Oracle Costing

Oracle Costing

Oracle Costing enables accurate tracking, valuation, and financial control of inventory and manufacturing.
It's tightly integrated with modules like Inventory, WIP, BOM, Purchasing, and Order Management.
Cost Structure

A cost structure is the collection of definitions and methods used to cost inventory, bills of material, and work
in process. The cost structure is composed of:
• Organizations
• Cost elements
• Subelements
• Activities
• Basis types
• General Ledger accounts
Inventory Organizations
In Oracle Manufacturing, each inventory organization must have a cost structure that you define. Organizations
can have their own cost structure or can share attributes of a similar cost structure.

Before set up Inventory, Bills of Material, or Work in Process, examine the current cost structure of your
organization(s) to determine which costing features and functions to use.

Cost Elements
Product costs are the sum of their elemental costs. Cost elements are defined as follows
• Material
• Material Overhead
• Resource
• Overhead
Subelements
Subelements as smaller classifications of the cost elements. Each cost element must be associated with one or more
subelements. Define subelements for each cost element and assign a rate or amount to each one

• Material Subelements
• Material Overhead Subelements
• Resource Subelements
• Overhead Subelements

Activities

An action or task perform in a business that uses a resource or incurs cost. Can associate all product costs to activities.
You can define activities and assign them to any subelement.
Basis Types
Basis types determine how costs are assigned to the item. Basis types are assigned to subelements, which are
then assigned to the item.

Cost Transfer and Distribution to the General Ledger

All costs are maintained by cost element. If you assign a different account to each cost element as you define your
subinventories and WIP accounting classes (if you use Work in Process), then elemental account visibility is
maintained when transactions are processed
Types of Costing

Oracle Cost Management provides several alternative cost methods. Generally, each Inventory Organization
has its own perpetual cost method. The available methods are Standard, Average, FIFO, and LIFO Costing.

1. Standard Costing

Standard Costing is the original costing method that Oracle had for manufacturing and distribution customers.
In Standard Costing, each item has a cost defined for each inventory organization. Different Inventory
Organizations can have either the same or different standard costs. The costs can be directly defined or rolled
up from components and lower level assemblies.
Organizations that use Standard Costing control their cost by reviewing variances.

An item that is bought with a purchase order price different from the standard cost generates a Purchase Price
Variance (PPV). If the invoice is different from the purchase order price, it generates an Invoice Price Variance
(IPV).

An assembly that is built has a standard cost. Each job that produces assemblies may create variances. Oracle
separates the variances for material, resources (labor or machines), overhead, and outside processing (OSP).

Inventory moves around the organization and is tracked at its standard cost. When the actual cost is different
from the standard cost, a variance is created.
Cost is fixed and set in advance for items (a pre-determined cost).

Where to use:
• Manufacturing environments with highly predictable, repetitive production — e.g., automotive, electronics,
Parmaceuticals.
• Ideal when you have engineering BOM and routings and can set a standard cost for planning.

Advantages for Business:

Enables cost variance tracking (actual vs. standard).

Supports better cost control and accountability.
Provides stability in cost for pricing and forecasting.
Actual cost methods

Oracle has three perpetual actual cost methods. They are actual in that they are not based on standards. Each
of the methods is considered as Generally Accepted Accounting Principle (GAAP). The actual methods are
Average Costing, FIFO, and LIFO.

Average Costing

Every receipt in Average Costing may change the average cost. The purchase order receipt is valued at the
purchase order price plus the material overhead that may be applied at the time of delivery to inventory. This
cost is included in the pool of costs for that item. The total cost for the item is divided by the new quantity and
a new average cost is calculated. This new cost will be use for issue transactions of this item. If an invoice is
matched to a receipt, the IPV can be moved to inventory, changing the average cost.
Accounting for interorganization transfers is similar to purchase order receipt. However, the timing of the reaveraging is
based on the change in ownership (the FOB point).

When an assembly is completed from a job in Oracle Work In Process (WIP), the cost of the completion is relieved from
the job and goes into inventory. As with the receipt above, a new average cost is calculated.

Cost can be changed manually with an Average Cost Update transaction.

Where to use:
• High-volume environments where prices fluctuate frequently — e.g., electronics distribution, retail, commodity
products.
• Ideal for businesses that have lots of purchase variability and low manufacturing complexity.

Advantages for Business:

Always reflects the actual cost of inventory.
Simple setup — no need for complex cost standards.
Provides cost transparency and is ideal for environments with frequent price changes
Average Costing
• Value inventory at a moving weighted average cost
• Track inventory and manufacturing costs without the requirement of having predefined standards
• Determine profit margin based on an actual cost method
• Measure the organization's performance against historical costs
• Include all direct costs of manufacturing an item in that item's inventory cost

Standard Costing
• Value inventory at a predetermined cost
• Determine profit margin based on projected costs
• Record variances against expected costs
• Update standard costs from any cost type
• Evaluate production costs relative to standard costs
• Measure the organization's performance based on predefined product costs
• Evaluate product costs to assist management decisions
FIFO Costing (First In First Out)

Every delivery of a receipt in FIFO Costing creates a new cost layer. The purchase order receipt is valued at the
purchase order price plus the material overhead that may be applied at the time of delivery to inventory. This
cost is the cost for the new layer. Each layer’s cost is kept separate but we do display a FIFO cost that is a
weighted average of all the layers. Issue transactions (consumption) will use the first layer first. Issues that
require a combination of layers are costed at the weighted average of the appropriate combination.

Accounting for interorganization transfers is similar to purchase order receipt. However, the timing of the
creation of layers is based on the change in ownership (the FOB point).

When an assembly is completed from a job in Oracle Work In Process (WIP), the cost of the completion is
relieved from the job and goes into inventory, creating a new layer for the assembly.
Cost of oldest received item is used first for costing and issued out.

Where to use
• In environments where older inventory must be used first due to shelf life or expiry — e.g., pharmaceuticals,
food and beverages, chemicals.
• In industries that focus on inventory quality and traceability.

Advantages for Business:

• Provides a more accurate reflection of the cost of goods sold when prices rise.
• Ensures older products are used first, reducing waste.
• Good for businesses that must maintain precise cost and traceability (compliance/regulatory needs).
Last In First Out(LIFO)

The cost of the most recent item received is used first for costing.

Where to use
• In environments where commodity or raw material prices fluctuate sharply (and older inventory is used later) —
e.g., steel, petrochemicals, agriculture.
• Frequently used for accounting/tax reasons (in certain countries).

Advantages for Business:

• Matches recent costs with revenue, providing a better measure of current profitability.
• Can reduce tax liabilities in certain economic environments (in some countries).
• Helps assess impact of price changes quickly.
 Cost Method Costing Logic Best For Advantages

Variance analysis, cost

Standard Costing Fixed cost set in advance Manufacturing
control

New average calculated on Simple, actual cost, no

Average Costing Retail, distribution
every transaction complexities

Commodities, industries with Matches current cost, tax

LIFO Latest cost used first
rising prices benefits

Reduces waste, better

FIFO Oldest cost used first Pharma, Food, Chemicals
traceability
 Costing Modules in Oracle

Module Purpose

Core module for managing costing methods, cost types,

Cost Management
cost groups, etc.

Inventory Source of material transactions

Work in Process (WIP) Tracks cost of jobs and assemblies

Bill of Materials (BOM) Defines structure used for cost rollup

Purchasing Impacts landed cost, material cost

Order Management (OM) Drives cost recognition via sales

Process Costing (OPM) Used in Process Industries – tracks batch-level costs

Overhead

We can use material overhead and overhead cost subelements to add indirect costs to item costs on either a
percentage basis or as a fixed amount in both standard and average costing organizations.

Material Overhead is earned by an item during purchase order receipt, inter-organization receipt, and WIP
completion transactions.
Item Costing

Item costing requires certain associations and settings most of which apply to a perpetual costing
method: Standard or Average or FIFO or LIFO. We perform various activities in the perpetual costing
methods. These include viewing, inquiring, purging, and error resubmission activities.

To define or view item cost information, we must first select an item / cost type association. Item
costs are always associated with a cost type.

Item Cost form is used to define costs for buy items or enter additional costs for assemblies with
costs generated from the cost rollup.