1. OAUG Cost Sub-Committee – 1 Manufacturing Variances October 20, 2009 Discrete Manufacturing SIG Cost Sub-Committee Manufacturing Variances October 20 th, 2009 Douglas Volz OAUG Discrete MFG Cost Group email: dvolz@comcast.net tel:: +1 (510) 755-7050 Bruce Baggaley Senior Partner, BMA Inc. email: bbaggaley@maskell.com tel:: +1 (609) 239-1080 x 2

2. OAUG Cost Sub-Committee – 2 Manufacturing Variances October 20, 2009 Agenda  Welcome  Schedule for 2009 and 2010  New SIG: G/L  This Month’s Topic – Manufacturing Variances  Conclusion

3. OAUG Cost Sub-Committee – 3 Manufacturing Variances October 20, 2009 Last Session for 2009 – November 17 th  Oracle will present on Oracle Landed Cost Management  A new module which helps to give organizations financial visibility into their extended supply chain costs, including transportation and handling fees, insurance, duties, and taxes

4. OAUG Cost Sub-Committee – 4 Manufacturing Variances October 20, 2009 Schedule for 2010

5. OAUG Cost Sub-Committee – 5 Manufacturing Variances October 20, 2009 New Special Interest Group: G/L SIG  Introduced during Openworld on October 11th  Contact Mohan Iyer at mohan@fscpsolutions.com for more informationmohan@fscpsolutions.com  Meant to be more than G/L, “The Multi-Org/Multi-National SIG group supports the formation of a special GL-SIG and will closely collaborate with this new focus group. With the introduction of the E-Business Suite Release 12 there is an even greater number of topics and challenges that need a new in-depth analysis and user review, such as Legal Entity Model, MRC, Sub-Ledger Accounting, Multi-Org Access Model. ”

6. OAUG Cost Sub-Committee – 6 Manufacturing Variances October 20, 2009 This Month’s Topic: Manufacturing Variances  How Oracle Discrete Manufacturing Handles Variances  Overview for Variances by Costing Method  Purchase Price Variance / Invoice Price Variance  WIP Labor Rate, Assembly Scrap, Yield Factors  Types of WIP and Types of WIP Jobs  WIP Variances for Standard Costing  Standard Cost and Average Cost Updates  Contrast Full Absorption Standard Costing With Lean Accounting  What’s Wrong with Full Absorption Standard Costing?  Value Stream Costing  Comparing Assumptions  Comparing What Is Important  Comparing Measurements and Behaviors  Value Stream Cost Analysis - by Type of Cost  What Must Be in Place for Value Stream Costing to Be Effective?  Conclusions

7. OAUG Cost Sub-Committee – 7 Manufacturing Variances October 20, 2009 Overview for Variances by Costing Method Average Costing  Invoice Price Variance  Average Cost Update  Material Overhead Over/Under Absorption  Resource/Production Overhead Over/Under Absorption  Assembly Scrap Standard Costing  Purchase Price Variance  Invoice Price Variance  Standard Cost Update  Material Overhead Over/Under Absorption  Resource/Production Overhead Over/Under Absorption  Assembly Scrap  Material Usage  Resource, OSP, & Overhead Efficiency

8. OAUG Cost Sub-Committee – 8 Manufacturing Variances October 20, 2009 Purchase Price and Invoice Price Variances  Both Average and Standard Costing have invoice price variances (IPV)  IPV measures the difference between the PO unit price and the invoice actual cost  Only Standard Costing has purchase price variances  PPV measures the difference between the PO unit price and the standard cost  Set these up on the Inventory Parameters: IPV Account PPV Account

9. OAUG Cost Sub-Committee – 9 Manufacturing Variances October 20, 2009 Material Overhead & Production Overh’d Over/Under Absorption Variances  Oracle MFG can earn material overhead at:  PO Receipt  Inter-Org Receipt  WIP Completion  You set up the absorption (or offset) account when you define sub-elements Absorption Account

10. OAUG Cost Sub-Committee – 10 Manufacturing Variances October 20, 2009 Labor Rate Variances  Oracle MFG can earn resources at  Part of the resource sub-element setup Actual rate X actual hours Actual rate X standard hours Standard rate X standard hours Standard rate X actual hours Standard Rate Checkbox Resource Rate Variance Account

11. OAUG Cost Sub-Committee – 11 Manufacturing Variances October 20, 2009 Assembly Scrap and Yield Factors  Component Yield factors are unchanged from Release 11i  It increases the cost (and component requirements) for the assembly  Input on the bill of material  Assembly Shrinkage is unchanged from Release 11i  Depending on your setup you may record assembly scrap when you move assemblies into Scrap or leave the value in the job

12. OAUG Cost Sub-Committee – 12 Manufacturing Variances October 20, 2009 How to Enter the WIP Assembly Scrap Transaction Use aliases Move to Scrap

13. OAUG Cost Sub-Committee – 13 Manufacturing Variances October 20, 2009 Assembly Scrap Factor by Cost Type Shrink Rate by Cost Type

14. OAUG Cost Sub-Committee – 14 Manufacturing Variances October 20, 2009 Types of WIP Variances by WIP Class  WIP Discrete Production Jobs – recognized when you close the WIP Job  WIP Non-Standard Asset Jobs – recognized when you close the WIP Job  WIP Non-Standard Expense Jobs – recognized when you close the period  WIP Repetitive Schedules – usually recognized when you close the period  WIP Flow Manufacturing – no variances – all earned at standard usage & rates

15. OAUG Cost Sub-Committee – 15 Manufacturing Variances October 20, 2009 Account Setup for WIP Variances – by WIP Class Used for OSFM

16. OAUG Cost Sub-Committee – 16 Manufacturing Variances October 20, 2009 Formula for Usage and Efficiency WIP Variances (Standard Costing) Costs-In Costs-Out 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. OAUG Cost Sub-Committee – 17 Manufacturing Variances October 20, 2009 Cost Update Variances  Average Costing Separate material transaction, entered by cost element There is no Average Cost Update for WIP  Standard Costing Run by submitting the Standard Cost Update You enter the desired offset (variance) account WIP gets its offset account from the WIP Accounting Class

18. OAUG Cost Sub-Committee – 18 Manufacturing Variances October 20, 2009 Contrast Traditional Costing with Lean Accounting

19. OAUG Cost Sub-Committee – 19 Manufacturing Variances October 20, 2009 What’s Wrong with Full Absorption Standard Costing?  Distorts profitability by inappropriate overhead application—assumes full/ “practical” capacity.  Motivates non-lean behavior; large batches, over- production & make-for-inventory –economies of scale  Requires significant detailed reporting of so-called “actual” information.  Considers labor as a variable cost when for practical purposes labor is largely fixed. Standard Costs “lie to you”. They give misleading information leading to bad decisions; make/buy, pricing, product introductions, etc.

20. OAUG Cost Sub-Committee – 20 Manufacturing Variances October 20, 2009 Value Stream Costing VALUE STREAM Production Labor Production Materials Production Support Operation Support Facilities & Maintenance All Other VS Costs All labor, machine, materials, support services, and facilities directly within the value stream. Little or no allocation. Machines & Equipment

21. OAUG Cost Sub-Committee – 21 Manufacturing Variances October 20, 2009 Comparing Assumptions Profit comes from full utilization of resources Waste = idle resources Control the business thru detailed tracking All excess capacity is bad Traditional Assumptions Profit comes from maximizing flow on pull from customers. Waste = resources impeding the flow Control thru continuous attention to flow & waste Excess capacity provides flexibility Lean Assumptions

22. OAUG Cost Sub-Committee – 22 Manufacturing Variances October 20, 2009 Value to the customer Value streams Flow & pull from the customers Team structure and individual empowerment, accountability System quality Pursuit of perfection Full utilization of resources Average part cost Overhead absorption Batch and Queue Inventory valuation Departmental structure and individual efficiency Product quality Pursuit of budget Comparing What Is Important Traditional ThinkingLean Thinking

23. OAUG Cost Sub-Committee – 23 Manufacturing Variances October 20, 2009 Labor efficiency & machine utilization Cost variances vs. standard Budget adherence Direct labor as % of sales Cycle time Throughput First time quality Inventory Turns Delivery to customer Value stream focus Comparing Measurements Traditional Measurements Lean Measurements

24. OAUG Cost Sub-Committee – 24 Manufacturing Variances October 20, 2009 Make more product— build inventory Utilize resources to the max Optimize dept. efficiencies Track direct labor in detail Allocate other costs Eliminate barriers to flow Focus on value streams rather than departments Continuous improvement and team-work Eliminate waste, inventory, and over- production Traditional BehaviorsLean Behaviors Comparing Behaviors

25. OAUG Cost Sub-Committee – 25 Manufacturing Variances October 20, 2009 Value Stream Cost Analysis - by Type of Cost

26. OAUG Cost Sub-Committee – 26 Manufacturing Variances October 20, 2009 What Must Be in Place for Value Stream Costing to Be Effective?  Report by value stream - not by department.  Ideally the people should be assigned to a single value stream with little or no overlap.  Few shared services departments. Few monuments. Little requirement for cost allocation.  Production processes must be largely under control, so that variability is reasonably low  Thorough tracking of “out-of-control” situations and of excepts like scrap, rework, etc.  Inventory must be under control, relatively low, and consistent

27. OAUG Cost Sub-Committee – 27 Manufacturing Variances October 20, 2009 Conclusion This session provided an overview for:  Oracle variances for average and standard costing  How lean accounting can offer significant advantages over traditional cost accounting 2010 cost sessions are in the planning stages  If you have topics you would like to discuss send an email to Doug Volz  Looking for ways to improve our sessions and increase our membership

28. OAUG Cost Sub-Committee – 28 Manufacturing Variances October 20, 2009 Thank You for Your Attendance and Participation