1. Compare Standard to FIFO Costing
OAUG Cost Management SIG June 18, 2013

2. Contents - Presenter Introduction What is EBS Discrete FIFO Costing?
EBS Standard and FIFO: A Comparison
FIFO Cost - Implementation Considerations
Change from Standard to FIFO Cost Org
Question and Answer

3. Presenter Introduction - Dave Sweas, CPA
Senior Solution Architect - MarketSphere Consulting, LLC
EBS functional experience: Since 1995 (Industry, Big 5, middle market consultancies)
EBS Concentration: Core Financials, Discrete Cost, Project Mfg., OPM Cost/SLA, Cost Management SLA
Industry experience: General Accountant, FA, AP, Budgets, Cost Accounting Manager, Plant Controller, Supply Chain Cost Analyst, Profitability Analyst
Advisory approach to implementation
Core strength: Converting “ERP/EBS-speak” into accountant-friendly language

4. What is EBS Discrete FIFO Costing?
FIFO Cost Method flag - Inventory Org level (permanent)
Available in R12 and 11i
“Classic” definition of first-in-first-out inventory & COGS costing
Layered Cost concept – Basic example:
Item A purchases: 100 qty at $1.00, then 100 qty at $1.20
Result: Two 100-qty Layers at two different values
150 qty consumed into WIP, and W/O Completion: 100 qty from Layer 1 at $1.00, 50 qty from Layer 2 at $1.20
Total Completion value = $160, $60 of Item A on-hand

5. What is EBS Discrete FIFO Costing?
Applies to all items within a FIFO Org
Costing method only; not automatically tied to physical flow of goods
Seeded Cost Types: “FIFO” and “FIFO Rates”
Key inquiries and reports: Layered Cost Transaction Detail, Layered Cost Elemental Report, Item Cost History, MADS / MADD detail (the latter is same report as in Std Cost Org)
See next section for Standard to FIFO comparison

6. EBS Standard and FIFO: A Comparison

7. Functionality / Business Need EBS Discrete Standard Costing
Standard vs. FIFO
Functionality / Business Need
EBS Discrete Standard Costing
EBS Discrete
FIFO Costing
Cost Rollup for inventory valuation - New Make item
Need prior to WO Completion of any item in BOM structure
Not needed
Cost Rollup to recognize BOM, Routing, or Material price changes, or for periodic revaluation
Need
Cost Rollup “what-if’s” (in separate Cost Types)
Supported
Correct Make item cost errors
Cost Rollup
Layer Cost Update (may need to involve other items)

8. Functionality / Business Need EBS Discrete Standard Costing
Standard vs. FIFO
Functionality / Business Need
EBS Discrete Standard Costing
EBS Discrete
FIFO Costing
Correct Buy item cost errors
Correct item cost and update to Frozen
Layer Cost Update (may need to involve other items)
Cost Update – New Make Item
Update to Frozen
Not needed
Cost Update - New Buy item
Not needed if direct entry to Frozen
Supply Chain Cost Rollup across Organizations
Supported
Supported for “what-if’s”

9. Functionality / Business Need EBS Discrete Standard Costing
Standard vs. FIFO
Functionality / Business Need
EBS Discrete Standard Costing
EBS Discrete
FIFO Costing
Inter-Org Transfers
Transfer at standard cost
Transfer FIFO Layer cost (Note: Timing is critical)
Variance capture in GL
Supported (but some custom reporting may be desirable)
Not supported (need custom reporting)
Material variances (e.g. PPV, Usage), reflected in Gross Margin
No (i.e., below Gross Margin)
Yes
PO price maintenance impact
Inaccuracies fall through as PPV, no effect on Assembly costs
Inaccuracies affect related Assembly costs

10. Functionality / Business Need EBS Discrete Standard Costing
Standard vs. FIFO
Functionality / Business Need
EBS Discrete Standard Costing
EBS Discrete
FIFO Costing
Valuation of Completions: WO Material pushed after all Completions done
Completions valued at Std. WIP Qty x Component Std Costs, usage difference to Job Close Variance
Optional: Incremental Completion Layers valued at Std WIP Qty x Component FIFO Costs. Then, any Push after Completions goes to Job Close Variance
Valuation of Completions: WO Material pushed during Completions
Same as above
Same as above (could instead value Completion at value of Material push)
Valuation of Completions: WO Material backflush
Completions valued at Std. WIP Qty x Component Std Costs
Completions valued at Std. WIP Qty x Component FIFO Costs

11. Functionality / Business Need EBS Discrete Standard Costing
Standard vs. FIFO
Functionality / Business Need
EBS Discrete Standard Costing
EBS Discrete
FIFO Costing
Manual labor charge after incremental Completion (Resource Charge Type = Manual)
Inv valuation = Std Qty x Std Resource Rate, diff vs. std to Job Close Variance
Inv valuation = $0 for Layer built from that Completion, labor $$ to Job Close Variance
Labor charge when Resource Charge Type = WIP Move
Inv valuation = Routing Qty x Resource Rate
Same way as Standard
BS inventory valuation (GAAP, / L-C-M, IFRS, etc.)
Need separate FIFO reserve
Accepted (Note: Get up-front auditor verification)
Periodic inventory valuation at actual cost (via Cost Mass Edit)
Supported (via Cost Mass Edit and rollup at BOM and Rtg qtys)
Not needed

12. Functionality / Business Need EBS Discrete Standard Costing
Standard vs. FIFO
Functionality / Business Need
EBS Discrete Standard Costing
EBS Discrete
FIFO Costing
Ability to vary GL Accounts by Subinventory
Supported
Supported in WMS Org; otherwise all Subinv have same Elemental Accounts (Note: R12 SLA addresses)
Display on Item Costs Summary form
Standard cost rolled up or entered
Average across all Layers
Ability to change Cost Methods after Org in use
Not supported
MOH absorption, MOH Defaults (e.g. MOH based on % of Material cost)

13. Functionality / Business Need EBS Discrete Standard Costing
Standard vs. FIFO
Functionality / Business Need
EBS Discrete Standard Costing
EBS Discrete
FIFO Costing
Outside Processing - Inventory valuation
Supported (inventory valuation at Std qty x Std Resource Rate)
Supported (inventory Layer valuation at WO OSP qty x PO price)
Cost Copy – Items, Resources, OH)
Supported
Supported (including from FIFO and FIFO Rates Cost Types)
COGS Recognition
Deferred COGS debit upon ship, run three Concurrent Requests to move $$ to COGS
Same as Standard
R12 Cost Management-SLA – Setups and Create Accounting
Feature

14. Functionality / Business Need EBS Discrete Standard Costing
Standard vs. FIFO
Functionality / Business Need
EBS Discrete Standard Costing
EBS Discrete
FIFO Costing
MTL and WIP seeded Cost Management reports
Supported
Supported (plus several FIFO Costing-related inventory reports)
Pending Cost Update
Not supported

15. FIFO Cost - Implementation Considerations

16. Current Landscape – Discrete Manufacturers
Fluctuating raw material prices, escalation in recent years
Material cost avg % of COGS value
Competitive - Hold line on pricing --“margin squeeze”
Need for improved GM/contribution margin info greater than ever
PPV – Often largest variance vs. standard; difficult to meaningfully allocate to COGS
Limitations of EBS period-end actual costing model
Accounting departments- Expectation with ERP: “Do more with same / fewer resources”
Lean concepts being driven firm-wide

17. FIFO Cost Org: Key Factors to Consider
Discrete Org Cost Methods are permanent
Overall PO price maintenance – Critical
BOM / Routing maintenance up-to-date?
Cost Rollups (what-if’s, new products, etc.) can be run in a FIFO Org
In general: The fewer the raw material SKU’s and greater the price fluctuations, the better the fit
In general: The more backflush, the better the fit

18. FIFO Cost Org: Key Factors to Consider
Process automation - Cost accounting (FIFO = no Rollup for new products, eliminates revaluation)
The more Resources = WIP Move, better the fit
Variance capture in GL needed? Variances for management reporting purposes only?
Conduct cost method requirements workshop, all parties involved
Beware of “accepting the past” (challenge long-time accounting processes)

19. FIFO Cost Org: Key Factors to Consider
Focus on COGS valuation (less so on inventory valuation):
COGS – Analysis
Inventory - Reporting
FIFO costing may not be acceptable for some industries
Consult internal / external auditors first: e.g., GAAP- & IFRS-compliance, prior year restatement considerations, relevancy of physical flow of goods

20. FIFO Cost Org: Key Factors to Consider
Vertical integration – The greater the number of Inter-Org Transfers, the more coordination needed
Distributors – Overall, easier to implement FIFO than manufacturing
Physical flow of goods sync with FIFO Layers

21. FIFO Costing and Physical Flow of Goods
EBS FIFO Layers are consumed without regard to Lots, Serial Numbers, etc. or other physical flow
Within normal range of inventory turns, in a discrete manufacturing environment the difference tends to be acceptable:
All factors (variances) considered, generally more comprehensive COGS valuation than standard costing
Other factors (low number of raw materials, back-flush vs. push) can offset need to match Material flow with Cost Layer consumption

22. Change from Standard to FIFO Cost Org

23. Change from Standard to FIFO Cost Org
Changing the Cost Method flag not supported **
Convert and validate Items, BOMs, Routings
Convert on-hand qtys
PO’s and SO’s in-process need to be pointed to new Org
Close as many WIP Jobs in old Org as possible
** FYI – This change is supported in EBS Process Organization

24. Question & Answer 24

25. Dave Sweas