1. Overview of Discrete Costing for Manufacturing OAUG MFG Discrete SIG Meeting November 10, 2010 Douglas Volz Douglas Volz Consulting doug@volzconsulting.com

2. Helping people using Oracle Applications since 1990 Agenda  Inventory Structure  High Level Review of Oracle Cost System Capabilities  Costing Methods  Oracle Cost Management Structure  Discrete MFG and Costing  Setting Standard Costs  Setting Average, FIFO, LIFO Costs  Month-End Accounting Close Slide 2

3. Helping people using Oracle Applications since 1990 Agenda (Continued)  Release 12 Cost Improvements  Flexible Account Number Assignment  Little Known Cost Features Slide 3

4. Helping people using Oracle Applications since 1990 Slide 4 Inventory Structure  Global Organization (Item Master)  Inventory Organization  Subinventory  Locators

5. Helping people using Oracle Applications since 1990 Slide 5 Complex Financial Entities

6. Helping people using Oracle Applications since 1990 Slide 6 Costing Concepts  Costing Methods  Average Costing  Standard Costing  Periodic Costing  FIFO Costing  LIFO Costing

7. Helping people using Oracle Applications since 1990 Slide 7 Average Costing  Oracle supports a moving or weighted average cost  The unit cost changes with each receipt transaction  Unit costs reflect the average of the incoming receipts from  purchase order receipts,  purchase order returns  inter-organization receipts  and for manufacturing, for WIP assembly completions  miscellaneous issues may or may not affect the unit cost  All issues occur at the existing average costs  Assembly costs come from the cost of your assemblies built in WIP  You may have indirect costs (material overheads, etc.) as well

8. Helping people using Oracle Applications since 1990 Slide 8 Standard Costing  The primary objective of standard costing is to provide a performance measurement system  Unit costs are set up in advance as an expected cost  Component costs (material costs) are defined using the projected average acquisition costs, plus any associated indirect costs  Assembly costs are rolled up using bills of material and routings  Standards are reset periodically, depending on how quickly your costs change  All manufacturing and distribution activities are measured against the expected costs  Typical variances include:  Purchase Price Variance,  Invoice Price Variance  Manufacturing Variances (material usage, resource efficiency, etc.)

9. Helping people using Oracle Applications since 1990 Slide 9 Other Costing Methods  FIFO Costing  FIFO costing values inventory by assuming that the oldest inventory (first in) is the first to be used or sold (first out), but there is no necessary relationship to the physical movement of specific items  FIFO supports WIP costing  LIFO Costing  LIFO costing values inventory by assuming that the most recently received item (last in) is the first to be used or sold (first out), but there is no necessary relationship to the physical movement of specific items  LIFO supports WIP costing  Periodic Costing  Periodic has dual costing capabilities, using Periodic Costing at month-end and using transaction-based “real-time” costing prior to month-end  Periodic supports WIP costing

10. Helping people using Oracle Applications since 1990 Slide 10 Cost Structure

11. Helping people using Oracle Applications since 1990 Slide 11 Organizational Costing  Costing is by Plant or Warehouse (called an inventory organization)  Each inventory organization has its own item material, labor, outside processing, and overhead costs Each inventory organization may have multiple cost versions, called Cost Types You can have any number of cost types that are not active (unimplemented costs)  Each inventory organization can have its own costing method  There is only one “Active” cost type that is used to record your Subledger Transactions Standard costing uses the Frozen cost type, and average costing uses the Average cost type …  Within an inventory organization, all items have the same costing method, Average, or Standard or FIFO or LIFO or Periodic

12. Helping people using Oracle Applications since 1990 Slide 12 Cost Elements  You have five available cost elements for each cost type Material (supplier purchase costs) Material Overhead (freight in, material handling, etc.) Resource (labor, machines, other factors of production) Outside Processing (subcontracting or outsourcing) Overhead (Resource and Outside Processing Overhead)  Only use the cost elements you need  But you can have an unlimited number of sub-elements Material (metal, plastic, etc.) Material overhead (inter-co profit, in-bound freight, etc.) Resources (labor, machine groups, etc.) Outside Processing (subcontract vendor service1, service2, etc.) Production Overheads (Factory Burdens, etc.)

13. Helping people using Oracle Applications since 1990 Slide 13 Oracle Cost Management Interaction

14. Helping people using Oracle Applications since 1990 Slide 14 Inventory Costing  Costs Into Inventory/Stores  Purchase costs into Inventory: Material, Material Overhead, etc. costs  For Standard Costing: Purchase Price Variances  More Costing for Inventory Movement  Misc. Account Receipt / Issue  Physical Inventory, Cycle Counts  Consignment (WIP/OSP, purchase consignment)  Subinventory and location transfers  Customer shipments  Internal orders  Project shipments and transfers (PJM)  Logical Transactions (extended supply chain network)  Supports many intercompany scenarios  Internal orders  Internal shipping and billing

15. Helping people using Oracle Applications since 1990 Slide 15 Discrete MFG and Costing  All of the Costing Methods support WIP Costing  Timing varies by how your charge to WIP Backflush, Assembly Pull, etc. Push  Costs into WIP:  Material Issues  Material Overhead  Earning Resources, Outside Processing and Overheads  Costs out of WIP  Scrap  Assembly Completion  Job Close Variances  Only for Standard Costing

16. Helping people using Oracle Applications since 1990 Slide 16 Manufacturing Variance Summary Costs-Incurred Costs-Relieved Variances Previous-level costs @ actual usage Previous-level costs @ standard Material usage variance Resource efficiencyResource Overhead efficiency Outside processing efficiency Overhead Sources of: Components issued Resources earned OSP earned Overheads earned WIP completions @ standard rolled up costs = - = = = - - -

17. Helping people using Oracle Applications since 1990 Slide 17 Cost Reports and Inquiries  Material Distribution Detail/Summary Reports  WIP Account Detail/Summary Reports  Discrete Job Value  Expense Job Value Report  WIP Value Report  WIP Value Inquiries

18. Helping people using Oracle Applications since 1990 Slide 18 Setting Standard Costs  Cost Mass Edits  Item Cost Copies  Cost Rollups (also across the Supply Chain)  Standard Cost Updates  Bills of Material Cost Inquiries and Reports  Pending and Standard Cost Adjustment Reports

19. Helping people using Oracle Applications since 1990 Slide 19 Setting Average, FIFO, LIFO Costs  Simulation Costing with Cost Rollups and Mass Edits  Transaction-based updates of Average, FIFO, LIFO costs  Manual cost updates  PO retroactive price adjustments  And if you are clever, using open interfaces for custom updates

20. Helping people using Oracle Applications since 1990 Slide 20 Month-End Accounting Close  Close by Inventory Organization  Month-End Inventory, Receiving, WIP Value Reports  Release 12, close in Inventory  Transfer to G/L using Subledger Accounting (Create Accounting)  Closing Inventory closes Receiving and WIP  Purchasing has its own close (and also closes off Receiving)

21. Helping people using Oracle Applications since 1990 Slide 21 Month-End Inventory Value Reports  Inventory Value Report  Intransit Value Report  Subinventory Account Value Report (disabled in Release 12)  All Inventories Value Report  Receiving Value Report  Receiving Value by Destination Report (disabled in Release 12)  WIP Value Report  Period Close Value Summary Report  Period Close Reconciliation Report (11.5.10 and 12)

22. Helping people using Oracle Applications since 1990 Slide 22 R12 Improvements Period Close Diagnostics  Forms Drilldown Using the same Inventory Accounting Periods form you can drilldown to associated forms to view the problem transactions  New workflow to notify of failing transactions  Period Close Pending Transactions Report Report for transactions holding up the inventory accounting period

23. Helping people using Oracle Applications since 1990 Slide 23 Reconciliation Improvements in R12  Inventory Value Reports have an “as of date” Inventory Value Report Receiving Value Report Intransit Value Report All Inventories Value Report

24. Helping people using Oracle Applications since 1990 Slide 24 Flexible Account Number Assignment  Release 12 Subledger Accounts allows you to extend the standard oracle setups (all costing methods except periodic)  Subledger Accounting rules govern how the final accounting entries are created and sent to the G/L Subledger Accounting Offers Major Improvements Subledger Accounting Comes with Default Rules

25. Helping people using Oracle Applications since 1990 Slide 25 SLA for Product Line Accounting, Variance Recognition Transactions Accounting Events Cost Management SLA Accounting Configurations Subledger Balances Subledger Journal Entries Accounting Program Journal Entry Setup GL Journal Entries and Balances

26. Helping people using Oracle Applications since 1990 Slide 26 SLA Accounting Tables Enter Transaction(s) Transaction Accounting Tables Accounting Processor XLA_AE_HEADERS XLA_AE_LINES XLA_DISTRIBUTION _LINKS XLA_EVENTS Module Specific Transaction Accounting Tables Create Accounting G/L Tables GL_LEDGERS GL_JE_HEADERS GL_JE_LINES GL_JE_BATCHES One Common Accounting Subledger Table GL_ INTERFACE Receiving Material WIP Basic Table Structure for SLA

27. Helping people using Oracle Applications since 1990 Slide 27 More Release 12: COGS Recognition  In R12 the customer shipment entries go to deferred COGS  Automates the matching of Cost of Goods Sold (COGS) for a sales order line to the revenue that is billed for that sales order line. “True” COGS 1. Customer Shipment 10 2. COGS Recognition Deferred COGS Inventory 10

28. Helping people using Oracle Applications since 1990 Slide 28 Related R12 BOM Features  Fixed Component Usage Support: Support for lot-based materials that have a fixed usage regardless of the job size for discrete WIP jobs, OSFM lot-based jobs and Flow Manufacturing  Component Yield Support: Flexibility to control the value of component yield factors at WIP job level. The transaction logic now considers pre-yield BOM quantity per assembly rather than the quantity inflated by shrinkage.

29. Helping people using Oracle Applications since 1990 Standard Features You May Not Be Using  Currency setup  Period open and close by organization hierarchy  Material overhead absorption rules  Transaction Value Historical Summary Report  Period close snapshots Slide 29

30. Helping people using Oracle Applications since 1990 Standard Features: Currency Setup  You can change your item cost decimal precision at any time Slide 30

31. Helping people using Oracle Applications since 1990 Standard Features: Period Open/Close by Org Hierarchy  You can open and close multiple inventory periods by organization hierarchy  Define your organization hierarchy using an Human Resources, Purchasing or Inventory responsibility  Using the Inventory Organization Parameters, Costing tab, make sure your “Transfer to GL” settings are all the same for all orgs in the same organization hierarchy Slide 31

32. Helping people using Oracle Applications since 1990 Standard Features: Period Open/Close by Org Hierarchy  Open Period Control request Slide 32

33. Helping people using Oracle Applications since 1990 Standard Features: Period Open/Close by Org Hierarchy  Close Period Control request Slide 33

34. Helping people using Oracle Applications since 1990 Standard Features: Mat’l Overhead Absorption Rules  Explicitly say which ones do and do not earn material overhead Slide 34

35. Helping people using Oracle Applications since 1990 Standard Features: Transaction Value Historical Summary Report  Rollback inventory value to any date you choose  Choose which columns of information to view  You have four columns to select  The fifth column on the report is everything else  Useful as a “roll-forward” audit report  Useful to verify month-end inventory value report balances  Two reports:  Transaction Value Historical Summary (for Standard Costing)  Transaction Value Historical Summary – Average Costing Slide 35

36. Helping people using Oracle Applications since 1990 Standard Features: Transaction Value Historical Summary Slide 36

37. Helping people using Oracle Applications since 1990 Standard Features: Period Close Snapshot  Period close snapshots (Release 11.5.10 onward)  Prior to Release 11.5.10, the inventory period close only stored summary values by inventory organization and subinventory (blank subinventories are for intransit)  When you close inventory you automatically store period-end inventory values and costs by organization, subinventory and item Slide 37

38. Helping people using Oracle Applications since 1990 Desired Enhancements  Multi-Org Reporting  Multi-Org Material Account Summary Report  Multi-Org Receiving Account Summary Report  Multi-Org WIP Account Summary Report  Multi-Org All Inventories Value Report (with account numbers)  Multi-Org Inventory Value Report (with account numbers)  Multi-Org Receiving Value Report (with account numbers)  Multi-Org Expense Value Report (with account numbers)  Multi-Org WIP Value Report (R12 still has account numbers!) Slide 38

39. Helping people using Oracle Applications since 1990 Slide 39 Summary  Oracle Discrete Costing offers robust, flexible costing  Multiple costing methods are supported  Powerful mass edits, item cost copies and cost update capabilities  Account classification is much better with Subledger Accounting  As you transact your cost accounting happens automatically  Multi-org reporting is a continuing area of concern

40. Helping people using Oracle Applications since 1990 Slide 40 Acknowledgements  Oracle Cost Development  Partners in crime at our clients

41. Thank You for Your Attendance and Participation Douglas A. Volz Slide 41

42. Helping people using Oracle Applications since 1990 Slide 42 Douglas Volz (doug@volzconsulting.com) Professional Background Doug Volz is a Senior Architect and Advisor for Oracle Application projects, with a particular interest in Cost and Project Management. He has 30 years accumulated experience, including 5 years in Oracle Development (co-designing Oracle Cost Management) and 12 years in industry in Cost and Accounting Management positions. His Manufacturing and Cost systems experience covers project management, software design/development, delivery and consulting services, for both Oracle Corporation, and multiple international consulting firms. Prior to his systems career, Mr. Volz also held numerous management accounting positions for telecommunications, defense, and electronics companies. In his consulting roles, Doug has served over 100 clients. Many of these were multi-org, multi-currency with global footprints. Countries include US, Mexico, UK, Netherlands, Belgium, Taiwan, P.R.O.C., Norway, Japan, Italy and Germany. Doug leads the OAUG Cost Special Interest Group. He also advises and participates on the Oracle Customer Advisory Board for Fusion Costing. Core Expertise  Multi-organization, Multi-currency ERP Implementations  Project Management and Senior Project Advisor  Core manufacturing processes  Cost Management  Inventory  Bills of Material  WIP  Systems Integration and Data Conversions Experience  Sample of clients served:  Beckman Coulter (US)  Matsushita (UK, Mexico)  NTL (now Virgin Media)  Logitech (US, Taiwan, P.R.C.)  Celgene Corporation (US)  NTL (UK, now Virgin Media)  TCI International (US)  Onninen AS (Norway)

43. Helping people using Oracle Applications since 1990 Slide 43 End of Presentation