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A Guide To Standard Costing
A Guide To Standard Costing
ABSTRACT
==========
Standard costing is used by Customers who employ predetermined costs for valuing inventory
and for charging material, resource, overhead, period close, and job close and schedule
complete transactions. Differences between standard costs and actual costs are recorded as
variances.
Manufacturing industries typically use standard costing.
Costs of items can be shared across organizations using standard costing. A note on the same
has been provided in this paper. An attempt has been made to understand the way in which
costs are built up for a manufactured item through this paper. This paper also provides an insight
into the Accounting distributions generated by transactions in different modules of the
Application.
SCOPE
======
This paper has been authored keeping in view an audience familiar with Oracle Cost
Management in general and Standard Costing Method in particular. Readers with an
understanding of basic transactional cycles in Order Management, Purchasing, Inventory and
Work in Process would be in a position to appreciate the entire gamut of this paper.
In order to avoid any bit of ambiguity, the contents have been distributed across
2 parts (A and B). Part A deals with Rolling up cost of an assembly item with a 2 level BOM.
This case has been discussed at length and makes for an interesting reading due to the inclusion
of various parameters possible. However, yours truly, does not claim that this paper satisfies the
requirement of a complete guide for Cost Rollup- Standard Costing. There is certainly more to
come. Also, it would be worth noting that the Assembly Cost Rollup is being replaced by the
Supply Chain Rollup in the next functional release. However, the existing name, Assembly Cost
Rollup has been used in this document.
Part B demonstrates the impact that standard costing has on various
transactions across four different modules of Oracle Applications. An effort has been made to
entwine the transactions with a business scenario. To enhance the readers clarity on the topics
discussed, screenshots and output of the relevant reports are used wherever necessary.
OVERVIEW
==========
An overview of a few topics has been provided to facilitate the understanding of the entire
breadth of this paper.
Cost Elements
--------------------To begin with, let us look at the various cost elements present in Cost Management.
The unit cost of any item is the sum of the costs of all the cost elements.
There are 5 cost elements, which are defined as follows:
Material -- The raw material/component cost at the lowest level of the bill of
material determined from the unit cost of the component item.
Material -- The overhead cost of material, which can be used for any costs attributed
Overhead
to direct material costs.
Resource -- Direct costs, such as people (labor), machines, space, or miscellaneous
charges, required to manufacture products.
Overhead -- The overhead cost of resource and outside processing, which is
used as a means to allocate department costs or activities.
Lot
Used to assign a fixed lot charge to items or operations. The cost per item is
calculated by dividing the fixed cost by the items standard lot size for
material and material overhead sub-elements.
--
Resource -- Used to apply overhead to an item, based on the resource value earned
Value
in the routing operation. Used with the material overhead and overhead
Sub-element only and usually expressed as a rate.
Resource -- Used to apply overhead to an item, based on the resource units earned
Unit
in the routing operation. Used with the material overhead and overhead
Sub-element only and usually expressed as a rate.
Total
Value
-- Used to apply overhead to an item, based on the total value of the item. Used
with the material overhead sub-element only and usually expressed as a rate.
Activity -- Used to directly assign the activity cost to an item. Used with the material
overhead sub-element only.
What is Cost Rollup?
Cost Rollup is a process by which the costs of assemblies are built, starting with the lowest level
and working up the structure to top-level assemblies. This process is specifically called a full cost
rollup. This method gives the most current bill of material structure and component costs.
There is another way of rolling up Costs, which is the singlelevel rollup, which only looks at the
first level of the bill structure for each assembly in the rollup and rolls the costs for the items at
this level into the parent. This method does not reflect structure or cost changes that have
occurred at a level below the first level of assemblies.
Part of the cost rollup process includes the option to print a report. If this option is chosen, either
the Consolidated Bills of Material Cost Report or the Indented Bills of Material Cost Report can
be printed.
This paper has made use of the following options:
Full cost rollup
Indented Bills of Material Cost Report
O1
RA1
R1
A1
Resources
-------------3 Resources have been defined under 3 different Departments.
DSR1, DSR2 and DSR3 are the 3 Departments defined.
The Resources defined are LAM, FIX and SAW.
Resource LAM used for Lamination purpose is defined under Department DSR1
Unit cost of this Resource is defined as $12.
The Navigation Path used for defining the Resource Unit Cost is as follows:
Bills of Material Routings Resources Rates (B)
Operation
Component
10
O1
20
RA1
Fig 8. Routing for ORA1
Resource
SAW
FIX
Resource Usage
0.9
1
Department
DSR3
DSR2
Overheads
---------------There are 2 overheads defined in the form of Mgmt and MfgMgmt.
Hence, these overheads have been associated with the required Departments and Cost type
Pending. We would be using the Pending Cost type for our test case involving Cost Rollup.
Note:- Overheads operate at the Department Level and need to be associated with a cost type.
Overhead Mgmt has been associated with Departments DSR1 and DSR2 with a rate of 9 and it
uses a basis type of Resource Value.
The Navigation used is as follows:
Cost Setup Subelements Overheads Rates (B)
Fig 9. Association of Overhead Mgmt with Pending Cost Type and Departments DSR1 and DSR2
The same can be achieved using the following Navigation too:
Bills of Material Routings Resources Rates (B)
As shown above, a 3-way association among the Overhead Mgmt, Pending Cost type, and
Departments DSR1 and DSR2 is complete.
However, in order to charge the overhead based on specific resources within the Department,
there needs to be an association between the Overhead and the specific Resource within the
Department.
To satisfy this condition, Overhead Mgmt has been associated with Resources LAM and FIX
within Departments DSR1 and DSR2 respectively.
Fig 10. Association of Overhead Mgmt with Resources FIX and LAM for Pending Cost type
The same can be achieved for each resource using the following Navigation too:
Bills of Material Routings Resources Overheads (B)
Similarly overhead MfgMgmt has been associated with Department DSR3 and Pending Cost type
with a rate of 7 using basis type Resource Unit. This Overhead has specifically been attached to
Resource SAW within Department DSR3.
Fig 11. Association among Department DSR3, Pending Cost type and Overhead MfgMgmt
Fig 12. Association between Overhead MfgMgmt and specific resource SAW within Department DSR3
Item costs
--------------All the 5 items, namely O1, R1, A1, RA1 and ORA1 have costs defined.
These are supported with screenshots and would be introduced one after the other in the course
of the discussion, as and when required.
PART-A
========
Part-A would look at the Cost rollup process for the Finished Good ORA1 in an Organization
employing the Standard Cost method.
COST ROLLUP
=============
As we start the exercise of understanding the rolled up costs, we must be reminded of
the following:
1) A yield factor of 0.8 has been set against R1 in the BOM of RA1.
This means to say that for every 1 unit of R1 used, there would be wastage of 0.2
units in the process of making RA1.
10
2) A yield of 0.7 has been set against RA1 in the BOM of ORA1.
3) Usage rate of Resource SAW has been set to 0.9 in the routing for ORA1.
As we go forward, we would understand the implications of the above settings.
Purchased Item A1
--------------------------Let us begin our understanding from the buy item A1.
Material Cost of Item A1 has been defined as $12 with a basis type of Item.
Material Overhead Cost has been defined with a basis type of Total Value and a rate of 0.3.This
means that the Material Overhead value would be 0.3 times the existing total value of item A1.
This results in a value of $3.6 i.e. 0.3 * $12.
Fig 14. Bills of Material Indented Cost Report Output for Item A1.
The Extended Qty/ Rate or Amount Column shows a value of 1.428571 against item A1 which is
due to the yield factor of 0.7 set against the sub-assembly in the making, RA1.
The Material cost of A1 would get multiplied by this value to provide the extended cost as
$17.14286 i.e. $12 * 1.428571 = $17.14286.
The Material Overhead Cost has a rate of 0.3 defined using Total Value as Basis type.
This data is represented by Quantity/Rate or Amount and Yield/Basis columns respectively
against the Cost Element of Material Overhead.
As understood earlier, when a basis type of Total Value is used, the existing total value of the
item would multiply the rate. This leads us to the product of 0.3 and $17.14286, which is the
existing total value of the item A1 resulting from the rollup.
Hence a value of $5.14286 is seen as the extended cost of Material Overhead.
11
Material Cost =
$12 * 1.428571 = $17.14286
Material Overhead Cost = $3.6 * 17.14286 = $5.14286
The column Item Unit Cost/Res Unit Cost displays a value of $15.6 based on the Item Costs
screen. This is only a representative value and is not used in the cost rollup.
Purchased Item R1
--------------------------Material Cost of R1 has been defined as $10 and the Material Overhead Cost as $2.
Both these costs use a basis type of Item.
Fig 16. Bills of Material Indented Cost Report Output for Item R1
The Extended Qty/ Rate or Amount Column shows a value of 1.785714 which is derived as
follows:
1
1
------------------------------------------------= ------------ = 1.785714
Yield factor of R1 * Yield factor of RA1
0.8 *0.7
This value directly multiplies the Material and Material Overhead costs as they use a basis type of
Item, resulting in values of $17.85714 and $3.57143 in the extended cost column against the
Material and Material Overhead cost elements respectively.
Material Cost
= $10 * 1.785714 = $17.85714
Material Overhead Cost = $2 * 1.785714 = $3.57143
Sub-assembly RA1
--------------------------As we have understood the rolled up costs derived with respect to the buy items R1 and A1, we
now move to sub-assembly RA1.
12
A Material Overhead Cost of $4 was defined for sub-assembly RA1 before the rollup was carried
out. Please note that there was no Material Cost defined.
Fig 18. Bills of Material Indented Cost Report Output for Item R1
Let us take the cost elements one by one and understand the costs.
The Extended Qty/ Rate or Amount Column shows a value of 1.428571 against item RA1 which
is due to the yield factor of 0.7 set against RA1 in the BOM of ORA1.
The Material Overhead of $4 gets multiplied by this value to result in an extended cost of
$5.71429.
The Cost Element of Resource has got 2 sub-elements in the form of Resources LAM and FIX
under Departments DSR1 and DSR2 respectively with a basis type of item.
The unit cost of Resource LAM is $12 as shown in Fig.4.
The unit cost of Resource FIX is $16 as shown in Fig. 5.
These costs once again get multiplied by 1.428571 to result in extended costs of $17.14286 and
$22.85714 respectively.
The final cost element that needs to be accounted is Overhead. Overhead Mgmt has been
attached to Cost type Pending with a rate of 9 and a basis type of Resource Value as shown in
Fig. 9.
A basis type of Resource Value means that the Rate defined against this Overhead would get
multiplied by the Value of Resource used. A pre-requisite for this to happen is that the Overhead
should be attached to the specific Resource.
To satisfy this condition, the Overhead Mgmt has been attached to Resources LAM and FIX as
shown in Fig.10.
Hence, the cost of Overheads is calculated by multiplying the rate of 9 with the extended cost of
both the Resources, LAM and FIX. This results in values of $154.28571 and $205.71429 in the
extended cost column against the Overhead Mgmt.
Material Overhead Cost
= $4 * 1.428571 = 5.71429.
13
Resource Costs
--- LAM
= $12 * 1.428571 = 17.14286
--- FIX
= $16 * 1.428571 = 22.85714
Overhead Costs
--- Mgmt (based on Resource Value of LAM) = 9 * $17.14286 = $154.28571
--- Mgmt (based on Resource Value of FIX) = 9 * $22.85714
= $205.71429
The Value of $314.6 in the Item Unit Cost/Res Unit Cost Column against RA1 is the rolled up
cost of sub-assembly RA1. This means to say that, if a rollup were carried out for RA1 only and
not ORA1, the rolled up cost of RA1 would have been $314.6.
This is essentially computed without considering the yield factor of 0.7 defined against RA1 in the
BOM of ORA1. However, the yield factor of 0.8 defined for Buy item R1 would be considered in
this computation as this item forms a part of the BOM of RA1.
Purchased Item O1
--------------------------This should be the simplest of all.
RA1 has a Material Cost of $18 and a Material Overhead Cost of $7 defined with a basis type of
Item.
Fig 20. Bills of Material Indented Cost Report Output for Item O1
Material Cost
= $18
Material Overhead Cost = $7
Finished Good ORA1
-----------------------------Finally, we get to the Finished Good Item ORA1.
ORA1 has got a Material Cost of $5 with basis type Item.
The Material Overhead Cost has a rate of 2 with a basis type of Resource Unit.
This means to say that the Resource Units used in making ORA1 would multiply the Rate. As
noted earlier, usage of Resource SAW is set to 0.9 and that of FIX is set to the not so interesting
value of 1.
14
Fig 22. Bills of Material Indented Cost Report Output for Item O1
As in the case of RA1, let us take each cost element and check for the Cost arrived at.
Material Cost element has an extended cost of $5, which is picked up from the Item Costs
screen. Similarly the Material Overhead Cost of $3.8 gets picked up.
Resource Cost element has 2 resources SAW and FIX as sub-elements.
Resource FIX has a unit cost of 16 as shown in Fig.5
Hence this cost is picked for the roll up.
Resource SAW has a unit cost of 20 as shown in Fig.6.
However SAW has a usage of 0.9 in the Routing for ORA1 as represented by Fig.8.
Hence the extended cost would get calculated as 0.9 * 20 resulting in $18.
The next Cost element to be considered is Overhead.
There are 2 sub-elements under this cost element in the form of MfgMgmt and Mgmt.
As shown earlier, Mgmt has a rate of 9 defined with a basis type of Resource Value and it has
been associated with Resource FIX. (Figs. 9 & 10).
Also, MfgMgmt has a Rate of 7 defined with a basis type of Resource Unit and has been
attached to the Resource SAW under Cost type Pending for the Resource Unit basis type to be
effective. (Figs. 11 & 12)
Hence the cost of sub-element Mgmt is calculated by multiplying the rate of 9 with the Resource
Value of $16 resulting in $144.
The cost of sub-element MfgMgmt is calculated by multiplying the rate of 7 with the Resource unit
value of $0.9 resulting in $6.3.
Material Cost
Material Overhead Cost = $2 * 1.9
Resource Costs
--- SAW
= $20 * 0.9
--- FIX
Overhead Costs
= $5
= $3.8
= $18
= $16
15
16
17
As part of our test case, Standard Cost Update has been run for all the 5 items.
Hence, costs of these items are now available for the system to consider them for all further
transactions and their subsequent accounting.
PART-B
========
In Part B, focus is laid on the behaviour of Standard Costing method on some basic transactions
across 4 different modules of Oracle Applications, namely Oracle Purchasing, Oracle Inventory,
Oracle Work in Process and Oracle Order Management.
A business requirement of manufacturing and shipping sub-assembly RA1 is assumed.
A voluntary choice of RA1, instead of ORA1, has been made in order to maintain the complexity
of transactions at a minimum level and also to aid a quicker and better understanding of the
accounting distributions generated by the system.
The series of transactions followed for manufacturing and shipping of RA1 is as follows:
1) Purchase Order transaction for receiving 10 quantities of Purchased item A1 into
subinventory SUB2.
2) A Return to Vendor transaction of 2 faulty quantities of A1 from SUB2 to Vendor.
3) Miscellaneous Receipt transaction for receiving 10 quantities of purchased item R1 into
subinventory SUB1.
4) Subinventory transfer transaction for transferring 8 quantities of R1 from subinventory
SUB1 to subinventory SUB2.
5) WIP Completion of 3 quantities of sub-assembly RA1 into subinventory SUB3 by
sourcing components R1 and A1 from subinventory SUB2.
6) WIP Assembly Scrap transactions of 1 quantity each of RA1 at Operation 10 and
Operation 20 respectively.
7) Sales Order transaction for shipping 2 quantities of RA1.
From the above flow of transactions, it is evident that 3 subinventories SUB1, SUB2 and SUB3
have been used for carrying transactions.
These subinventories have a set of accounts (cost group) defined, representing each of the 5
cost elements. Similarly, the WIP accounting class, Discrete, used for WIP transactions also has
a set of accounts defined.
18
SUB1
SUB2
01-000-1410-0000-000
01-000-1410-1100-000
Material
Material Overhead 01-000-1420-0000-000 01-000-1420-1100-000
01-000-1430-0000-000
01-000-1430-1100-000
Overhead
01-000-1440-0000-000
01-000-1440-1100-000
Resource
01-000-1450-0000-000
01-000-1450-1100-000
Outside Processing
Fig 24. Accounts of Subinventories and Accounting Class
SUB3
Discrete
01-000-1410-1200-000
01-000-1410-0000-000
01-000-1420-1200-000
01-000-1420-0000-000
01-000-1430-1200-000
01-000-1430-0000-000
01-000-1440-1200-000
01-000-1440-0000-000
01-000-1450-1200-000
01-000-1450-0000-000
These are the accounts that are frequently hit by the transactions.
In addition to the above accounts, there are a few other accounts that would get hit by the
transactions, which would be presented at a later stage as and when required.
Now, we proceed with the understanding of the transactions and the corresponding accounting
distributions generated.
1) A Purchase Order for 10 quantities of item A1 is created, received and delivered into
subinventory SUB2. Price of item A1 on the Purchase Order is $14.
Please note that the material cost of A1 is $12 and Material Overhead cost is $3.6 as
shown in Fig.13.
19
20
21
22
23
24
Using this onhand quantity, let us proceed with the making of sub-assembly RA1 and
deliver to subinventory SUB3.
A standard discrete job is created with a start quantity of 5 for making sub-assembly
RA1. Completion subinventory is provided as SUB3.
Refer to Fig.7 for the routing used in making RA1.
Before proceeding with the understanding of WIP Assembly Distributions, let us have a
re-look at the costs rolledup for sub-assembly RA1.
This would ease the understanding of the accounting distributions generated.
Include in Rollup
| Based on Rollup
| | Asset/Costed
Op Item/
Description/
Last Make| | |
Yield/
Quantity/
Shrink/
Extended Qty/ Item Unit Cost/
Level Seq Cost Element Sub-Elem Department Rev Buy | | | Phtm Basis UOM Rate or Amount Basis Factor Rate or Amount Res Unit Cost Extended Cost
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------0
RA1
SUB-ASSEMBLY
A Make Y Y N
Ea
1.000000
0.000000
1.000000
314.60000
Material Over Mat'lHndlg
Item+
USD
4.000000
1.000000
4.000000
4.00000
10 Resource
LAM
DSR1
Y
Item+
HR
1.000000
1.000000
1.000000
12.00000
12.00000
10
Overhead
Mgmt
DSR1
Res value USD
9.000000
12.000000
9.000000
108.00000
20 Resource
FIX
DSR2
Y
Item+
HR
1.000000
1.000000
1.000000
16.00000
16.00000
20
Overhead
Mgmt
DSR2
Res value USD
9.000000
16.000000
9.000000
144.00000
.1
.1
10 R1
2nd LEVEL ITEM
Material
MATERIAL
Material Over Mat'lMgmt
A Buy Y N Y N
20 A1
SECOND LEVEL ITEM
Material
MATERIAL
Material Over Mat'lHndlg
A Buy Y N Y N
0.8000 Ea
1.000000
Item+
USD 10.000000
Item+
USD
2.000000
0.000000
1.000000
1.250000
1.250000
12.500000
2.000000
12.00000
1.0000 Ea
1.000000
Item+ USD 12.000000
Ttl value USD 0.300000
0.000000
1.000000
12.000000
1.000000
12.000000
0.300000
15.60000
12.50000
2.50000
12.00000
3.60000
--------------314.60000
========
$4
The amount of $4 shown separately is the Material overhead Cost defined against RA1.
This cost of RA1 existed, before the rollup for RA1 as done. Hence it is not included as
part of the rolled up costs but is considered separately.
The distributions generated due to WIP Assembly Completion of 3 quantities of RA1 are
as follows:
25
26
27
28
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The account that is getting debited, 01-520-5110-0000-000, is the Cost of Goods Sold
account.
The Navigation for defining the Cost of Goods Sold account is as follows:
Inventory Setup Organizations Parameters Other Accounts (T)
Fig 48. Navigation for defining the Cost of Goods Sold account
Summarization of Accounting Entries
================================
A summary of accounting entries for the transactions carried out is as follows:
PO Receiving
ACCOUNT
Receiving Inspection @ PO cost
DEBIT
XX
CREDIT
XX
PO Delivery
ACCOUNT
Subinventory Material Account @ PO Cost
DEBIT
XX
XX
CREDIT
XX
XX
XX
XX
DEBIT
CREDIT
XX
XX
DEBIT
CREDIT
XX
XX
XX
XX
XX
XX
30
Miscellaneous Receipt
ACCOUNT
Subinventory Material Account@ standard cost
SubinventoryMaterial Overhead Account@standard cost
DEBIT
XX
XX
CREDIT
XX
DEBIT
CREDIT
XX
XX
XX
XX
DEBIT
XX
CREDIT
XX
XX
DEBIT
XX
CREDIT
XX
DEBIT
CREDIT
XX
XX
DEBIT
XX
CREDIT
XX
31
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