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Pac WP2
Pac WP2
ABSTRACT
Periodic Costing is relevant for customers with fiscal inventory reporting requirement as it is invoice-based
and also allows you to include additional invoiced charges in the cost of the item. It is used also by
customers who want invoice-price based valuation of their inventory to set standards or to update their
perpetual costs. Thus periodic costing helps report the actual cost or the total acquisition cost of an item at
the end of a fiscal period.
This paper takes a close look at transactions in the procurement process to understand how Periodic
Costing picks up the acquisition cost or the “landed cost” of an item. Periodic Costing shares that cost at the
organization cost group level that can span across inventory organizations. These inventory organizations
might be following different perpetual costing methods. Thus Periodic Costing is compatible with
simultaneous perpetual costing. Periodic Costing requires a perpetual costing method.
Periodic Costing comprises Periodic Average Costing (PAC) and Periodic Incremental LIFO Costing. This
paper explores Periodic Average Costing. Within PAC, this paper delves into the procurement process to
provide the best possible view of how actual costs for items are derived by the Periodic Cost Processors
based on the acquisition cost. The steps in matching an invoice have been covered in some detail to
familiarize audience from manufacturing and costing with the points to keep in mind for successful
processing of transactions by periodic costing and for correct calculation of item costs. Audience from
Purchasing and Accounts Payable may already be familiar with the invoice matching methods and steps.
This paper does not elaborate on PAC topics, which are already documented in adequate detail in the
existing literature, but they do get mentioned where required. Repetition has been carefully avoided without
sacrificing continuity of the subject matter.
The new process in Release 11i.9, Acquisition Cost Adjustment is beyond the scope of this paper.
Periodic Average Costing meets the fiscal reporting and government needs in Spain, France, Italy and
Brazil.
It was introduced as a new feature in Release 11i. Before the introduction of periodic costing, average costs
could not be recalculated. Now, you can average your costs for activities for an entire period. This way, the
order of transactions has no bearing on the valuation.
These are transactions that carry their own costs e.g. PO Receipt, WIP Completion Transactions, transfers
across organization cost groups, to name a few. These transactions are used to calculate the average unit
cost, which is applied to cost derived transactions.
These transactions are transacted at the newly computed weighted average cost of the period e.g. material
issues, issues to WIP, to name a few.
This is a cost group defined in Periodic Costing. It groups one or more inventory organizations that share
periodic item costs. The periodic item cost is held at the cost type/organization cost group/period
combination.
For the test cases in this paper, that would demonstrate how PAC works, we need to create a basic setup for
PAC. This has been done using the Vision database. We have used Vision Operations as our Legal Entity
and Vision Operations as our Set Of Books (refer Fig 1). The steps taken are detailed below.
C1 – Camelot Manufacturing
This organization follows Average Costing as the perpetual costing method.
This organization is attached to a newly defined location C1-Camelot.
C1 is its own Costing Organization, with Costing Method = Average.
Vision Operations (V1) is the Item Master Organization for C1 and Vision01 is the organization Calendar.
Defined subinventory “Stores” under C1.
X1 – Xanadu Manufacturing
This organization follows Standard Costing as the perpetual costing method.
This organization is attached to a newly defined location X1-Xanadu.
X1 is its own Costing Organization, with Costing Method = Standard.
Vision Operations is the Item Master Organization for X1 and Vision01 is the organization Calendar.
Defined subinventory “Stores” under X1.
Step 2: Define an Organization Cost Group and attach this cost group to a Legal Entity and an Item
Master Organization
Cost: Periodic Costing > Setup > Organization Cost Group
Org Cost Group = CG01
Description = Vision Organization Cost Group
Legal Entity = Vision Operations
Item Master Organization = Vision Operations
Step 4: Associate the inventory organizations with the Organization Cost Group
and the Cost Type with the Legal Entity
Cost: Periodic Costing > Setup > Org Cost Group/Cost Type Association
Step 5: Setting Accounting Options (Optional and not used in this paper)
This is set by clicking on the Accounting Options button under the Cost Type Associations tab (see Fig 3).
This is an optional step that is required if we need to create accounting entries (cost distributions) and post
(transfer them) to the General Ledger. If we do not create accounting entries, we cannot post to the GL and
therefore, General Ledger options will not be available to us under Accounting Options. Under this option
you get to select the Accounting Library as either US GAAP or as PAC Brazil.
For the test case demonstration in this paper, we do not need this setup. We will not be creating cost
distributions for Periodic costing. So this option has been ignored.
Periodic Accounting Periods display accounting periods for the legal entity and the cost type. Unopened
periods are labeled as Future. The period statuses of Open and Closed are among the similarities Periodic
Costing shares with perpetual costing methods. There is however, a striking difference. Unlike perpetual
costing, Periodic Costing permits only one period to be kept open at any given time for each cost type.
Since, for our investigation in this paper, we will begin with transactions in March-03, we will need to ensure
that for Legal Entity = Vision Operations and Periodic Cost Type = PAC01, all periods prior to Mar-03 are
closed one at a time. For a Periodic Accounting Period to be closed successfully, there should be no
pending transactions for the period in Inventory, WIP or Receiving for the cost group. The perpetual periods
in the respective organizations (C1 and X1) also need to be closed.
Fig 3. Associating Cost Type with Legal Entity
To close each Periodic Accounting Period, the periodic cost processors that need to be run are the Periodic
Acquisition Cost processor followed by the Periodic Cost processor. This is done to process the cost group
CG01 till the last phase (either the cost processing phase or the distribution phase, as the case may be).
Only when all the cost groups have been successfully processed, can the period be closed. The Periodic
Cost Distributions processor needs to be run (after the Periodic Cost processor completes successfully) only
if Create Accounting Entries has been enabled in Accounting Options. Once each processor completes its
run, you can check the status by clicking on the Process Status button in the Periodic Accounting Periods
screen (as shown in Fig 4 for the period closure of Feb-03).
The Organization Cost Group CG01 is linked to the Set Of Books Vision Operations (USA) which is
associated with the calendar Accounting. The length of the periods in this calendar will determine the
length of the periodic accounting periods for Legal Entity = Vision Operations and Cost Group = CG01.
You can run the Acquisition Cost processor and the Periodic Cost processor for the whole period or a partial
period, called a partial period run. In the course of our investigation, we would be running the two processors
every time we perform a transaction that would impact the periodic cost. This would help us study the
change in item cost at every stage as we go along.
Fig 4. Process status of the periodic cost processors at the close of the Feb-03 period.
We shall demonstrate six test cases. Each case would highlight certain points that would provide us with an
understanding of how the PAC algorithm works.
Case 1
Here, we shall raise a Purchase Order with the Invoice Match Option set to PO. We shall receive the entire
consignment in one single receipt.
(1) Create an item. This item will be used throughout this paper for our investigation.
Inventory: Items > Master Items
Create Item = 20GBHDD (using the Purchased Item Template)
Description = 20GB Hard Drive
Assign the item to C1 and X1.
Purchasing: Purchase Orders > Purchase Orders > (B) Shipments > (T) More
Let the Invoice Match Option be set to PO.
Purchasing: Purchase Orders > Purchase Orders > (B) Shipments > (B) Receiving Controls
Receipt Routing = Direct Delivery
Save your work.
Noted the PO Number (3599).
(3) The consignment of 100 units of 20GBHDD arrives the same day (28-Mar-2003).
Receive the same into C1.
Purchasing: Receiving > Receipts
We are in organization C1.
Select Subinventory = Stores
Receive the entire Qty = 100 units.
Destination Type is Inventory since we are following Receipt Routing as Direct Delivery.
Save your work.
Note the Receipt Number (Receipt No 1).
Case 2
This time, we shall raise a PO with Invoice Match Option set to Receipt. The consignment will be
dispatched and received in two batches.
(1) There is a requirement for another 100 units of 20GBHDD in organization C1.
Create another PO for 20GBHDD.
Type = Standard Purchase Order
Supplier = Advanced Network Devices
Site = SANTA CLARA
Ship-To = C1-Camelot
Bill-To = V1-New York City
Buyer = Stock, Ms. Pat
Item = 20GBHDD, Quantity = 100, Price = $50
Promised By = Need By = 28-Mar-2003
Purchasing: Purchase Orders > Purchase Orders > (B) Shipments > (T) More
Ensure this time that Invoice Match Option is set to Receipt.
(2) Again, the consignment of 100 units of 20GBHDD arrives but in two different batches
of 40 units and 60 units respectively.
Receive the same into C1, Stores subinventory.
Purchasing: Receiving > Receipts
Create two separate receipts as follows:
First receive 40 units.
This is Receipt Number 4.
Next receive the remaining 60 units.
This is Receipt Number 5.
(3) Three days later (on 31-Mar-2003), the supplier sends an invoice for the first batch of 40 units at $55
per piece. For Periodic Costing to take note of this new price, we need to match this invoice to Receipt
Number 4.
(4) The time has come to launch the periodic cost processors.
Cost: Periodic Costing > Periodic Acquisition Cost
Launch the Acquisition Cost Processor.
Cost: Periodic Costing > Periodic Cost
Once the Acquisition Cost Processor completes successfully,
Launch the Periodic Cost Processor.
Reason:
We must take note of the rule that if no invoice is matched to the receipt then for that PO Receipt
transaction, Periodic Costing will consider the PO price, provided the Invoice Match Option in the PO had
been set to Receipt.
This happened with PO Number 3609 for the 60 units that have been received but not yet
matched to any invoice.
However, if an invoice has been matched to the receipt then Periodic Costing will
look at the invoice price.
This happened with PO Number 3609 for the 40 units received (Receipt Number 4).
Therefore, Periodic Cost
= (Acquisition cost of the PO Receipt Transactions)/(Total quantity received)
= [(100 * PO Price) + (40 * Invoice Price) + (60 * PO Price)]/(100 + 40 + 60)
= [(100 * $50) + (40 * $55) + (60 * $50)]/(100 + 40 + 60)
= $10,200/200 = $51
Note: Why PAC will always look at only the PO Price for PO No. 3599 will become clear in Case 3.
(6) Now, for the receipt of 60 units (Receipt No. 5), the supplier sends an Invoice charging $60 per unit.
Payables: Invoices > Entry > Invoices
Select Type = PO Default
This prompts for the PO Number.
Enter PO Number = 3609
This will default the Supplier details.
Enter Invoice Date = 31-Mar-2003
Enter Invoice Number = 31030304
Invoice Amount = $3,600 (for 60 units @ $60/unit)
Reason:
On the same lines as explained above, this time Periodic Costing will take note of the invoice price of $60
matched against the 60 received units belonging to Receipt Number 5.
Therefore, Periodic Cost
= (Acquisition cost of the PO Receipt Transactions)/(Total quantity received)
= [(100 * PO Price) + (40 * Invoice Price) + (60 * Invoice Price)]/(100 + 40 + 60)
= [(100 * $50) + (40 * $55) + (60 * $60)]/(100 + 40 + 60)
= $10,800/200 = $54
Case 3
Option 1: Creating Freight Charge by Allocation (this will demonstrate the difference between ‘Invoice
Match Option’ on the PO being set to PO or Receipt)
Now, if we run the two Periodic Processors, we find that the Periodic cost has
remained as $54.
This is not because the Unit Price entered in the invoice was the same as the PO price. This happened
because of two reasons. Reason1- the Invoice Match Option on the PO was set to PO. With this
setting, even if the Invoice Price were different from the PO Price, PAC would still look at the PO
Price. Reason2 – due to the Invoice Match Option being set to PO, the Freight charge introduced into
the invoice by Allocation is ignored by PAC.
Periodic Cost
= (Acquisition cost of the PO Receipt Transactions)/(Total quantity received)
= [(100 * PO Price) + (40 * Invoice Price) + (60 * Invoice Price)]/(100 + 40 + 60)
= [(100 * $50) + (40 * $55) + (60 * $60)]/(100 + 40 + 60)
= $10,800/200 = $54
Option 2: What would have happened if PO No. 3599 had Invoice Match Option set to Receipt
At this point, this is only a hypothetical option, as we can no longer change the Invoice Match Option of PO
No. 3599, since a receipt has already been made against this PO. But the explanation tries to show the
difference it would have made!
In this case, PAC would have looked at the Invoice Price of $50 for an Invoice Quantity of 100 units of
20GBHDD (Invoice amount = $5,000). PAC would then have added $200 Freight charge to this amount.
This way, the acquisition cost would amount to ($5,000 + $200)/100 = $52.
Therefore, Periodic Cost
= [(100 * Acquisition Cost) + (40 * Invoice Price) + (60 * Invoice Price)]/(100 + 40 + 60)
= [(100 * $52) + (40 * $55) + (60 * $60)]/(100 + 40 + 60)
= $11,000/200 = $55
Special Note:
The Organization Cost Group that we have defined for Periodic Costing (CG01) is above the Inventory
organizations C1 and X1. Periodic costing shares costs not at the inventory organization level but at the
Organization Cost Group level. The following example from our earlier transactions demonstrates this.
In inventory organization C1, we have performed certain transactions with item 20GBHDD, because
of which, the Periodic Item Cost = $54 (assuming we followed Option 1 in Case 3 above).
Thus, the periodic cost for item 20GBHDD is shared across organizations C1 and X1.
The Period end cost and quantity are stored in CST_PAC_ITEM_COSTS table.
The cost_layer_id is unique for a period/organization cost group/item combination.
On 01-Apr-2003, when we try to close the Periodic Accounting Period of Mar-03, the system
pops an error "Last Cost Manager run was before the period ending date. Rerun cost manager
to completely process all proceeding transactions". This is a mandatory system check, even
though no transactions were processed after the last run of the Periodic Acquisition and Cost
processors.
We shall now run the Periodic Inventory Value Report for the item 20GBHDD for Mar-03 (Refer Fig 5).
The Periodic Cost for the item at the close of the Mar-03 period is reflected as the Material Unit Cost.
Fig 5. The Periodic Inventory Value Report for item 20GBHDD for the period Mar-03
Case 4
We would now be carrying the periodic cost over to the next periodic accounting period.
Now, the March-03 perpetual costing (for both C1 and X1) and Periodic Cost Accounting periods
have been closed. The period for Apr-03 has been opened in perpetual costing (for both C1 and X1)
as well as in Periodic Costing.
Run the Periodic Acquisition Processor followed by the Periodic Cost Processor.
This will create a new record for our item 20GBHDD (inventory_item_id = 7864) for the new
period Apr-03(period_id = 221) and for the Cost Group CG01 (cost_group_id = 1512)
into the table CST_PAC_ITEM_COSTS.
Case 5
Now, we shall bring in the Standard Costing org X1 into the picture.
We shall now perform some transactions for 20GBHDD in org X1, and investigate how this impacts the
periodic cost.
But, first let us create a standard cost for 20GBHDD in X1.
Cost: Item Costs > Standard Cost Update > Update Costs
Run the Standard Cost Update for Cost type = Pending and Specific Item 20GBHDD.
Once this process completes successfully, the item will have a
Material unit cost = $50 in the Frozen Cost Type.
(3) Now run the Periodic Acquisition Processor and the Periodic Cost Processor.
In the Item Cost Inquiry, check the Periodic Item Cost for 20GBHDD.
Periodic Item Cost = $52.
Reason:
Periodic Cost
= [(Balance Qty from Previous Period * Previous Period Acquisition Cost) + (Received Qty * PO Price)]
/(Balance Qty from Previous Period + Received Qty)
= [(200 * $54) + (200 * $50)]/(200 + 200)
= $20,800/400 = $52
The point to note here is that the balance quantity from the previous period and the previous period's cost of
$54 exist due to transactions carried in org C1. However, under Periodic Costing they will impact the
periodic cost based on transactions in org X1 as well because both X1 and C1 share the same org Cost
Group CG01. This explains why an Organization Cost Group in Periodic Costing can have multiple
inventory orgs under it following different perpetual costing methods. Periodic Costing rises above perpetual
costing at the inventory org level and functions at the Organization Cost Group level.
A Special Note on Cost Layers and Quantity Layers in Periodic Average Costing (PAC):
CST_PAC_ITEM_COSTS stores the item cost and quantity in a period and organization cost group.
In Periodic Average Costing, the COST_LAYER_ID is unique for a period/organization cost group/item
combination.
This means that for all transactions performed in the period Mar-03 for the item 20GBHDD in the
organization
cost group CG01, there will be one unique cost_layer_id in the PAC tables. This is not the case with
Periodic Incremental LIFO Costing.
The layer_quantity field stores the period end quantity for an item/cost group combination.
The begin_layer_quantity field, stores the opening stock for the period.
In Mar-03, there was zero stock for 20GBHDD to begin with. However, at the close of the Mar-03 period
we had received 200 units for the item into C1. This became the begin_layer_quantity value for Apr-03.
Thereafter, we have received an additional 200 units into X1. Thus at this point of time the
layer_quantity for Apr-03 appears as 400.
(4) For the 200 units received into X1 we shall now create and match an invoice to complete our
investigation on Case 5.
For the 200 units of 20GBHDD received into org X1, the supplier sends an invoice for the entire
quantity
@ $62/unit. He has included the transportation cost as well.
Reason:
Periodic Cost
= [(Balance Qty from Previous Period * Previous Period Acquisition Cost) + (Received Qty * Invoice Price)]
/(Balance Qty from Previous Period + Received Qty)
= [(200 * $54) + (200 * $62)]/(200 + 200)
= $23,200/400 = $58
Case 6
Here, in the final case, there is a requirement for 100 units of 20GBHDD in X1. Of these, 30 units are
required urgently. Supplier has sufficient stocks to supply the required quantities off the shelf. However,
owing to the urgency, management in X1 decides that the supplier arranges to have the 30 units sent by
express courier. The courier agency would present the invoice separately to X1. The remaining 70 units
would be shipped by the supplier using his own transporter. The freight charges for these 70 units would be
included in the same invoice that would contain the billing details of these 70 units.
Reason:
Periodic Cost
= [(400 * $58) + (100 * $50)]/(400 + 100) = $28,200/500 = $56.4
(4) The supplier sends an invoice with the following billing details:
30 units charged @ $52/unit
70 units charged @ $55/unit
Freight charge worth $250 for the 70 units consignment.
As shown above, Allocate $250 worth Freight charge for Receipt No 10.
Click on the Match button.
Validate, remove Holds (due to difference between PO price and Invoice price), Approve and
Create Accounting entries for the invoice.
Reason:
Periodic Cost
= [(400 * $58) + (100 * Acquisition Cost)]/(400 + 100)
= [(400 * $58) + (100 * $56.6)]/(400 + 100)
= $28,860/500 = $57.72
(6) Now the courier agency sends the invoice for Freight charges for the 30 units express delivered.
Invoice Amount = $300
Create an invoice with Invoice Amount = $300 and Matching Type = Freight (so far we had been using
Matching Type = Item).
Enter Freight amount = $300.
Validate and Approve the invoice. Create Accounting Entries.
Reason:
Periodic Cost
= [(400 * $58) + (100 * Acquisition Cost) + $300]/(400 + 100)
= [(400 * $58) + (100 * $56.6) + $300]/(400 + 100)
= $29,160/500 = $58.32
Now, if we run the Periodic Inventory Value Report the periodic cost of $58.32 is reflected as the Material
Unit Cost (Fig. 7).
Fig 7. The Periodic Inventory Value Report for item 20GBHDD for the period Apr-03
CONCLUSION
Periodic cost is shared across inventory organizations each of which could be following its own perpetual
costing method (Standard, FIFO, LIFO or Average). This arrangement is possible because the periodic cost
is held at the periodic cost type/organization cost group/period combination. To ensure that Periodic
Average Costing picks up the acquisition cost from the invoice, the purchase order should have the Invoice
Match Option set to Receipt. Once this is done, PAC would pick up the invoice price as well as freight or
other charges that are levied either on the same invoice (by Allocation) or on a separate invoice (by using
the Match Type option).
ACKNOWLEDGEMENT
Saumit Mandal CPIM, is a Senior Support Analyst and a BDE for Core Manufacturing at Oracle’s India
Support Center, Bangalore.
White Paper: Costing by Acquisition: A Brief Guide to Periodic Average Costing (PAC) for Purchased Items
Author: Saumit Mandal CPIM
Contributing Authors: N/A
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