COSTING

Every transaction we perform should be costed in the Application.

Provide data access to Cost Org &

Roles Cost Accountant
Business Unit
General Accounting Manager To Open GL Periods

What Is Average Cost Method?

Average cost method assigns a cost to inventory items based on the total cost of goods
purchased or produced in a period divided by the total number of items purchased or
produced. Average cost method is also known as weighted-average method.

Total Cost of Goods Purchased or Produced in Period ÷ Total Number of

Items Purchased or Produced in Period = Average Cost for Period
The result can then be applied to both the cost of goods sold (COGS) and the
cost of goods still held in inventory at the end of the period.

Example of Average Cost Method

For example, consider the following inventory ledger for Sam’s Electronics:

Purchase date Number of items Cost per unit Total cost

1/1 20 $1,000 $20,000
1/18 15 $1,020 $15,300
2/10 30 $1,050 $31,500
2/20 10 $1,200 $12,000
3/5 25 $1,380 $34,500
Total 100 $113,300
Assume the company sold 72 units in the first quarter. The weighted average
cost is the total inventory purchased in the quarter, $113,300, divided by the
total inventory count from the quarter, 100, for an average of $1,133 per unit.
The cost of goods sold (COGS) will be recorded as 72 units sold × $1,133
average cost = $81,576. The cost of goods available for sale, or inventory at the
end of the period, will be the 28 remaining items still in inventory × $1,133 =
$31,724.
What Is Last In, First Out (LIFO)?

Last in, first out (LIFO) is a method used to account for business inventory that records the
most recently produced items in a series as the ones that are sold first. That is, the cost of the
most recent products purchased or produced is the first to be expensed as cost of goods sold
(COGS), while the cost of older products, which is often lower, will be reported as
inventory.

Example of LIFO

Assume company A has 10 widgets. The first five widgets cost $100 each and arrived two
days ago. The last five widgets cost $200 each and arrived one day ago. Based on the LIFO
method of inventory management, the last widgets in are the first ones to be sold. Seven
widgets are sold, but how much can the accountant record as a cost?

Each widget has the same sales price, so revenue is the same. But the cost of the widgets is
based on the inventory method selected.

Based on the LIFO method, the last inventory in is the first inventory sold. This means the
widgets that cost $200 sold first. The company then sold two more of the $100 widgets. In
total, the cost of the widgets under the LIFO method is $1,200, or five at $200 and two at
$100.

In contrast, using the FIFO method, the $100 widgets are sold first, followed by the $200
widgets. So, the cost of the widgets sold will be recorded as $900, or five at $100 and two at
$200.

What Is the FIFO Method?

FIFO means "First In, First Out." It's an asset management and valuation method in which
older inventory is moved out before new inventory comes in. The first goods to be sold are
the first goods purchased.

How First In, First Out (FIFO) Works

The FIFO method is used for cost flow assumption purposes. The costs associated with
manufactured products must be recognized as an expense as items progress to
later development stages and finished inventory items are sold. The cost of inventory
purchased first will be recognized first under FIFO.

The dollar value of total inventory decreases in this process because inventory has been
removed from the company’s ownership. The costs associated with the inventory can be
calculated in several ways, one being the FIFO method.

Typical economic situations involve inflationary markets and rising prices. The oldest costs
will theoretically be priced lower than the most recent inventory purchased at current
inflated prices in this situation if FIFO assigns the oldest costs to the cost of goods sold. This
lower expense results in higher net income. The ending inventory balance is inflated.
Example

Inventory is assigned costs as items are prepared for sale and based on the order in which the
product was used. It's based on what arrived first for FIFO.

Assume a company purchased 100 items for $10 each and then purchased 100 more items
for $15 each. The company sold 60 items. The COGS for each of the 60 items is $10/unit
under the FIFO method because the first goods purchased are the first goods sold. Of the
140 remaining items in inventory, the value of 40 items is $10/unit and the value of 100
items is $15/unit because the inventory is assigned the most recent cost under the FIFO
method.

The company sells an additional 50 items with this remaining inventory of 140 units. The
cost of goods sold for 40 of the items is $10 and the entire first order of 100 units has been
fully sold. The other 10 units that are sold have a cost of $15 each and the remaining 90
units in inventory are valued at $15 each or the most recent price paid.

Standard Cost = Direct Material Cost + Direct Labour Cost + Manufacturing

Overhead Cost.
Cost Organization: - Setup & maintenance->> MFG & SCM management->> Cost Accounting->>
Manage Cost organization->> Create->> Enter details->> Save & close.

 Standard cost->> We have to enter/define the item cost for all RM & components. For SFG &
FG we don’t define, cost rolled up by application.
 Average cost->> we don’t define, based on PO price application calculate average cost.
 Cost Roll up program: - RM & resource cost Roll up by application for FG.

Cost Book: - Setup & maintenance->> MFG & SCM management->> Cost Accounting->> Manage Cost
Book->> Create->>Enter details->> Save & close.

->>Cost Book stores our transaction cost.

Relationship: - Assign INV org, cost Book, Ref data set & verify period end validation.

Setup & maintenance->> MFG & SCM management->> Cost Accounting->> Manage Cost
Organization Relationship ->> Create->>Enter cost Org & Master Org.->> Under Relationship - Set
assignment->> Attach Reference data set->>
Then, Attach INV Org

Note:- INV org should be attached with profit Centre BU

Next, Add cost Book

Also, we have dot Period End Validation under cost Book. If any client need some time to close work
order after period End, for this we can change the action from Error to Ignore.
Value Structure: - Setup & maintenance->> MFG & SCM management->> Cost Accounting->>
Manage Valuation structure ->> Create->> Enter details & create valuation structure->> Save & close.

Flex field structure->> at which level we want to see valuation.

Similarly create valuation structure for Expense

Cost Elements/Components: - Components Cost like- RM charge, resource charge, labor charge etc.

Setup & maintenance->> MFG & SCM management->> Cost Accounting->> Manage Cost elements -
>> Create->>Save & close.
Manage Overhead expense Pools:

Setup & maintenance->> MFG & SCM management->> Cost Accounting->> Manage Overhead
expense Pools->>Create->> Enter details

Cost Components Mapping Rule: - Mapping our cost elements with std. cost elements provided by
oracle.

Setup & maintenance->> MFG & SCM management->> Cost Accounting->> Manage Cost Component
mapping ->>Create->> Enter details

Under Mapping ->> cost components codes->> Mapping our cost elements with oracle provide std
cost elements->> Save & close.

Note: - Non recoverable tax should also mapped with material cost used for dropship process.

Cost Profile: - Select cost method which we have to follow

Setup & maintenance->> MFG & SCM management->> Cost Accounting->> Manage Cost Profile->>
Create->> Enter details->>
Similarly, create Cost profile for Expense also

Valuation Unit: - Select cost method which we have to follow

Setup & maintenance->> MFG & SCM management->> Cost Accounting->> Manage Valuation Units-
>> Create->>Enter details->> From segment->> click create

Provide cost & INV org

Similarly, for Expense

Default cost profile: - Assign Cost Org, Cost Book, Cost profile

Setup & maintenance->> MFG & SCM management->> Cost Accounting->> Manage Default cost
profile->> Create->> Enter details->>

Here we are controlling the cost method through cost profile for any organization that should be
attached here.
Note: - We can control costing method at item & category level also not only INV org.

Manage Item cost profile: - For Particular Item level

Setup & maintenance->> MFG & SCM management->> Cost Accounting->> Manage item cost profile
->>Create->> Enter details & select item

For category level cost profile: -

Setup & maintenance->> MFG & SCM management->> Cost Accounting->> Manage default cost
profile ->>Create->> Enter details & provide category (like- FG, SFG, RM)
Note: Before running the below program GL and Costing periods as to be opened.

GL periods open:

Nav: ApplicationGeneral Accounting Periods close—> Click on General ledger Action Open
target Period and open the target period

Costing Periods opening:

Nav: ApplicationSupply chain execution Costing accounting—> task bar under costing
processing  manage Costing Accounting periods Click on Search and click on View period details

Click on the Open target period to open

Run the following program once the periods are open in toolSchedule process

Programs Transfer Transactions from Inventory to Costing Inventory - Costing

Transfer Transactions from Production to Costing MFG - Costing
AP – Costing (Ex: IPV- invoice price
Transfer Costs to cost management Variance- PO prices – invoice
price)
Transfer Transactions from Receiving to Costing Receiving - Costing

Next Step: Manage Cost Scenarios

Nav: Application  Supply chain execution  costing accounting under cost & profit planning
Manage Cost Scenarios

Create cost scenarios and save

To roll up the cost go to action and select rollup cost and submit the program

Note: Roll up cost is done once MFG module is involved

To load the cost to item goto action and select Manage Standard cost

Click on +icon to add item cost

Select the item and add the cost

Note: we load item cost through ADFDI

Next Step to Update the Standard cost: Goto action update standard cost
Once the program is completed successful status changes to New to Publish

Next Step to Create Cost accounting Distribution(CAD):

Nav: ApplicationSupply chain execution Costing accountingTask  Under Cost processing

 Create costing accounting distributions

Note: for the first we need to create CAD

Click on +icon and enter Run control and add cost org, cost book and cutoff date as auto

And Click on Schedule process and submit the program

 Before CAD Run - Costing, GL
Programs Create Cost Accounting Distributions (CAD)
Period Should Open

Next step: Receipt Accounting Distributions (RAD):

Nav: ApplicationSupply chain execution Receipt accountingTask  Under Accural

processing  Create Receipt accounting distributions

Select the BU and Submit the Program

To Review the CAD: Review Costing accounting Distributions

Nav: ApplicationSupply chain execution Costing accountingTask  Under Cost processing

 Review costing accounting distributions
Click on View detail

To Review the RAD: Review Receipt accounting Distributions

Nav: ApplicationSupply chain execution Receipt accountingTask under Accural processing

 Review Receipt accounting distributions

Period End Validation:

Validations
Perform cost accounting validations for periods that are in status Open, Pending Closed, or Closed.
The validations check for the following:
 Completed work orders not closed
 Pending revenue recognition events import
 Pending Interface
 Pending cost processing
 Pending preprocessing
 Pending preprocessing for manufacturing transactions
 Pending create accounting in final mode
 Pending accounting event creation
 Pending accounting overhead rates absorption
 Pending resource rates and standard costs absorption
 Pending preprocessing of trade events
 Pending processing of trade events
 Pending DCOGS transactions

Periods End Validation

 Nav: ApplicationSupply chain execution Costing accounting—> task bar under costing
processing  Manage Costing Accounting periods Click on Search and click on View
period details

Select accounting period to be closed and click on Run validations, which run the program
To view any exceptions, click on View exceptions
Create Accounting:

Nav: ApplicationSupply chain execution Costing accounting—> task bar under Accounting 
Create Accounting  Select ledger and accounting mode –Final and submit
Oracle P2P Accounting entries
In Oracle purchasing 3 different events occur
1. Enter Purchase Order:
No accounting takes place

2. Enter a Receipt:
For Inventory, Asset and Expense Items:
Dr: Inventory Receiving A/c
Cr: Accrual A/c

3.Receiving Transaction:
Based on type of item here accounting entry differs
Inventory Item:
Dr: Inventory Valuation A/c
Cr: Inventory Receiving A/c
Expense Item:
Dr: Expense A/c
Cr: Inventory Receiving A/c
Asset Item:
Dr: Asset Clearing A/c
Cr: Inventory Receiving A/c

Oracle Payable:
In payable 3 events occur
1. Enter Invoice:
Dr: Accrual A/c
Cr: Liability A/c

2.Payment against Invoice:

Dr: Liability A/c
Cr: Bank clearing A/c

3.Clearing (Cash Management):

Dr: Bank clearing A/c
Cr: Bank A/c

Oracle P2P Accounting entries

Incase below type of items one more accouting entry happens in Oracle
Inventory Item: Item issued to Dept.
Dr: Expense A/c
Cr: Inventory valuation

Asset Item: Asset is capitalized

Dr: Asset A/c
Cr: Asset clearing A/c
 Procure To Pay Journal Entries for Inventory, Expenses, and Asset
Items
In any business, items play a vital role. In Oracle applications, these items segregated into 3
types
1. Inventory Items
2. Expense Items
3. Asset Items

1.Inventory Inventory Item are the items which we use in sales and purchases of our
Item : business
2.Expense Item Expense item which we use for Official Usage. Ex: Stationary, Furniture,
: Cleaning Materials, etc
3.Asset Item : An item that we Depreciate and track as an asset in the Fixed Asset module

O2C Cycle with Accounting Entries

A quick summary of accounting entries in Order to Cash cycle

Sales order creation – No entries

Pick release:
Inventory Stage A/c…………………Debit
Inventory Finished goods a/c……..Credit
Ship confirm:
Cogs A/c ……………………………Debit
Inventory Organization a/c………Credit
Receviable:
Receviable A/c………………………Debit
Revenue A/c………………………Credit
Tax ………………..…………………Credit
Freight…………..….……………….Credit
Cash:
Cash A/c Dr…………………………Debit
Receivable A/c……………………….Credit

Procure-to- Pay Accounting Entries:

When we receive the Goods in the staging area the accounting entry would be (GRN):
Receiving Inventory --- Dr-----It will pick from receiving options.
Ap Accrual --- Cr---It will pick from Purchasing Options.
When we are moving the Goods from Staging area to Sub-Inv (Recv Trans):
Material A/C --- Dr-----It will pick from Inventory Options
Receiving Inv --- Cr----It will pick from Receiving Options
While Creating Invoice:
Ap Accrual --- Dr
Liability ---- Cr-----It will pick from supplier Liability
While Making Payment:
Liability – Dr
Cash Clearing – Cr-----It will pick from Bank
Reconciliation:
Cash Clearing --- Dr
Cash – Cr
Standard Invoice Entry :
Ap Accrual --- Dr
Liability ---- Cr
Debit and Credit Memo Entries:
Liability --- Dr
Ap Accrual --- Cr
Prepayment Entries:
While Creating Prepayment Invoice:
Prepayment --- Dr----It will pick from supplier
Liability – Cr----It will pick from supplier
While Making Payment to Prepayment:
Liability – Dr
Cash – Cr
While applying Prepayment on Standard Invoice:
Liability --- Dr
Prepayment – Cr
INTEREST INVOICE ENTRY WHILE MAKING PAYMENT:
Interest expenses –- Dr-----It will pick from Financial options
Liability ---------------- Dr
Cash ---------------------Cr
EXPENSE REPORT ENTRY:
Item Expense A/C --- Dr
Liability --- Cr

PAYMENT REQUEST INVOICE ENTRY :

Item Expense --- Dr
Liability – Cr
FUTURE DATED PAYMENT ENTRY :
When Bills Issued:
Item Expense – Dr
Bills Payable --- Cr
When Maturity Date Confirmed:
Bills Payable – Dr---It will pick from Supplier or Financial options
Liability – Cr
WITH HOLDING TAX ENTRY :
When Withholding tax applied on standard Invoice:
Item Expense --- Dr
Liability --- Cr
Withholding --- Cr-----It will pick from WHT codes
Auto Generated WHT Entry:
Item Expense – Dr
Liability --- Cr
RETAINAGE RELEASE ACCOUNTING ENTRY:
When Invoice matched with PO accounting entry would be:
Accrual ------ Dr
Liability ---- Cr
Retainage ---Cr----It will pick from financial options
While making payment to the invoice matched with PO:
Liability ---- Dr
Cash --------Cr
When Retainage Release Invoice Matched with PO accounting entry would be:
Retainage --------Dr
Liability ----------- Cr
While making Payment to Retainage Release:
Liability ---Dr
Cash --------Cr
Order - to- Cash ENTRIES:
Pick Release:
Receiving Inventory ---- Dr
Item Expense/Material ac ---- Cr
Ship Confirmation:
COGS ---- Dr----It will pick from Inv Information
Receiving Inv (Sub-Inv) ---- Cr
While Creating Transaction:
Receivable ---- Dr
Revenue ------- Cr
Freight --------Cr
Tax -------------Cr
While Recording Receipt: WHEN STATE IS CONFIRMED
Confirmed Cash--------------Dr
Receivables ----Cr
When Remitted: WHEN STATE IS REMITTED
Remitted Cash ---- Dr
Confirmed Cash--------Cr
When Reconciled: WHEN STATE IS CLEARED
Cash -------Dr
Remitted Cash --- Cr
DEPOSIT ACCOUNTING ENTRY:
When we create DEPOSIT invoice the accounting entry would be:
Receivable --- Dr
Accrual (Unearned Revenue) -------- Cr
When we create Sales Invoice:
Receivable---Dr
Revenue----- Cr
When Deposit adjusts with actual transaction invoice the entry would be:
Unearned Rev (Accrual) -----Dr
Receivables-------Cr
GAURANTEE ACCOUNTING ENTRY:
When we crate Guarantee transaction:
Unbilled receivable----Dr
Unearned Revenue ---Cr
When we create sales Invoice:
Receivable ----Dr
Revenue -------Cr
When Guarantee transaction adjusts with sales invoice:
Unearned Revenue ---Dr
Unbilled Receivable—Cr
REVENUE RECOGNISATION:
INVOICE ADVANCE:
When we create sales invoice and set invoicing rule as IN ADVANCE(FIXED SCH):
Receivables ---- Dr
Unearned Revenue -------- Cr
Once we recognize the Revenue the accounting entry would be:
Unearned Revenue ---- Dr
Revenue------------------Cr
And the final entry would be:
Receivable ------Dr
Revenue ---------Cr
INVOICE ARREARS:
REVENUE RECOGNISATION using Invoice Arrears Schedule:
Unbilled Receivables—Dr
Revenue-----------------Cr
Once we have billed the customer
Receivables---------------Dr
Unbilled Receivables—Cr
ON-ACCOUNT ACCOUNTING ENTRY:
When we created the Receipt and applied to On Account :
Cash ---Dr
Receivables ----CR,
ONACCOUNT -----Cr
CUSTOMER REFUND ACCOUNTING ENTRY :
When we release the On account and Refund the Amount:
Cash ----Dr
Receivables----Cr
On Account Cash ---Cr
Unapplied Cash -----Dr
Refund----------------Cr
ASSET
Asset Addition
The process of adding a Fixed Asset either through detailed, quick or mass addition is called asset
addition. Detail and quick addition are carried out only in Oracle Assets.

The journal entry in Oracle Assets during detailed or quick addition is

Dr. Asset Cost
Cr. Asset clearing account

Asset clearing account is used to reconcile the transactions between Oracle Payables and Oracle
Assets. When an asset is added through detailed or quick additions, the credit goes to the asset
clearing account.

Also for mass addition process, oracle assets use Asset Clearing account for reconciliation.

In Oracle Assets the journal entry remains the same

Dr. Asset Cost

Cr. Asset clearing account
In AP
Dr Asset Clearing Account
Cr Accounts Payables
Changes:
Changes refer to change in Asset Cost or Depreciation method or Depreciation rate for one or more
assets. Oracle Assets would use the new cost or depreciation method or rate from the period of change
to arrive at the depreciation amount. Also it recalculates the depreciation that should have been
calculated so far, compares with the actual depreciation and passes an adjusting entry.
If the transaction results in addition to the cost of asset, then the journal entry created is
Dr. Asset Cost
Cr. Asset Clearing
Hence an adjusting entry to incorporate depreciation as per the new cost of the asset should be
incorporated. Also due to change in method or rate the new depreciation calculated may be lower or
greater than the depreciation calculated so far.
If the accumulated depreciation recalculated is lower than the accumulated depreciation calculated
until now,
Dr. Accumulated Depreciation
Cr. Depreciation Expense (Adjustment)
If it is greater than the Accumulated depreciation until now,
Dr. Depreciation Expense (Adjustment)
CR. Accumulated Depreciation
Transfer
Transfers refer to change in Location, expense account, and employee assignment. If there is a change
in expense account, for e.g. If an asset is transferred from department 001 to department 002,The
journal entry for accounting the asset cost is
Dr. Asset Cost (002)
Cr. Asset Cost (001)
The journal entry for accounting the accumulated depreciation is
Dr. Accumulated Depreciation (001)
Cr. Accumulated Depreciation (002)
Revaluation
Revaluation is a process so as to reflect current market price of the Asset.
The journal entry created by revaluing a fixed asset is as follows:
Revalue Accumulated Depreciation is enabled at the Book Controls level:
The amount of revaluation would be credited to Accumulated Depreciation and Revaluation reserve in
the same proportion as the existing Accumulates Depreciation and Net Book value.
Dr. Asset Cost Cr. Accumulated Depreciation
Cr. Revaluation Reserve
Revalue Accumulated Depreciation is disabled at the Book Controls level:
To the extend of the revaluation amount, the following journal entry would be passed.
Dr. Asset Cost
Cr. Revaluation Reserve
Also, the existing depreciation reserve would also be transferred to the Revaluation Reserve
Dr. Accumulated Depreciation
Cr. Revaluation Reserve
Oracle Assets passes the following journal entry for retirement. If the retirement transaction resulted
in a Gain, the journal entry passed would be.
Dr. Accumulated Depreciation
Dr. Proceeds of sale
Cr. Asset Cost
Cr. Gain / Loss
If the retirement transaction resulted in a Loss, the journal entry passed would be.
Dr. Accumulated Depreciation
Dr. Proceeds of sale
Dr. Gain / Loss
Cr. Asset Cost
Depreciation:
Running depreciation (as applicable to a particular asset) during the period end would pass a journal
entry
Dr. Depreciation Expense
Cr. Accumulated Depreciation