Oracle Enterprise Asset

Management
– Costing in EAM

An Oracle White Paper

Nov 2012
Table of Contents

1. OVERVIEW ................................................................................................................................................................................................................................. 1

2. SETUPS REQUIRED FOR COSTING IN EAM........................................................................................................................................................................... 1

3. WORK ORDER COSTING USING AN EXAMPLE.................................................................................................................................................................. 12

4. REBUILDABLE COSTING...................................................................................................................................................................................................... 24

5. DIRECT ITEM COSTING........................................................................................................................................................................................................ 25

6. OSP COSTING.......................................................................................................................................................................................................................... 26

7. JOB CLOSE................................................................................................................................................................................................................................ 27

8. COST ROLLUP FEATURES.................................................................................................................................................................................................... 30

9. TRANSFER INVOICE VARIANCES......................................................................................................................................................................................... 31

10. OVERVIEW OF WORK ORDER BILLING ........................................................................................................................................................................... 32

11. OVERVIEW OF WORK ORDER CAPITALIZATION............................................................................................................................................................34

12. APPENDIX 1 : OVERVIEW OF THE TYPES OF COSTING…..............................................................................................................................................37

1. OVERVIEW

The objectives of this white paper are to provide an overview of how Costing Works in
Enterprise Asset Management (EAM). It is not designed to be a specialist Costing paper.
EAM users need to have a basic understanding of Costing and the setups required. This
white paper will aim to fulfill this need and will use an example work order to discuss how
costs are calculated. The paper will discuss the following in detail :

• Setups Required for Costing.

• Work Order Costing Using an Example
• Rebuildable Costing
• Direct Item Costs
• OSP Costing
• Job Close
• Cost Rollup Features
• Transfer Variance Invoices
• Work Order Billing
• Work Order Capitalization/Asset Valuation

The following types of Costing are all supported in EAM :

 Standard
 Average
 FIFO
 LIFO

2. SETUPS REQUIRED FOR EAM COSTING :

In this section, I will summarize the setups that should be carried out for Costing in EAM.

2a. Organization Parameters

Setup the following organization parameters :

- Cost Group
- Costing Method
2b. Cost Categories :

EAM has 3 default categories….you can define more. The default categories are : Contracts,
Operations and Maintenance.

Each Cost Category is made up of 3 Cost Elements :

• Material – Costs from material transactions.

• Labor - Costs from labor resource transactions.
• Equipment - Costs from equipment resource transactions.

The appropriate costs are posted to these Cost Elements.

The following diagram shows how these Cost Elements are mapped to the Cost
Management Cost Elements:

2
So – how do you define additional Cost Categories? You need to use the Cost Category
Lookup Form:

2c : Purchasing Categories:

Additional categories are often required for purchasing of direct items. The screenshots
below show how the Category Association Form can be used to link the purchasing
categories to the appropriate cost elements and accounts:

3
Note: The appropriate purchase category for the Direct Item can be assigned when adding
the item in the Material Requirements section of the Work Order. The default category will
display for the department (see below) and this can be changed on the work order for the
direct item itself.

2d. Default Cost Category for Department.

The above category will then always default on the work order for the specified
department.
4
 • Material charges are classified as Material cost elements. The cost category
for the Material cost element is the cost category of the department
assigned to the routing of the operation.

• Resource charge of type person is classified as a Labour cost element. The

cost category for the Resource cost element is the cost category of the
resource’s owning department.

• Resource charge of type machine is classified as Equipment cost element.

The cost category for the Equipment cost element is the cost category of the
asset's owning department.
• All other resource types are classified by the default cost element in the
eAM Parameters

2e. Setup of Wip Accounting Class (WAC)

The WAC define the valuation and variance accounts that will be charged for work orders.
You are actually defining the valuation accounts for EACH OF THE COST ELEMENTS already
discussed. The following setups are required:

- Setup the required WACs

- Assign the defined WACs to the Cost groups defined for your organization.

WIP accounting class valuation accounts are charged when you issue components, move
assemblies, complete assemblies, and charge resources.

Variance accounts are charged when jobs are closed. (See job close section for explanation
of how variance accounts are handled in EAM)

The following screenshot shows how the WAC is assigned to the appropriate Cost group:

5
2f. Setup of EAM Parameters.

The following details are setup on the EAM Parameters Form:

• Set the Default Cost Element. How is this used?

Remember the following:

 Material charges are classified as Material cost elements.
 Resource charge of type person is classified as a Labour cost element.
 Resource charge of type machine is classified as Equipment cost
element.
 ALL other resource types are classified by the DEFAULT COST ELEMENT
defined in this EAM Parameters Setup.

• Set the Default Cost Category. How is this used?

If a Department on a work order does NOT have a cost category assigned to it, then
the Default Cost category from the EAM Parameters is used.

• Set the Default WIP Accounting Class.

When defining asset numbers, the WAC to be used for the asset can be defined.

If there is no default defined at asset number level, then the EAM Parameter WAC
will be used.

6
 Variance accounts play no role in eAM. The proper set up is to load the appropriate
maintenance expense account into both the valuation and variance account fields
for the WIP Accounting Class.
This will result in maintenance work order expenses booking to the expense account
when incurred.
So, when setting up WIP Accounting Classes, use the same maintenance expense
account code in both the valuation and variance columns. This will cause
maintenance expenses to book to the proper GL account and period.

• Set the “Value Rebuildables at Zero Cost” Parameter.

This is used when issuing or returning rebuildable components from the expense
subinventory to the Work Order.

• If the flag is unchecked, the rebuildable will be issued to the WO at

ITEM COST (if defined).
• The flag is ignored if you issue or return rebuild from an asset
subinventory (work order will be charged the item cost whatever
the flag)

Remember that Rebuild Items are like normal inventory items – the cost can be
updated using the item cost form.

2g. Setups of Project Parameters :

If you are using Oracle Projects, some additional setups on Project Parameters are required
for Costing. These enable the Cost Collector process to pass costs for direct items to project
maintenance work orders.:

PROJECT PARAMETERS :

- Cost group
- WIP Accounting Class (WAC).

7
- Direct item expenditure type

2h. Setups of Cost Types:

Cost Types are a set of costs identified by name. There are 2 pre-defined cost types :

• Average (for Average Costing).

In Average Costing, there are 2 cost types used :

 Average Cost Type : This cost type holds the current average unit
cost of items on hand, and is used to value transactions (such as
issues and transfers out) and inventory balances and for average
costing organizations.

 Average Rates Cost Type : This is USER DEFINED. This MUST be setup
to hold subelement rates and amounts. Used only in average costing
organizations.

• Frozen : This is used to value transactions (such as issues and transfers out) and
inventory balances for standard costing organizations only.
8
So if you are using average costing, you need to ensure that your average rates cost type is
defined (if required – see above) and also ensure that the organization parameters reflect
this setup - see below:

2i : Setup of Material Costs :

All your material costs must be setup using the Item Cost Form :

2j : Setup of Resource

All your resources need to be defined using the Define Resources Form :
9
 The Standard Rate checkbox was not selected above.

 Hence , ACTUAL RATE will be used for resource costing when calculating actual
resource costs.

 The ACTUAL RATE can be seen 2 slides down – it is the EMPLOYEE RATE.

 Actual Employee Rate * Actual Resource Units (standard flag unchecked)

 Standard Rate * Actual Resource Units (standard flag checked)

 EAM ONLY supports the following charge types –

- Manual
- PO Receipt

 Wip Move and PO Move Charge Types are not supported in EAM

 Manual Charge Type: Resources charged manually using Resource Transactions.

 PO Receipt Charge Type : Resource charged automatically.Cost defaults as cost on

the purchase order receipt. This is ONLY used for OSP Resources.

 An important setup is BOM:HR UOM – make sure this profile option is setup.

10
The above setup shows how employees are linked to the resource using the employees
button (valid for person type resources).

The above setup shows how the ACTUAL RATE is entered for an employee resource using
the Employee Labor Rates Form.

2k : Setup of Overheads :

All your overhead costs need to be setup.

Cost Elements for overhead : Can be either :

• Material : For Materal Overhead

• Overhead : For Resource or Move Based Overhead.

These overheads are used to add indirect costs to the item costs.

They are earned during the activity specified on the next screen.
(e.g during a wip completion or a PO receipt)

11
3. WORK ORDER COSTING USING AN EXAMPLE :

I will now use an example work order and show how the costing is calculated through the
various stages of the work order.

First – a new work order is raised in release status.

The above work order is linked to a maintenance activity.

The next screenshot shows the operations that are linked to this maintenance activity.

The next screenshot shows the materials that are linked to the work order (for the specific
operation 10):

12
At this stage, we will now consider the types of costs that are calculated for a work order :

 ESTIMATED COSTS : estimated cost of the work order. This will not take into
account actual hours worked for any labor costs nor will it consider any
additional material costs.
 ACTUAL COSTS : the material and resource costs that the current WO has
accumulated in the selected period.

 VARIANCE COSTS : Difference between the actual and estimate costs.

We will now discuss the ESTMATED COSTS in more detail and look at how these are shown
on the work order.

Estimated Costs are calculated by the Work Order Cost Estimate Processor concurrent
program. This is usually set to run automatically in the background – here is a screenshot
showing the program run manually.

There are various stages for the calculation of estimated costs as shown in the diagram
below :

13
The pending, running, error and complete statuses show the statuses of the Work Order
Cost Estimate Processor concurrent program.

The re-estimate option allows the program to be re-run should any changes be made.

The next screenshot shows that the estimated costs have been calculated because the
status is showing as completed. These details can be viewed by selecting the Costs button
from the work order form.

Note the re-estimate button in the above screenshot to re-estimate the estimated costs for
the work order.

The following screen shows the screen that is seen when the Value Summary button is
clicked from the above screenshot. This will display the estimated costs, actual costs and
variance costs.

Note that at this stage of the work order, the actual costs have not been calculated
because no transactions have been posted.

Next, let’s look at the estimated costs using the Estimates tab in the above screen.

This will display the estimated costs as below:

14
Clicking the Details button in the above screen will display the detailed estimate costs as
shown below. This will display the labor, material and equipment costs for EACH operation
as well as a total which is the sum of these :

You can now drill down into the detailed estimates for EACH operation by selecting the
appropriate operation and then clicking on the Detailed Estimates button. The following
screenshot shows the detailed estimates for the 1 st displayed operation – operation 20 :

The next screenshot shows the detailed estimates for the 2 nd displayed operation –
operation 30 :

15
The next screenshot shows the detailed estimates for the 3 rd displayed operation –
operation 40 :

The next screenshot shows the detailed estimates for the 4 th displayed operation –
operation 10 :

Next we will process the work order and then see how the actual costs get populated.

First, the material as issued as shown in the screenshot below. Note that although only 2
shop rags are required, 10 were actually issued. This is simply to demonstrate that actual
costs can differ because additional material or labor is required.

So, we will issue some additional material in this example.

Note that Fork Lift Battery is a rebuildable item with no unit cost – hence zero cost will be
calculated for this item.
16
Next the labor will be booked. Again, some additional labor time will be entered on top of
the specified required time to demonstrate how actual costs can be different from
estimated costs.

The labor costs entered are as follows for the resources Fliftmech and FFTK (which are the
2 required resources on the operations) :

 Op 10 : Fliftmech : Needed 0.1 Booked 1.0

FFTK : Needed 1.0 Booked 1.0

 Op 20 : Fliftmech : Needed 0.1 Booked 0.2

 Op 30 : Fliftmech : Needed 0.1 Booked 0.3
 Op 40 : Fliftmech : Needed 0.1 Booked 0.2

It should be noted that FFTK is a machine resource and specifies an hourly cost of 7.50 for
the machine.

Next, we will complete the work order.

Remember: For Maintenance Class EAM Jobs – completion is used to flag the job is
completed. There are no MMT transactions generated. The screen below shows the work
order completion has been processed :

17
On completion of the work order, the actual costs will be calculated and can be seen using
the actual costs tab (WO > Costs > Value Summary > Actual Costs) :

Let us now look at the detailed actual costs below (by clicking on the details button in the
screen above) :

Let us now compare the estimated and actual costs and see how they were calculated :

OP EST EST EST ACT ACT ACT

MATERIAL LABOR EQUIPM’T MAT LABOR EQUIPM’T
10 15.55 2.50 7.50 15.95 20.00 7.50
20 2.50 4.00
30 2.50 6.00
40 2.50 4.00

Here are the explanations for the cost differences for estimated costs and actual costs
shown in the above table :

 Actual material cost for Op 10 is 40p more then the estimated costs. The reason for
this is that 10 shop rags were actually issued rather then the required 8. Each shop
18
 rag costs 5p. So 8 x 5p = 40p.

Material Cost is simply calculated as :

Item Unit Cost x Quantity Issued

 Actual labor cost for Op 10 = 20.00 and estimated cost for the same op is 2.50.

This is calculated as follows :

Estimated Cost :

In the resource cost setup screen further above, it was seen that the resource cost
rate for the resource Fliftmech was 25.00.

Estimated Costs = Required Units x the Standard Rate for the Resource.

So: 0.1 x 25.00 = 2.50.

Note that the equipment cost of 7.50 is calculated from the machine resource ,
FFTK. This has an hourly cost of 7.50 against it.

Actual Cost :

The actual employee rate for the employee used on op 10 for resource Fliftmech
was 20.00. (see further above in labor rates window for the resource setup
section)

The time booked against op 10 for resource Fliftmech was 1.0.

Actual Employee Rate * Actual Resource Units (standard flag unchecked)

20.00 x 1 = 20.00

 Actual labor cost for Op 20 = 4.00 and estimated cost for the same op is 2.50.

Estimated cost = required units x standard rate = 0.1 x 25 = 2.50

Actual cost = actual resource unit x actual employee rate (standard flag
unchecked)

0.2 x 20.00 = 4.00

 Actual labor cost for Op 30 = 6.00 and estimated cost for the same op is 2.50.

Estimated cost = required units x standard rate = 0.1 x 25 = 2.50

Actual cost = actual resource unit x actual employee rate (standard flag
unchecked)
19
 0.3 x 20.00 = 6.00

 Actual labor cost for Op 40 = 4.00 and estimated cost for the same op is 2.50.

Estimated cost = required units x standard rate = 0.1 x 25 = 2.50

Actual cost = actual resource unit x actual employee rate (standard flag
unchecked)

0.2 x 20.00 = 6.00

GL POSTINGS:

Let us now consider the postings to GL for the WO transactions.

LABOR TRANSACTIONS :

Remember that the accounts are taken from the WIP Accounting Class assigned for the
work order.

Applies for both ACTUAL COSTING (as in our example) and STANDARD
COSTING :

• Debit : WIP accounting class resource revaluation account

• Credit : Resource Absorption account.

MATERIAL TRANSACTIONS :

Material issues increase the WIP valuation and decrease the inventory valuation : i.e

• Debit: WIP accounting class valuation accounts (WIP Accounts)

• Credit : Subinventory elemental Accounts (Inventory Accounts)

Back to our example – we can actually see the postings shown above to GL by clicking on
the distributions button from the actual costs tab :

20
VARIANCES

The variances tab on the Value Summary Form shows the difference between the actual costs and
estimated costs :

The following information should be noted regarding variance accounts in EAM.

The system is using the forms and terminology of standard WIP acccounting - but in EAM,
the accounting behaves differently.

The accounts designated as Variance Accounts are really the expense accounts to which
the work order will be charged. They are not a variance from standard.

During the month all transactions are costed as though they are going to a
normal manufacturing order even though we know that EAM work orders should be
expensed.

At the end of each month and when the work order is closed, the costs on the
work order are charged to expense using the accounts that you have designated as
variances.

21
You must either close the work order or go through a period end to see the
amounts in the "variance accounts".

Variance accounts play no role in eAM. The proper set up is to load the appropriate
maintenance expense account into both the valuation and variance account fields for the
WIP Accounting Class.
This will result in maintenance work order expenses booking to the expense account when
incurred. So, when setting up WIP Accounting Classes, use the same maintenance expense
account code in both the valuation and variance columns. This will cause maintenance
expenses to book to the proper GL account and period.

COSTS RELIEVED:

It will be noted that when using the WIP Value Summary form, there are details shown for
Cost relieved (which are std costs relieved against the job at job completion).

It will be noticed that these are NOT seen in the EAM Value Summary Form.

This is INTENDED functionality. EAM deals with maintenance jobs rather then production
jobs as in WIP. Therefore, in EAM jobs, the cost relieved is always zero and this is as
expected.

SELF-SERVICE PAGES:

We have looked at the cost details using Forms. It should be noted that the costs can also
be viewed from Self Service as shown below :

Navigation : Maintence Super User > Work Orders > View Costs

From the above page, you can now drill down to the cost detail by clicking on a specific
cost. So clicking on the actual cost takes us to the screen below which shows the detailed
costs :

22
 When we now select the “View Transactions” button from the above page, it allows us to see the
same detail as seen in the distribution screen on the forms – i.e you can see the accounts to which
the transactions are posted :

4. REBUILDABLE COSTING :

When looking at costs for rebuildable items on a work order, bear in mind that the key
setup for rebuildables is the following EAM Parameter :

• “Value Rebuildables at Zero Cost” Parameter.

This has already been discussed in the setup section above.

The parameter is considered when issuing or returning rebuildable components from the
EXPENSE subinventory to the Work Order.

• If the flag is unchecked, the rebuildable will be issued to the WO at

ITEM COST (if defined).
23
 • The flag is ignored if you issue or return the rebuildable item from
an asset subinventory (work order will be charged the item cost
whatever the flag)

Rebuild Items are like normal inventory items – the cost can be updated using the item
cost form.

Remember that when you are completing rebuild work orders, the completion
subinventory has to be an expense subinventory.

5. DIRECT ITEM COSTING :

Direct items are items which are not stored in Inventory so item costs are not relevant.
There are 2 types of Direct Items :

 NON-STOCK Direct Items. Setup in Inventory. These are non-stockable, non-

transactable and purchasable items (i.e the inventory item master paramaters).

 DESCRIPTION Based Direct Items.These are not setup in inventory and are merely
given a description on the material line.

The following diagram shows the process flow for processing Direct items on work orders :

HOW ARE DIRECT COSTS UPDATED?

The actual Costs for Direct Items updated as follows:

1. Receipt the PO.

2. This triggers resource transactions.

3. The resource transaction triggers direct item costs and will post to the MATERIAL
accounts specified on the WIP Accounting Class for the WO.

4. If actual costs are not updated, check for pending resource transactions.

WHERE DOES THE COST FOR DIRECT ITEMS COME FROM :

24
 The cost for direct items is derived based on the following sequence – the highest
sequence number takes priority (i.e no 4 is the highest priority) :

1. List price defined for direct item

2. Price specified for direct item in the work order
3. Purchase requisition price of direct item.
4. Purchase order price of direct item.

6. OSP COSTING

How are OSP Costs processed (in terms of value added to job)?

- System checks for OSP resources of type PO Receipt. These type of resources are only
used for OSP work orders in EAM.

- When you receive assemblies back onto the work order, a resource transaction is
created at the standard or actual rate specified for the resource. This is the trigger for
creating the OSP cost.

- The standard rate for the resource is selected if the standard checkbox is selected on
the resource - otherwise the actual rate is used for the resource.

Costing Outside Processing Charges at Standard

When you receive the assembly from the supplier, Purchasing sends the resource charges to
WIP at either standard cost or actual purchase order price, depending upon how you
specified the standard rate for the outside processing resource.
If the Standard Rates option is enabled for the outside processing resource being charged,
then the application charges WIP at the standard rate and creates a purchase price variance
for the difference between the standard rate and the purchase order price.

Costing Outside Processing Charges at Actual Purchase Order Price :

If the Standard Rates option is disabled for the outside processing resource being charged,
then the system charges WIP the purchase order price and does not create a purchase price
variance.

Posting to GL :

Posting to GL for standard and actual costs is as follows :

a. Standard Rate Option Enabled:

- WIP accounting class outside processing valuation account ; Debit
25
 - Purchase price variance account : Debit if PO price > std rate
- Purchase price variance account : Credit if PO price < std rate
- Organizational Receiving Account : Credit

b. Standard Rate Option Disabled (Actual PO Price used)

- WIP accounting class OSP valuation account : debit
- Organizational Receiving Account : Credit

- To view OSP Costs as a separate line in Value Summary Form :

- Put OSP Item on separate Operation Line

- Assign the line to a department with a separate Cost Category assigned then
other depts.
- If this is not done, the OSP costs can still be seen using the distributions (transactions
posted to GL OSP accounts)

7. JOB CLOSE :

A job can be closed only if in the status of Complete or Complete- No Charges.

Closing the Work Order Automatically Transfers the Costs to the Oracle General Ledger.
Once the Work Order is Closed, all the Material Cost, Resource Cost, Equipment Cost and
the OSP cost are Transferred to GL. Once you close a Work Order, the concurrent process
also posts all the Transaction Cost Details to the GL_INTERFACE Table from where all the
Journals get imported when the Financial Users run the "Import to GL" process.

It is NOT mandatory to Close your Work Orders in order to post the Work Order
Maintenance cost to GL. Every Time the Store Users Close the Inventory Period for the
particular month, the system runs the "Transfer to GL" concurrent process in the
background. This process, takes care of posting the WIP transactions for that particular
Inventory Organization for the closing period. Therefore Even if we do not Close the Work
Orders, the Transactions will still get interfaced to GL.

I have closed our example job from above and will show some screenshots which show the
resultant postings :

You will not see any job close variances if you use the Wip Value Summary form in EAM. If
you use the WIP Value Summary in WIP for an EAM job, you will see job close variances
that are posted at job closure. However, these are different to those seen for WIP jobs.

The screenshot bellows the WIP Value Summary form in WIP for the closed EAM
Maintenance job used in our above example.

26
You will notice the following :

- Costs Relieved are zero (as explained previously). These are not relevant for EAM Jobs.
- The Variance relieved is the same as the cost incurred.

The above screen shows the job close variance posted for the material cost incurred.

The above screen shows the job close variance posted for the resource cost incurred.

It should also be noted that if you do NOT issue the required material for an EAM job,
there will be no variance posted as a result. This is opposite to the behaviour seen in WIP.

There are also no variances posted in EAM for resource and overhead costs that are not
accounted for.

27
 The behaviour for job close variances in EAM is as follows :

The Job Close variance (and the Period close variances generated at periodends) causes
the maintenance expenses incurred on the work order to be passed on from the WO
Valuation account to the Variance account (this can be see in the above screenshots). The
posting is :

- WIP accounting class variance Accounts : DEBIT

- WIP accounting class valuation accounts : CREDIT

If these two accounts were set up to be the same in the WIP Accounting class, (which is
the recommended modelling especially for Average cost type), then the above postings are
merely symbolic in the sense that the same account is debited and credited. The debit to
the WO Valuation account during the actual EAM material or labor transaction would be
the point at which this maintenance expense is first recognized in the P&L. Subsequent
variance posting will have no impact.

Variance accounts play no role in eAM. The proper set up is to load the appropriate
maintenance expense account into both the valuation and variance account fields for the
WIP Accounting Class.
This will result in maintenance work order expenses booking to the expense account when
incurred. So, when setting up WIP Accounting Classes, use the same maintenance expense
account code in both the valuation and variance columns. This will cause maintenance
expenses to book to the proper GL account and period.

The Variance observed in the Work Order Cost details page is just a cost view of the
difference between the Estimated Cost and Actual Cost of the work orders. This gives an
idea to the maintenance planner and execution team as to the extent of costs incurred in
actual compared to the estimated cost.

EAM WO Cost Estimation is not impacting the accounting once the period is closed. (In
fact, once the period is closed, nothing from EAM can do adjustments into GL)

8. COST ROLLUP FEATURES

ASSET COST ROLLUP :

Navigation : Maintenance Superuser > Assets > View Costs

Select the “Include Child Assets” checkbox in Cost View Options region.

This will rollup the costs of all the children assets to the parent asset and is useful for
reporting purposes.

28
 WORK ORDER COST ROLLUP:

Navigation : Maintenance Superuser > Work Order Tab > Select Parent WO > Work Order
Relationship Tab > View Costs.

Now select the checkbox “include child work order”.

This will rollup the cost of the child work orders to the parent.

ALTERNATE COST HIERARCHY ROLLUP:

Navigation : - Work Order Tab > Select WO > Work Order Relationship Tab > Update
Alternate Cost Hierarchy > Import Work Hierarchy
Then select the work order > View Costs

This will enable viewing of costs of work orders outside the hierarchy.

9. TRANSFER INVOICE VARIANCES:

29
 The Purchase Order Price and Invoice Price may vary. So :

- You can transfer the difference to the Work Order from the user defined adjustment
account.
- This is available for both OSP and Direct Items
- Allows valuation of costs at Actual Cost

The steps are as follows:

- Navigate to Transfer Shop Floor Variance Window

- Specify the type (OSP, direct item)
- Specify the adjustment account from which you want to transfer the variance
- You can specify a specific work order or item
- Run a report to simulate the process before the actual transfer is done.

10. OVERVIEW OF WORK ORDER BILLING

This section will include a brief overview of how the billing process works :

SETUP CONSIDERATIONS FOR BILLING :

1. Billing Form asks for Cost Basis which is :

- Price List or
- Cost Plus

2. Cost Plus Setup :

- Set Costing Enabled Flag on Item Master
- Inventory Asset Value checkbox (Item Master)
- Use Item Costs Form to define costs.

3. Price List Setup

- Define the items on price list

5. Define AR Transaction Source for invoicing.

5. Oracle Receivables – Line Transaction Flexfield. Needs to have

Work Order Billing Flexfield code defined to allow billing
transactions to be interfaced to AR.

6. Define EAM Parameter : If required, set the parameter : “Invoice Billable Items Only” on
EAM Parameters Form.

7. If you have set the parameter above to only invoice billable items, then you need to
define which items are billable. Billable Items must have billable type defined in the
service tab on the Item Master.

30
8. The Billing Type field on the service tab (see above) can be expense, labor or material.

9. Billable Items : Must have invoiceable item and invoice enabled flags set on Item
Master.

10. Billable Resource Setup :

- Create a resource item in Item Master
- Set invoiceable item/invoice enabled flags
- Setup Costs for cost plus or price list
- Create a resource and link the item to it

11. Billable Activity Setup :

- Create an item in Item Master
- Set invoiceable item/invoice enabled flags
- Setup Costs for cost plus or price list
- Link the activity to asset group/asset num

12. Billable WOs must be Closed or Complete-No Charges

BILLING PROCESS :

The form above is the Billing Form.

Navigation : Enterise Asset Management > Billing > Billing

Note that only Work orders with the status Closed or Complete – No Charges are eligible
for billing.

31
 It should also be noted that work orders linked to Projects can now be billed in R12 using
the above billing form. Previously, in R11, these type of work orders were only billed using
Projects Billing. Now you can use both in R12.

However, it should be noted that only NON-CONTRACTS projects are supported by the
EAM Billing Form. If the Project is a CONTRACT Project, it will not be available for selection
in the Billing Form and you have to use projects Billing.

The Billing Form offers 2 billing options as can seen above :

 Bill by Activity (billable activities)

 Bill by Requirements (billable materials)

The above screen shows an example of billing by requirements.

The above screen shows an example of billing by activity.

In both cases, the calculate amounts button is used to calculate the billable costs.

Once this is done, the Initiate Billing button is used to commence the billing process and
populate the Accounts Receivables Interface Tables.

After billing is initiated, you can create invoices by running the AutoInvoice concurrent
process. You can set this program to automatically run, or execute it from the menu.

11. OVERVIEW OF WORK ORDER CAPITALIZATION

WHAT IS CAPITALIZATION?

• Suppose an assets value is £10000.

32
 • Some maintenance work is done which increases the value of the asset (e.g a new
motor fitted). This costs £500.
• The cost of this maintenance can be “capitalized”. This means the assets value is
increased by the maintenance cost.
• The new value of the asset is therefore £10500
• Only material and labor transactions will capitalize work orders – NOT direct item
receipts.

CAPITALIZATION PROCESS :

• Link the Fixed Asset Category and Fixed asset number to the asset using the Asset
Definition Form.
• Go to WO Capitalization Form.
• Identify which work orders will increase the assets value (Closed or Complete – No
Charges status only).
• Ensure that there are costs against the WO.
• Click Capitalize Work Order button.
• Enter Capitalization % (so if line cost is £50 and 5% entered….asset capitalised by
£5.)
• Select the lines to capitalize > Calculate Amounts. This will calculate the
capitalization costs taking into account the capitalization %.
• Click the Initialise Capitalization button to execute a concurrent process that
capitalizes the current work order's maintained asset's associated Fixed Asset with
the calculated amounts.

The screenshot below shows the Capitalization Form.

After selecting the work order, and then clicking the capitalize work order button, the
following screen is seen. This is where the actual calculations and capitalization % is
specified as indicated in the section above.

33
The following screenshot shows how past details can be seen for capitalizations.

34
12. APPENDIX 1 : OVERVIEW OF THE TYPES OF COSTING

This section gives a high level overview of the types of Costing. It is not designed to be a
detailed Costing Guide. It is designed to give non-Costing Engineers and non-Costing users
a basic understanding of the different types of Costing.

The two most widely used inventory accounting systems are the periodic and the
perpetual.

 Perpetual: The perpetual inventory system requires accounting records to show

the amount of inventory on hand at all timesA method of accounting for
inventory that records the sale or purchase of inventory in near real-time.
Perpetual inventory provides a highly detailed view of changes in inventory and
allows real-time reporting of the amount of inventory in stock, hence, accurately
reflecting the level of goods on hand.

 Periodic: In the periodic inventory system, sales are recorded as they occur but the
inventory is not updated. A physical inventory must be taken at the end of the year
to determine the cost of goods

EAM supports four perpetual costing methods: standard, average, FIFO, and LIFO.

A. STANDARD COSTING

Standard Costing is quite simply a 2 step process :

35
- Firstly, predetermined (estimated) costs are used for valuing inventory and for charging
material, resource, overhead, period close, and job close transactions.
- Secondly, differences between the standard costs and actual costs are recorded as
variances.

Valuation accounts are charged when material is issued to a job or schedule, or when
resources, outside processing, or overhead are earned by a job or schedule. Valuation
accounts are also relieved when assemblies are completed from a job or schedule. Variance
accounts are charged upon job or period close, depending on how the WIP parameters are
set (for repetitive schedules) or the type of job, asset, or expense.

Note that the behaviour for EAM is slightly different from above :

The accounts designated as Variance Accounts are really the expense accounts to which
the work order will be charged. They are not a variance from standard.

During the month all transactions are costed as though they are going to a
normal manufacturing order even though we know that EAM work orders should be
expensed.

At the end of each month and when the work order is closed, the costs on the
work order are charged to expense using the accounts that you have designated as
variances.

Variance accounts play no role in eAM. The proper set up is to load the appropriate
maintenance expense account into both the valuation and variance account fields for the
WIP Accounting Class.
This will result in maintenance work order expenses booking to the expense account when
incurred. So, when setting up WIP Accounting Classes, use the same maintenance expense
account code in both the valuation and variance columns. This will cause maintenance
expenses to book to the proper GL account and period.

The section below includes a very high level view of the steps for setting up standard
costing :

To set up standard costing:

1. Define item costs.

2. Set activity costs for items.
You can assign an activity to any cost. If you use the activity basis type, you can directly
assign the activity cost to the item. When you use the other basis types, the cost is based
on the subelement, basis type, and entered rate or amount. The activity defaults from the
subelement, and, if needed, you can override the default.
3. Edit costs.
You can mass edit item costs and activities using several predefined mass edits.

36
4. Mass edit account assignments for selected items. These accounts include: Cost of Goods
Sold, Encumbrance, Expense, and Sales. You can edit your account assignments for all
items, a category of items, or a specific item.
5. Copy costs between cost types.
6. Perform cost update, if needed.
This step is optional if your frozen standard costs are complete.
7. Define Bills of Material parameters (not for EAM) .
This ensures that bill and routing information (resource, outside processing, and overhead
cost elements) is accessible when you define item costs and define overhead.
8.Define resources.
9. Define departments.
10. Assign resources to departments.
11. Define overheads and assign them to departments.
12. Review routing and bill structures to confirm that costs will roll up properly.
13. Control overheads by resource.
For overheads based on resource units or resource value, you must specify the resources on
which the overhead is based. You can then charge multiple resources in the same
department for the same operation, while still earning separate overhead for each
resource. If you do not associate your overheads and resources, you do not apply overhead
in the cost rollup or charge resource-based overhead in WIP.
14. Confirm that your WIP accounting classes and their valuations and accounts are
properly set up.
15. Run a summary audit to validate your structures. (not for EAM)
After you have defined your bill and routing structures, items and unit costs, you should run
the summary audits to ensure information integrity. These audits check for bill of material
structures with no headers, valued items with no costs, and so on.
16. Perform cost rollup as appropriate to set initial standard costs.
With the initial cost rollup/update, you complete the setup of the manufacturing cost
structure and begin normal processing, including purchase order receipts, material issues,
job/schedule creation, shop floor moves, and so on. Later, you analyze, report, and
distribute costs through the period close process.
17 . Perform a cost update after rolling up assemblies. This revalues inventory and
implements new costs.

B . AVERAGE COSTING :

Under average cost systems, the unit cost of an item is the average value of all receipts of
that item to inventory, on a per unit basis. Each receipt of material to inventory updates the
unit cost of the item received. Issues from inventory use the current average cost as the
unit cost.
By using the average costing method, you can perpetually value inventory at an average
cost, weighted by quantity :

(inventory value = average unit cost * quantity).

You can charge WIP or EAM resources at an actual rate. You can charge the same resource
at different rates over time. You can also charge outside processing costs to a job at the
purchase order unit cost.

37
To set up average costing:

1. Set the Control Level for your items to Organization. Organizations cannot share average
cost.
2. Define, at minimum, one cost type to hold the average rates or amounts for material
overhead rates.
Inventory valuation and transaction costing in an average cost organization involve two cost
types: Seeded: Average and User-Defined: Average Rates.
3. Assign the cost type defined in the last step as the Average Rates Cost Type in the
Organization Parameters window in Oracle Inventory.
4. Set the TP: INV:Transaction Processing Mode profile option in Oracle Inventory to On-line
processing.
When using average costing, you must properly sequence transactions so that the
application uses the correct costs to value transactions and calculate unit costs.
Proper transaction sequencing can only be ensured if all transaction processing occurs on
line.
5. Set the INV:Transaction Date Validation profile option to Do not allow past date.
6. Define bills of material parameters. (not for EAM)
Defining bills of material parameters ensures that bill and routing information
(resource, outside processing, and overhead cost elements) is accessible when you define
item costs and overhead.
7. Define resources.
8. Define departments.
9. Assign resources to departments.
10. Define overheads and assign to departments.
The cost processor uses the assigned basis type to apply the overhead charge
and to assign the activity to the calculated overhead cost. You can define
pending rates and use the cost update process to specify the pending rates as
the Average Rates cost type.
11. Review routing and bill structures. (not for EAM)
12. Control overheads by resource.
For overheads based on resource units or resource value, you must specify the resources
on which the overhead is based. You can then charge multiple
resources in the same department for the same operation, while still earning
separate overhead for each resource. If you do not associate your overheads
and resources, then you do not apply overhead or charge resource-based
overhead in WIP.
13. Confirm that your WIP accounting classes and their valuations and accounts are
properly set up.
14. In addition to setting the TP: INV:Transaction Processing Mode profile option in Oracle
Inventory to On-line processing, you must also set the following WIP transaction processing
profile options to On-line:
• TP:WIP:Completion Transactions Form
• TP:WIP:Material Transactions Form
• TP:WIP:Move Transaction
• TP:WIP:Operation Backflush Setup
• TP:WIP:Shop Floor Material Processing

38
15. Define rates for your resources and associate these resources and rates with the
Average rate cost type.
16. . Define overheads and assign them to departments.
For each overhead subelement, define a rate of amount in the cost type that you have
specified as the average rates cost type. Overheads with a basis type of Resource Units or
Resource Value use the actual transaction resource amount or hours to calculate the
overhead amount. The cost processor uses the assigned basis type to apply the overhead
charge and assigns the activity to the calculated overhead cost. You can define pending
rates and use the cost update process to specify the pending rate as the Average Rates cost
type.
17. Define WIP parameters. (for WIP - not eAM)
You can use the Require Scrap Account parameter to determine whether a scrap account is
mandatory when you move assemblies into a scrap intraoperation step. Requiring a scrap
account relieves scrap from the job or schedule. Not requiring a scrap account leaves the
cost of scrap in the job or schedule. If the Require Scrap Account is set to No, scrap costs
remain in the job.
You must set the appropriate average costing parameters (Default Completion Cost Source,
Cost Type, Auto Compute Final Completion, and System Option) to determine how
completions are charged.

C . FIFO AND LIFO COSTING :

First In, First Out (FIFO) and Last In, First Out (LIFO) are two separate perpetual costing
methods based on actual costs. These methods are also referred to as layer costing. A
perpetual costing method is selected for each inventory organization including Standard
costing, Weighted Average costing, FIFO costing, or LIFO costing. Inventory balances and
values are updated perpetually after each transaction is sequentially costed.
FIFO costing is based on the assumption that the first inventory units acquired are the first
units used.
LIFO costing is based on the assumption that the last inventory units
acquired are the first units used.

Layer costing methods are additional costing methods to complement the Standard and
Average costing methods.

In layer costing, a layer is the quantity of an asset item received or grouped together in
inventory and sharing the same costs. Available inventories are made of identifiable cost
layers.
• Inventory layer
On-hand inventory contains layers that are receipt-based (purchased items) or completion-
based (manufactured items).
• Work in Process (WIP) layer
Components issued to a WIP job are maintained in layers within the job itself. Each issue to
WIP represents a separate layer within the job. In addition, each WIP layer consists of only

39
one inventory layer initially consumed by the issue transaction. The costs of those
inventory layers are held separately within the WIP layer.

The cost flows of FIFO and LIFO are opposite.

• In FIFO valuation, the earliest-received stock is assumed to be used first; the
latest-received stock is assumed to be still on hand.
• In LIFO valuation, the earliest-received stock is assumed to be still on hand; the latest-
received stock is assumed to be used first.
 Receipts are valued at purchase order prices. When you deliver a purchase order
receipt to inventory, it is valued at the purchase order price.
 Inventory is maintained in receipt-based layers only.
Layer creation: Receipts into inventory create new layers with their own quantity and
cost.
Layer consumption: Issues consume earliest layers that still have quantity balance.
Issue transactions are costed based on the cost of the consumed layers.

 WIP components are held in layers within a job. Component issues are held in layers
within each job. Each issue creates a WIP layer. In addition, component issued to a
job will not lose their inventory layer
identification and costs.

Items are returned to inventory as new layers.

A new inventory layer is created when a component is returned to inventory from WIP.
A receipt of a customer return also creates a new layer at the same cost as the original
shipment.

 You can charge WIP resources at an actual rate. You can charge the same resource at
different rates over time. You can also charge outside processing costs to a job at the
purchase order unit cost.

We will not discuss setting up layer costing – the costing user manual contains the
required details.

40
Costing in EAM
Nov 2012
Author: Zar Ahmed

Oracle Corporation
World Headquarters
500 Oracle Parkway
Redwood Shores, CA 94065
U.S.A.

Worldwide Inquiries: Phone:

+1.650.506.7000
Fax: +1.650.506.7200 www.oracle.com

Oracle is a registered trademark of Oracle Corporation. Various product and

service names referenced herein may be trademarks of Oracle Corporation. All
other product and service names mentioned may be trademarks of their respective
owners.

Copyright © 2003 Oracle Corporation

All rights reserved.

41