will derive information about the item

from this organization. Some of the information will be Set Of Books related (money values, account codes), some will be Operating Unit related (tax codes). So the values had better be valid for the Operating Unit. So the inventory organization referred to has to belong to the Operating Unit. This org is known as the Item Validation org. In our setup for Operating Unit O_U we have defined O_1 as the item validation org. So, in summary: Item Master can be anywhere within the Set Of Books / Multi-org structure. Determines which items can be assigned to your inventory organization. Item Validation must exist within the Operating Unit's SOB. Determines which items can be seen by AP / PO/ OM/AR in that Operating Unit. 4.2 Cost Master: When defining the Inventory Org, you either point to the Item Master org (as Costing Master) or the organization you are defining - there's no other choice and it is determined by item attribute settings (control at Master level or Org level for the costing attributes). However, when WIP is installed you can only have the org be its own cost master. 4.3 Transaction Types in PAC logic: Basically we categorize material transactions under following categories based on Transaction types: 4.3.1 Cost Owned Transactions: The Cost Owned transactions carry its own transaction values and can be sub-divided into two sub-groups. a): These transactions will be processed first to calculate the period weighted average item costs (PWAC). It includes PO Receipt, Return To Vendor, PO Distribution Adjustment, MISC transactions with a value, and InterOrganization Transfer. Referred in this paper as Group 1 transactions. b): WIP Scrap, Assembly Return, and WIP Completion. It is Cost Owned transactions, however, it requires to process previous level transactions first. Referred in this paper as Group 1' transactions. 4.3.2 Cost Derived Transactions Cost Derived transactions use system calculated PWAC which is based on Cost Owned transactions. Referred in this paper as Group 2 transactions. Group 2: Material Inventory Transactions to use above Period Average Costs. It includes Account Issues, WIP issues, Return from WIP, Material Issue, Cycle Count Adjustment, Physical Adjustment, Sub-Inventory Transfer, Sales Order Issues, and MISC transactions w/o a user entered value.

5.0 PERIODIC COST PROCESSING LOGIC

Periodic Costing allows you to cost items from one or more inventory organizations on a periodic basis. This cost is based on invoice price if the invoice is available; otherwise, the purchase price is used for purchased items. For manufactured items, Periodic Costing is the sum of the actual cost of resources and materials consumed. Weighted average actual cost of a manufactured item is a rollup of average actual resource cost, average actual outside processing cost, average actual material cost and average standard overhead cost incurred up to a specified period for completing one unit assembly of that item. In Periodic costing WIP Module processes WIP related transactions, charges Materials to jobs and relieves costs from the jobs for completion, return or scrap.

Logically periodic cost processing can be categorized under following phases: a) Compute Acquisition Cost This cost is calculated cost for all purchased items in the period based on receipt-invoice matching. If the invoice price is not available, it uses PO price for acquisition cost. b) Current Period Beginning Balance: In general, the last period ending balance is the current period beginning balance. This is used in computing the current cost of the item in the current period. c) Low Level Computation In this phase cost processor fetches items having WIP assembly completion, scrap or returns transactions and calculate the low level code. The periodic cost manager processes transactions these transactions and other cost derived transactions for these items based on low level codes starting from the lowest level. d) WIP Job Information: The WIP cost processor builds resource and overhead information for all relevant jobs. WIP Resource-Overhead cost is calculated based on move transactions quantity completed past each operation for a given job for the period and Resource/OSP charges based on periodic rates. For outside processing, the acquisition cost is taken. For each resource/OSP transaction, resource/OSP based overheads are applied to the WIP operation based on periodic Rates for the resources charged. The move-based overheads are charges based on periodic Rates set up in the periodic cost type for the inventory organization. WIP cost processor computes the net material quantity issued for this period (This information is build while processing the component material transaction or backflush transactions). Adds the charges incurred in this period to the beginning balance for the period (obtained from the prior period run). This is used to get the elemental job value of each discrete job. If a job close transaction lies in the period it flushes out values for discrete jobs. It also flushes out the value from all jobs (non standard) that do not have an assembly reference. e) Cost Processing for Group 1 and 2 The periodic cost manager initially calculates periodic weighted average cost for all the items having un-costed material transactions, carrying their own acquisition cost (Group 1). While processing cost carrying transactions, they are ordered by transaction date and time. When the manager completes cost carrying transactions, it processes all un-costed cost derived transaction for items having no completion transactions in the period i.e.. those transactions, which do not require to process previous level transactions first, using the PWAC calculated above. Then periodic cost manager processes transactions for items having WIP assembly Completion, Assembly Scrap, and Return transactions, since previous level transactions are already processed for these items. Periodic cost manager fetches remaining cost derived transactions based on low level codes starting from the lowest level.

6.0 SET UP
Figure 1:Basic Organization Structure
PAC ORG SETUP
S_O_B Set of Books

L_E Legal Entity

O_U Operating Unit

M_O Item Master ORG

O_1 STD Discrete

O_2 Avg Discrete

C_G Cost Group

07/02/03

6.1 Some Basic Setups Make Sure you set following Profile Options: GL SET OF BOOKS NAME: To S_O_B at Responsibility Level Your GL responsibility. MO: OPERATING UNIT: To O_U at Responsibility Level (FOR AP/PO/OM.etc). Make Sure you open the following periods: - GL periods. - Inventory Period - Purchasing Period - Periodic costing Period Before you start basic setups in Purchasing make sure you need to run Request Replicate seed data. Now in Purchasing you need to do following setup: - For your User associate it with Employee. Check whether you have associated this Employee with proper Job & Positions. - Need to associate this User with HR Organization also. - Now in Purchasing you need to setup the values for seeded Document types Standard PO, Standard Requisition etc. - Need to do setup for Purchasing Options & Financial Options. In Payables: - Need to do setup in Payables for Payables Option. - Make sure you set the correct Value for the profile MO: Operating Unit for the Payables responsibility. - In Payables setup set the tolerance value for the Invoices. In Bills Of Material and WIP - Make sure to set the BOM parameters (level) and WIP parameters for the newly created Orgs.

Please note that these are just few necessary setups, which were required for the scenario covered under this paper. You might need to do further more setups depending on the scenarios you need to cover. 6.2 Organization Cost Groups And Cost Types Matrix: Table 1 Organization Cost Group Cost Types Matrix
Cost Type Rate Cost Type Name Chart of Accounts Periodic Set of Books Functional Currency Calendar Calendar

Period Type MS_PAC Org Cost Group C_G MSA_PAC_R Cost Type MS_PAC S_O_B Operations Accounting Flex USD Accounting Month

6.3 SETUPS 6.3.1 Basic Assumptions: 1. There is one and only one Master Item Organization for each Organization type Cost Group. 2. All inventory organizations can belong to one and only one Organization type Cost Group. 3. When the user define Organization type Cost Group, it must be associated to specific Legal Entity. 4. Frozen and Average Cost Types cannot be used for Periodic Costing, and it must be Multi-Org and Non-Updatable. 5. Periodic Rates Cost Type must be Multi-Org and Updatable. 6. Cost Types used for Periodic Costing cannot be disabled. 7. Organization type Cost Group cannot be disabled. 8. Actual Cost extension is not allowed for Cost Derived transactions, WIP Assembly Completion, and WIP Assembly return. 6.3.2 Periodic Costing Setup i) Define Organization Cost Group: Create organization cost group MCG1 Navigation Path: Cost Periodic Costing Setup Organization Cost Group Cost group = C_G Description = Cost Group 1 for L_E Legal entity = L_E Item Master Org = M_O Save.
Figure 2:Organization Cost Group

ii) Associate Organization Cost Group to Organizations Associate organizations to C_G. Navigation Path: Cost Periodic Costing Setup Cost Group/Cost Type Associations Choose L_E from LOV for legal entity Folder = Cost Group Associations If Cost Group field does not display C_G, arrow up or down to have it displayed.

Move cursor to Organization column, choose O_1 from LOV. On next line, choose O_2 from LOV. Save

Figure 3:Org Cost Group / Cost Type Association

iii) Associate Cost Type to Legal Entity Prerequisite: 1. Create cost types MS_PAC (to hold item cost). Create cost types MSA_PAC_R (to hold resource and overhead rates) 2. Create calendars MS_PAC_MONTHLY
3.

Create Set of Books S_O_B

Associate Cost Type to Legal Entity L_E Navigation Path: Cost Periodic Average Costing Setup Associations Choose L_E from LOV for legal entity Tab = Cost Type Associations Choose cost type MS_PAC from LOV

Cost Group/Cost Type

Cost Method - Choose Periodic Weighted Average from LOV Set of Book = - Enter S_O_B or choose set of book from LOV Periodic Rate Cost Type - Enter MSA_PAC_R or choose from LOV Save

Figure 4:Accounting Options in PAC

iv) Assign Accounts to Organization Cost Group/Cost Type Association Assign Accounts Navigation Path: Cost Periodic Costing Setup Periodic Account Assignment Open the first periodic accounting period Cost Periodic Costing Periodic Close Cycle Periodic Accounting Periods Legal Entity = L_E (enter or choose from LOV) Cost Type = MS_PAC (enter or choose from LOV) Hit Enter or click on Find button Select period APR-03 and click on Change Status button [This is the period that you would like to first process Period Average Costing. It does not have to be the very first period of the calendar] Click OK button in Caution window

Figure 5:Periodic Account Assignment

Cost group category level accounts: used to perform periodic inventory accounting based on categories defined in the master item

organization for the cost group.

Cost group level accounts: used independently of the category to define variance and inventory offset accounts. 6.3.3 BOM STRUCTURE: Basically we will be doing all the transactions based on following Assembly structures for explaining the periodic cost processing logic:
Figure 6:Assembly Structure for Item P

Assembly

Figure 7:: Assembly Structure for Item 'Z'

Assembly Z

6.3.4 WORK CENTRE STRUCTURE:

Figure 8 :: Work Centre Structure for Department D_1
D-1

R_m1 Rate :15/ Item

R_m2 Rate : 20 / Item

6.3.5 RESOURCE / OVERHEAD SETUP

Table 2: Resource / Overhead Details

Resources

Basis

Usage

Availability

Rate

Cost Type

R_m1

Item

Available 24Hrs Available 24Hrs Department D_1

15/Item

15/Ite m
20/Item 20/Item 10/Item

Frozen MSA_PAC_R Frozen MSA_PAC_R Pending MSA_PAC_R

R_m2 O_m1

Item Item

10/Ite m

7.0 BUSINESS SCENARIOS

In this white paper we will be focusing more on Transactions related to Oracle Work in Process. For having more details on understanding PAC logic for Purchased Items, users can also refer the white paper Note 236950.1.

To summarize the scenarios we are covering in this paper: Scenario 1: Cost for the Buy Item R & S with invoice Match Option set as At Receipt Scenario 2: Scenario 3: Scenario 3.1: Scenario 3.2: Scenario 3.3: Scenario 3.3.1: Scenario 3.3.2: Scenario 3.4: Scenario 3.5: Scenario 4 : Scenario 5: Cost for the Buy Item R & S with invoice Match Option set as At PO and with allocated freight charges. Periodic Cost Calculation for Assembly Item P Completing WIP job with a scraped quantity. (Posted as variance at job close) Effects of Assembly return transaction on Periodic Cost Calculation for Assembly Item. Completing WIP job with a scraped quantity (Posted against the scrap account) Doing Scrap transaction at the last Operation. Doing Scrap Transaction in first Operation. WIP transaction costing for Assembly Item with manual resource transactions A WIP Component Issue transaction for an Assembly Item: Completing WIP Non-Standard job with assembly associated Effect of Driving inventory Negative in Periodic Average costing. Periodic Close Cycle.

Scenario 1: Cost for the Buy Item R & S with invoice Match Option set as At Receipt Step a) Create PO for Item R for Qty 20 @100 and S for Qty 20 @150. Receive the PO.

Figure 9:PO details for Item R & S

Step b) Create Invoice. (Allocated 10$ each as freight charges while creating the invoice with both the lines of the PO # 9).
Figure 10:Invoice details

Step c) Match the Invoice. Run the Payables Accounting Process for creating Accounting. Periodic acquisition Cost Calculation Logic: Run the acquisition Cost Processor and Periodic Cost Processor and see the Periodic Cost for these items: Calculation Logic: Acquisition Cost For Item R: (Invoice Amount Matched) / Total Quantity Received. = (2010) / 20 = 100.5 Acquisition Cost For Item S: (Invoice Amount Matched) / Total Quantity Received. = (3010) / 20 = 150.5 This will be the Periodic Weighted Average Cost (PWAC) since there is no beginning balance Qty for these Items. PWAC = (Beginning-Balance-Qty*Previous-Period-AcquisitionCost+ReceivedQty*Acquisition Cost) ------------------------------------------------------------------------(Beginning Balance Qty + Received Qty)
Figure 11 PWAC for Item R & S

After this we Created another PO for Item R for Qty 5 @105 $ and for S for Qty 5 @ 145 $

Created the invoice. Match the invoice with invoice amount of 540 and 740 respectively for item R and S. Re-ran the acquisition Cost Processor and Periodic Cost Processor and now the Periodic Cost for these items: Calculation Logic: Acquisition Cost For Item R: (Invoice Amount Matched) / Total Quantity Received. = (540) / 5 = 108 Acquisition Cost For Item S: (Invoice Amount Matched) / Total Quantity Received. = (740) / 5 = 148 Now Periodic Weighted Average Cost (PWAC) for these Items will be calculated as follows: PWAC for Item R: (20*100.5 + 108*5) / 25 = 102. PWAC for Item S: (20*150.5 + 148*5) / 25 = 150.
Figure 12 :PWAC for Item R & S

Scenario 2: Cost for the Buy Item R & S with invoice Match Option set as At PO and with allocated freight charges: Step a) Create a PO for item R for Qty 5 with PO Price as 102$ and Item for Qty 5 @150.Make sure that the Invoice Match Option is set to At PO. Receive the PO. Step b) Create an invoice. Match the invoice and allocate a freight charge of 10$ each on both the lines of PO 11. Step c) Rerun the Periodic acquisition Cost Processor and Periodic cost processor to see the effect on the periodic cost of Item R & S.
Figure 13 PWAC for Item R & S

Calculation Logic: Acquisition Cost For Item R: (PO Price) / Total Quantity Received.

= (510) / 5 = 102 Acquisition Cost For Item S: (PO Price) / Total Quantity Received. = (750) / 5 = 150 This shows that when the Invoice Match Option is Set to At PO then for periodic cost calculation system only looks at PO price not the Matched amount in the invoice. Now Periodic Weighted Average Cost (PWAC) for these Items will be calculated as follows: PWAC for Item R: (25*102 + 102*5) / 30 = 102. PWAC for Item S: (25*150 + 150*5) / 30 = 150. Scenario 3. Periodic Cost Calculation for Assembly Item P In this section we will be covering following scenarios for WIP transactions: Scenario 3.1: Completing WIP job with a scraped quantity.( Posted as variance at job close ) Step a) Create a Discrete Job for Assembly P for Qty 5 in Org O_1 (Std Costing) Step b) Go to Move transaction form. Scrap 1 Qty at Operation step 10. This will result in scraping of component associated with this operation i.e.. R and for assembly P (Since the item S is attached to next operation it will not be back-flushed). Step c) Complete rest 4 qty in the job.
Figure 14 Discrete Job Details

Step d) Rerun the Periodic acquisition Cost Processor and Periodic cost processor to see the Effect on the periodic cost of Item and see the results in Periodic Inventory Valuation report and Periodic Material and Receiving Distribution Detail Report.
Figure 15 :PWAC for Assmebly Item 'P'

Cost of Item P = (150+102) Material +

(15 + 20) Resource + (10+10) Overhead = 307. Note: Since we have not specified the scrap account during the scrap transaction, scrap cost remains in the job and when we closed the job this will be posted as Variance. Step e) Close the discrete job P_1 so as to post the scrap cost associated with the job as variance.
Figure 16 : Periodic Actual costing WIP Value Report

Figure 17 Periodic Average Costing Inventory Value Report

Scenario 3.2. Effects of Assembly return transaction on Periodic Cost Calculation for Assembly Item. For covering this scenario we will take another Assembly Item Z for which in the previous period PER4-03, we have two Completed Jobs Z_1- in Org O_1 for qty 5 and Job Z_1- in Org O_2 for Qty 5. Step a) PWAC for Item Z in PER04-03 = 63.8085 and On-hand =10 Qtys.

Figure 18 PWAC for Assembly Item 'Z'

This PWAC for Item Z is calculated based on two WIP completion transactions in the Cost Group C_G. - Completion transaction of Qty 5 in ORG O_1 @67.81 - Another completion transaction in ORG O_2 @59.81 Hence PWAC for Item Z = (5*67.81 + 5*59.81) / 10 ~ 63.81 In periodic costing for calculating Periodic weighted average cost for an Item, cost manager fetches all the transactions existing in a cost group (across Orgs) for the item. Step b) Current Period (PER6-03) Beginning Balance for item Z = 10 quantity PWAC = 63.8085$. In general, the last period ending balance is the current period beginning balance. Step c) Now we will do a Misc. Receipt transaction for Assembly Item Z with Transaction Cost 65$ for Qty 2 in average costing Org O_2. Step d) Re-run the Periodic acquisition Cost Processor and Periodic cost processor to see the effect on the periodic cost of Item: This calculates the PWAC for item Z = (Beginning Balance Qty*Previous Period Acquisition Cost + Received Qty*Acqu.Cost) -------------------------------------------------------------------------------------------------------(Beginning Balance Qty + Received Qty) = ( 10*63.8085 + 2*65 )/12 = 64.007092$ Step e) Now we will do an Assembly Return transaction against the job Z_1 in Org O_2 for Qty 3. The returns are done at the prior periods operation quantity and prior periods relieved cost. Therefore when there is a net return, the charges for this period have no bearing on the return cost. In our case this return transactions will be costed at prior Periods relieved cost i.e. relieved cost for Job Z_1 in Org O_2 = 59.81 Hence PWAC for Item Z will be calculated as : = (12 * 64.007092 + (-3) * 59.81) / (12 + (- 3)) ~ 65.4066.

Figure 19 PWAC for Assembly Item 'Z'

Scenario 3.3: Completing WIP job with a scraped quantity (Posted against the scrap account) Scrap transactions will be costed at a WIP average cost and will be costed before the completion transactions so that the completion cost reflects scrap expense. 3.3.1: Doing Scrap transaction at the last Operation. Step a) Create a discrete job P_2 for qty = 5 Step b) Now do a scrap transaction at operation 20 for qty =1
Figure 20 Discrete Job Details for job P_2

3.3.2: Doing Scrap Transaction in first Operation. Step a) Create a discrete job P_3 with qty = 5 . Step b) Now do a scrap transaction at operation 10 for qty =1
Figure 21 Discrete Job Details for job P_3

Since the scrap transactions are done against the scrap account this time there wont be any variances posted against the jobs.

Figure 22 : Periodic Actual Costing WIP value Report

Point to be noted here is that the cost incurred / relieved is different in the two jobs (in spite of same quantitys being completed) because of the location where the scrap has been incurred. Now we will see how the cost of the Assembly Item P gets affected by completion of these two jobs. Rerun the Periodic acquisition Cost Processor and Periodic cost processor to see the effect on the periodic cost of Item: Before we created above jobs PWAC for Assembly Item P was 308 and Total On-hand Qty in the cost group level i.e.. in ORG O_1 and O_2 = 6. We got this PWAC cost because of Misc. receipt transaction for two Qtys of item P @310.

(Beginning Balance Qty*Previous Period Acquisition Cost + Received Qty*Acquisition Cost) ------------------------------------------------------------------------------------------------------------------(Beginning Balance Qty + Received Qty) (4*307 + 2*310) / 4+2 = 308. Now for Item P we have following transactions in the period: - Misc Transaction of Qty = 2 @ 310 $ in Org O_2
Figure 23 Distributions in Periodic Costing for Misc. Transaction in Org O_2

- Job ( P_2 ) Completion transaction of Qty 4 @ 307$ in ORG_1

Figure 24 Distributions in periodic costing for WIP completion transaction for Job P_2

- Job ( P_3 ) Completion transaction of Qty 4 @ 307$ in ORG_1

Figure 25 Distributions in Periodic costing for WIP completion transaction for Job P_3

- WIP Assembly Scrap transaction against job P_2 of Qty 1 @307 in Org_1
Figure 26 Distributions In Periodic Costing for Scrap transaction in Job P_2

- WIP Assembly Scrap transaction against job P_3 of Qty 1 @127 in Org_1
Figure 27 Distributions In Periodic Costing for Scrap transaction in Job P_3

Now, Beginning Balance Qty = 4.

Previous Period Acquisition Cost = 307. Hence, when we run the periodic cost processor, Periodic cost for item P will be calculated as follows: (Beginning Balance Qty*Previous Period Acquisition Cost + Received Qty*Acquisition Cost) --------------------------------------------------------------------------------------------------------------------(Beginning Balance Qty + Received Qty)

(4* 307 + 2*310 +4*307 + 4*307) / 4 + 2+ 4+ 4 = 307.42857

Figure 28 : PWAC for Assembly Item 'P'

The Point to be noted here is that Scrap transactions are costed at a WIP periodic average cost and are costed before the completion transactions so that the completion cost reflects scrap expense. Scenario 3.4 WIP transaction costing for Assembly Item with manual resource transactions: Unclose already closed job P_2 and do manual resource transaction for quantity 1 against this job. This will result in additional resource variance incurred against the job when the job will be closed again. Resource rates are picked up from the Period actual rates cost type (periodic rates defined at the Legal entity cost type level. Now Re-Run the Periodic acquisition Cost Processor and Periodic cost processor to see the effect on the periodic cost of Item : The accounting distributions in periodic costing will be created a shown in figure below:
Figure 29 WIP Distributions in Periodic Costing for Job P_2

Distributions for completion transaction for 4 qtys of item P.

Figure 30 Distributions in Periodic Costing for Assembly Completion for Item 'P'

Distributions for scrap transaction of qty 1 for assembly item P

Figure 31 Distributions in Periodic Costing for Assembly Scrap Transaction for Item 'P'

Now point to be noted here is due to manual resource transaction resource cost incurred for completing 5quantity of assembly item P has become 152$ as compared to previous figure of 140. This is calculated as follows: Net resources charged to the job: R_m1 = 5 @ 15 = 75$ R_m2 = 5 @ 20 = 100$ R_m1 = 15$ (due to manual resource transaction) So net resource charges for completing 5 quantity of item = ( 75 + 100+ 15 ) / 5 = 38$ This will be the net unit resource cost for this job. Now in job P_2, completion cost for the Assembly Item P for completing 4 qtys will be : Cost of Item P = (150+102) Material + (38) Resource + (10+10) Overhead = 310.

Hence the Periodic weighted average cost for the item P in period PER6-03 will now be calculated as follows: (Beginning Balance Qty*Previous Period Acquisition Cost + Received Qty*Acquisition Cost) -------------------------------------------------------------------------------------------------------------------(Beginning Balance Qty + Received Qty) = (4* 307 + 2*310 +4*307 + 4*310) / 4 + 2+ 4+ 4 = 308.2857.

Figure 32 PWAC for Assembly Item 'P'

Scenario 3.5: A WIP Component Issue transaction for an Assembly ItemCompleting WIP Non-Standard job with assembly associated. Nonstandard discrete jobs are very flexible and can be used to control a wide variety of manufacturing activities. In this section we will take the scenario of Disassemble assemblies that explain how non standard discrete jobs can be used to manage disassembly operations. Disassemble Assemblies: Step a) Define a nonstandard discrete job: Make sure to associate this job with a Expensed Non Standard Job accounting class.
Figure 33 Discrete Job Details for job P_N_2

Step b) Use the Operations window to manually create a single operation routing with the Disassembly standard operation as the only operation. Step c) Use the Material Requirements window to manually create the component requirements. The first requirement is "P" assembly itself at the Disassembly operation. Enter Push as the supply Type . Create negative component requirements including the components "R","S".

Figure 34 Material Requirement Details in job P_N_2

Step d) Use the WIP Material Transactions window to issue the "P" to the Non-Standard discrete job. Step e) Use the Resource Transactions window to charge resource time incurred during the dismantling Process. Step f) Use the WIP Material Transactions window to "WIP Neg Comp Issue " "R" & "S" components.
Figure 35 WIP Negative componet issue transaction

Step g) Now since the disassembly process is over we will change the job status to cancelled no charges.
Figure 36 Job details showing the status as cancelled

When the disassembly process is over and all the components have been returned to inventory, you must change the job status to Cancelledno charges. The cost accountants can run a Discrete Job Value Report to check all the charges. Step h) Now to analyze the cost for this job, it will have an ending balance for resource and overhead cost incurred during assembly and disassembly process which will be written off as an variance when this job is closed or at the period end when expense type Non standard jobs are automatically expensed.

Figure 37 Discrete Job Details report

Step I) To see the effect on periodic cost of the assembly item and its components ReRun the Periodic acquisition Cost Processor and Periodic cost processor Now due to this Non-standard job, for assembly item P we have another transaction for Assembly Item P in the period PER6-03 i.e.. WIP Component Issue for Qty 2. Distributions for this WIP Component Issue Transaction will be as shown below:
Figure 38 Distributions in Periodic Costing for WIP component issue for assembly Item 'P'

Now to analyze the PWAC cost calculation for Item P in this Period PER6-03 This time we will analyze the cost with cost element level details and with emphasis on sequencing of transactions by cost Manager. We have Following Transactions in this Period: i) Misc. Transaction with Qty 2. ii) WIP Completion Transaction with Qty 4 against job P_2 iii) WIP Completion Transaction with Qty 4 against job P_3 iv) WIP Component Issue transaction for Qty 2 against Non-Standard Job P_N_2. v) WIP Scrap transactions for Qty 1 for Job P_2. vi) WIP Scrap transactions for Qty 1 for Job P_3. Now as we have mentioned in our section on PERIODIC COST PROCESSING LOGIC Cost processor first picks Cost-owning transaction in the period. Then if there are any WIP completion Transaction in the period it processes these transactions as per the low level code starting from the lowest level. Note: TL is This Level Cost for assembly and PL is Previous Level Cost.

i) In our case cost Processor will pick first miscellaneous transaction and will calculate the cost for the transaction as follows: Opening Balance Quantity = 4 (From Previous Period) Opening Balance Cost details: ------------------------------------Material Cost TL : 0 Material Cost PL : 252 Resource Cost : 35 Prior Cost Overhead Cost : 20 Transaction Cost Details: Receipt Quantity = 2 Material Cost TL Material Cost PL Resource Cost Overhead Cost : 310 : 0 : 0 : 0 Transaction Cost / Actual Cost

New On-hand Quantity = 6 Material Cost TL Material Cost PL Resource Cost Overhead Cost : (0*4+ 310*2)/6 = 103.33 : (252*4 + 0*2)/6 = 168.0 : (35*4 + 0*2)/6 = 23.33 : (20*4 + 0*2)/6 = 13.33 New Cost

ii) Then Cost Processor will process WIP Component Issue transaction for Qty = 2 . On-hand Qty = 6 Material Cost TL Material Cost PL Resource Cost Overhead Cost : 103.33 : 168.0 : 23.33 : 13.33

Prior Cost

Transaction Cost / Actual Cost Issue Qty = 2 Material Cost TL Material Cost PL Resource Cost Overhead Cost : 103.33 : 168.0 : 23.33 : 13.33 Actual Cost

New On-hand Quantity = 6 2 = 4 Qtys Material Cost TL Material Cost PL Resource Cost Overhead Cost : 103.33 : 168.0 : 23.33 : 13.33 New Cost

iii) After this Cost Processor will pick up WIP completion Transactions based on Transaction_id and Transaction_date. First: WIP completion for Job P_2. On-hand = 4 Qtys Material Cost TL Material Cost PL Resource Cost Overhead Cost : 103.33 : 168.0 : 23.33 : 13.33

Prior Cost

Transaction Cost / Actual Cost for Completion of 4 Quantitys in Job P_2 Material Cost TL Material Cost PL Resource Cost Overhead Cost : 0 : 252.0 : 38.0 : 20

Actual Cost

New On-hand Quantity = 8 Qty Material Cost TL Material Cost PL Resource Cost Overhead Cost : (103.33*4+ 0*4)/8 = 51.67 : (168*4 + 252*4)/8 = 210 : (23.33*4 + 38*4)/8 = 30.67 : (13.33*4 + 20*4)/ 8= 16.67 New Cost

Second: Completion Transaction for JOB P_3 On-hand = 8 Qtys Material Cost TL Material Cost PL Resource Cost Overhead Cost : 51.67 : 210.0 : 30.67 : 16.67 Prior Cost

Transaction Cost / Actual Cost for Completion of 4 Quantitys in Job P_3 Material Cost TL Material Cost PL Resource Cost Overhead Cost : 0 : 252.0 : 35.0 : 20

Actual Cost

New On-hand Quantity = 8 Qty Material Cost TL Material Cost PL Resource Cost Overhead Cost : (51.67*8+ 0*4)/12 = 34.44 : (210*8 + 252*4)/12 = 224.0 : (30.67*8 + 35*4)/12 = 32.11 : (16.67*8 + 20*4)/ 12= 17.78 New Cost

Hence Periodic Weighted Average Cost (PWAC) for Item P = 34.44 + 224 + 32.11+17.78 = 308.333
Figure 39 :PWAC for Assembly Item 'P'

Scenario 4: Effect of Driving inventory Negative in Periodic Average costing: To analyse this scenario we will take Buy Item X, which has following On-hand In Org O_1 = 24 In Org O_2 = 15. PWAC = 10.8085

Figure 40 PWAC for Buy Item 'X'

Now we will do the Misc. issue transaction for Quantity 40, driving Inventory negative at cost group level. Rerun the Periodic acquisition cost processor and Periodic Cost Processor to see the effect on cost of the item. Again we will analyze the cost for this item with cost element level details and with emphasis on sequencing of transactions by cost Manager. Opening Balance Quantity = 37 (From Previous Period) Opening Balance Cost details: ------------------------------------Material Cost: 8.78 Material Overhead: 2.03 Prior Cost Now we have Following Transactions in this Period: a) WIP Component issue transaction for Quantity 1 b) WIP Component Return transaction for Quantity 3 c) Misc. issue transaction for Quantity 20 without user entered cost. d) Misc. issue transaction for Quantity 4 without user entered cost. e) Misc. issue transaction for Quantity 16 with user entered cost 11$.

Now as per Periodic cost processing logic, cost Processor will first pick cost-carrying transaction i.e.. Transaction (e) Misc issue for Qty 16 @11. Transaction Cost = 11$ Issue Quantity = 16. Material Cost: 8.56 Material Overhead: 2.44 Actual Cost

New On-hand Quantity = (37- 16) = 21. New Cost: Material Cost: (8.78*37 + 8.56* (-16))/ (37+(-16)) = 8.94292468760554 Material Overhead: (2.03*37 + 2.44*(-16))/ (37+(-16)) = 1.71968929415738 Then Cost Processor will process all the cost derived transactions in the period sequencing as per the transaction_id and transaction_date. Point to be noted here is even if inventory is driven negative periodic cost for all the cost derived transactions is taken as prior relieved cost i.e.. Material Cost: 8.94292468760554 Material Overhead: 1.71968929415738 Hence total Periodic Weighted Average Cost = 10.6626139817629
Figure 41 PWAC for Buy Item 'X'

Scenario 5: Periodic Close Cycle. Users can close a periodic period when following conditions are satisfied : a) The GL accounting periods / Inventory periods in all the orgs under the same cost group should have been closed. b) There should not be any pending cost transactions in the period, all the three cost processors i.e.. Periodic acquisition cost processor; Periodic Cost Processor and Periodic distribution processor should have run successfully. Cost associated with Non-standard jobs with no assembly will be flushed at the end of the period to recognize period expense. 8.0 WATCH OUT FOR Here are some limitations that users will need to understand. In Periodic Average Costing Cost is relieved based on the actual transactions as and not the standard requirements (BOM/Routing). The concept of relieving cost based on standard requirements is germane to perpetual average costing. All assembly completion transactions within a period are costed at the same elemental per unit cost. This cost will be the average WIP value. However, net returns in a period will be valued at the average of prior periods relief costs.

Discrete jobs cost will be flushed when a job close transaction is encountered. Cost associated with Nonstandard jobs with no assembly will be flushed at the end of the period to recognize period expense. For resource of type Person the cost defined in the periodic rates will be used. This is equivalent to saying that a Person Type resource is costed at the period standard rate because for release 11.5 we do not maintain periodic employee rates. Completions from non-standard jobs of an assembly will re-average the period cost of that assembly (i.e. they will be treated as product costs in that period). Costs incurred in non-standard jobs that do not have an assembly will be written off to period variances (i.e. they will be treated as period expenses). A job that is closed in a period before the current period being processed is not propagated to future periods. If such a job is later reopened, it will accumulate new charges starting with zero value.

9.0 CONCLUSION:

All the cost carrying transactions are costed first then the cost processor using the periodic weighted average cost calculated for the items processes other cost derived transactions in a period. The periodic cost manager initially fetches all uncosted material transactions and calculate the PWAC based on acquisition cost. The returns are done at the prior periods operation quantity and prior periods relieved cost. Therefore when there is a net return, the charges for this period have no bearing on the return cost. In Periodic Costing if inventory is driven negative the Periodic average cost for the item does not become zero as in perpetual Actual costing, however it is stored at prior periods relieved cost for that item.

Periodic Actual Cost Processing Logic June 2003 Author: Mandeep Singh Ahluwalia

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