oracle scm cost

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Oracle Apps Tutorial: Understanding Cost Elements, Cost

Types, Cost Groups, and Costing Methods in Cost

Management

On May 20, 2013, inOracle Cost Management,Oracle E-Business Suite,Oracle Supply

Chain Management,by ssutphin

There are four main Cost Management concepts that are important to costing. They are Cost

Elements, Cost Types, Cost Groups, and Costing Method.

Cost elements divide your items cost into five main elements and into as many sub -elements

as you want. The five main cost elements are defined by Oracle and you can not change

them. They are material, material overhead, resource, overhead, and outside processing. The

material and material overhead are used in purchasing an item. The resource, overhead, and

outside processing are used in the manufacturing of an item. Think on the material costelement as the sum of the purchased material and the material overhead element as the sum of

the overheads associated with buying and handling that material. The other three elements

are manufacturing cost. Resource cost element represents the labor and machinery cost

involved in the manufacturing process. The overhead element represents the overheads

involved in the manufacturing process. The last cost element is the outside processing

element. This cost element represents the cost of having a 3rd party perform a step in the

manufacturing process. The step is specifically called out in the routing of the item. To give

you a little background on how the Oracle determines the cost of a manufactured item, each

manufactured item as a BOM (Bill of Material) and a routing. The BOM tells us what and

how much material to use and the routing tells us what resources to use.

Cost Elements

Material Material Overhead Resource Overhead Outside Processing

Cost types allow you to maintain different versions of an items cost (by cost element). For

transactional processing and accounting, Oracle only uses one cost type. For the standard

costing method, this is a cost type called Frozen and for the average costing method, this isa a cost type called Average. You can not directly update the Frozen or Average cost

types. The Frozen cost type is updated using the Standard Cost Update program. This

program copies cost from another cost type to the Frozen type. The differences between to

two costs will create an adjustment to your inventory value. The Average cost isupdated

when you receive an item on a purchase order. You can maintain other cost types for

historical reporting or to simulate an items cost under different cost scenarios. Say you

wanted to know what the cost of an item would be if a certain category of raw materials

purchase price changed. You could copy the Frozen cost to another cost type and then

update the material cost for all items in that raw material category. Then after you run a

Supply Chain Rollup with your new cost type, you could compare the impact of the price
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change on your finished goods. You could also perform the same analysis if you had a

change in your labor rates.

Item Cost by Cost Type and Cost Element

Now the next concept gets a lot of people confused. It is the concept of Cost Groups. A

Cost Group is a subdivision of costs within a single inventory organization. Normally your

item cost would be uniform in each inventory organization. But with Cost Groups, you can

maintain different costs for each cost type within a single inventory organization. I have used

this feature in an Average costing environment with Project Manufacturingyou can only

maintain multiple cost groups if Project Manufacturing or Warehouse Management is

installed. In this implementation, we defined each project to be in its own cost group and

therefore maintain its own Average cost for purchased material. We maintained a cost type

to record the actual cost (Average) and a cost type to record the estimated cost. This

organization specialized in engineered-to-order products and estimating the correct item cost

was critical to pricing.

Item Cost by Inventory Organization, Cost Type, Cost Group, and Cost Elements

The final main concept in Cost Management is the costing method. This determines how you

are going to populate each of the cost elements. There are two main costing methods with

three speciality cost methods. The two main costing methods are standard cost and average

cost. The difference in these two methods are how purchased items are costed and how make

items (assemblies) costs are calculated. When using the standard costing method, you defined

a cost (set a standard) for each cost element: material (purchased items), material overheads,

WIP overhead, WIP resources, and outside processing. Using the average costing method,

the material cost element and the outside processing element are set by the purchase price.

The other cost elements (material overhead, overhead, resource) are set the same way as in

the standard costing method.
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Lets compare the two different costing methods (standard and average) by cost element and

by item type (buy or make). In a buy item, we will only have two cost elements: material

and material overhead.

Receiving a buy item

Cost Element Standard Costing Average Costing

Material @ a user defined cost using the

Frozen cost type

@ the PO price using the Average cost

type

Material

Overhead

@ a user defined cost using the

Frozen cost type


AvgRates cost type

WIP or miscellaneous Issuing, shipping, or transferring a buy item

Cost ElementStandard Costing Average Costing

Material @ a user defined cost using theFrozen cost type

@ the weighted average cost (for that costgroup) using the Average cost type

Material

Overhead


Frozen cost type

@ the weighted average cost using the

Average cost typ

WIP Job Charge

Cost Element Standard Costing Average Costing

Resources @ a user defined cost using the

Frozen cost type


AvgRates cost type

Overhead @ a user defined cost using theFrozen cost type @ a user defined cost using theAvgRates cost type

Outside

Processing


Frozen cost type


AvgRates cost type

For WIP jobs, you can base the items cost on actual units used or on standard units. To use

actual material units, you would record the actual material issued to the job. We call this

process pushing material to the job. To use standard material units, you would set the

material to backflush. We call this process pulling material to the job. The same goes for

labor. You can record the actual hours worked at each step in the job or setup the WIP job to

record standard hours. The advantage of using actual units is a more accurate item cost

especially in a configure-to-order or an engineer-to-order environment. The disadvantage ofusing actual units is the effort involved in tracking and entering the data.

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