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A GUIDE TO STANDARD COSTING

An Oracle White Paper


November 2003

1
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 reader’s 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.

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Outside -- This is the cost of outside processing purchased from a supplier.
Processing

Sub-elements can be used as smaller classifications of the cost elements. Each cost element
must be associated with one or more sub-elements. An amount or rate is attached to each sub-
element.

Basis Types
------------------

Basis types determine how costs are assigned to the item. Basis types are assigned to sub-
elements, which are then assigned to the item. Each sub-element must have a basis type.

Item -- Used with material and material overhead sub-elements to assign a fixed
amount per item, generally for purchased components. Used with resource,
outside processing and overhead sub-elements to charge a fixed amount per
item moved through an operation.

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 item’s 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 -- Used to apply overhead to an item, based on the total value of the item. Used
Value 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 single–level 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

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What is a Cost Type?

A cost type is a set of costs uniquely identified by name. In Standard Costing method, ‘Frozen’ is
the seeded cost type. An unlimited number of additional simulation or unimplemented cost types
can be defined and updated.

In this paper, ‘Pending’ Cost type is used for simulation purpose.

What is a Cost Group?

A cost group is a set of accounts that hold on hand inventory. Prior to cost groups,
subinventories were utilized to hold the accounts. The physical and accounting attributes are
used in the subinventories to track the location, quantity, and value of the inventory.

Cost groups were introduced to create separate tracking of the physical and accounting aspects
of inventory.

Some of the benefits of using a cost group are:


• Tracking quantity account and quantity movement characteristics
• Maintain multiple item costs in each organization when using a perpetual costing method
(Average, FIFO, and LIFO). Distinct cost is maintained for each item/cost group
combination.
• In standard costing, all inventory of an item carries only the standard cost
regardless of cost groups being utilized.
• Eliminate the need for accounting changes for subinventory transfers.Subinventory
transfers are pure physical moves when using the cost group functionality.

If the current organization is not Project References Enabled, the Common cost group is
defaulted and cannot be updated. If the organization is Project Reference Enabled, any cost
group can be selected.
The Common cost group is seeded when Cost Management is installed.
The valuation accounts defined in the Organization Parameters window are used for this cost
group and cannot be changed or made inactive. However, in an organization that is Project Cost
Collection Enabled the name and description of this cost group can be changed.

Since Warehouse Management / Inventory Patchset B, there is new functionality with regard to
cost groups. Each time a new organization is created, a new cost group is also created for that
organization.

To determine the default cost group for a given organization, the Navigation is as follows:
Inventory Æ Setup Æ Organization Æ Parameters Æ Costing Information (T).

The same Cost Group is associated with all the SubInventories in the Org. However, this could
be overridden at the subinventory level.

Sharing Costs across Organizations

Costs of items can be shared across organizations using standard costing. This is a unique
feature of Standard Costing method.
If standard costs are shared across multiple organizations, costs are maintained by the cost
master organization and shared by the child cost organizations. Costs cannot be entered into the
child cost organizations. All reports, inquiries, and processes use the shared costs.

Pre-requisites for sharing costs across organizations:

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• Inventory Organizations should be using the Standard Costing method.
• Work in Process and Bills of Material modules should not be enabled for the Child
Organizations
• The item attributes "costing enabled" and "inventory asset value" should be controlled at
the Item level.
Note: The cost master organization can be a manufacturing organization using Work in Process
or Bills of Material.

The following points need to be kept in mind while sharing costs:

1. Once the User decides to share costs at implementation time, all child orgs defined in
future would need to share costs.

2. Cost update submission must be done for the master cost organization, when sharing
costs.

3. The accounting period organization in which the process is being launched should be
open for the cost master organization and all the organizations which are sharing costs
from this master.

SETUP
=======
In this section, let us try to understand the setup that serves as a foundation to present the test
cases.

Bill of Material (BOM)


------------------------------
The following BOM would be used in understanding the Cost rollup process.

ORA1

O1 RA1

R1 A1

5
Fig 1. Bill of Material of ORA1
As shown in the above screenshot, BOM of ORA1 comprises 3 Purchased items and 1 Sub-
assembly.
O1, R1 and A1 are the purchased items.
RA1 is the sub-assembly.

The Yield of component R1 is specified as 0.8, in the Component Details Tab of Bills of Material
screen. This means to say that for every 1 unit of R1 used in the making of RA1, 0.8 units would
effectively get utilized and the remaining 0.2 units would go unutilized or waste. So, in order to
see that 1 unit of RA1 effectively gets utilized; 1/0.8 or 1.125 units should actually be used.

The yield of A1 is set to 1.

Fig 2. Bill of Material of RA1 displaying the yield of components

Similarly, the yield of sub-assembly RA1 is set to 0.7 in the BOM of ORA1.
However, the yield of O1 is set to 1.

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Fig 3. Bill of Material of ORA1 displaying the yield of components

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 Æ Routings Æ Resources Æ Rates (B)

Fig 4. Resource Cost of LAM

Resource FIX used for fixing purpose is defined under Department DSR2.
Unit Cost of Resource FIX is $16.

Fig 5. Resource Cost of FIX

Resource SAW is used for sawing.


It is defined under Department DSR3 with a unit cost of $20.

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Fig 6. Resource Cost of SAW

ROUTINGS
-----------------
Routings are defined for both RA1 and ORA1.
Routing for RA1 has got 2 operations – 10 and 20.
Resource LAM is attached to operation 10 and Resource FIX is attached to operation 20.
Item R1 is worked upon in operation 10 and A1 is worked upon in operation 20 using the
respective Resources attached.
Usage of both the resources is set to 1.
Operation Component Resource Resource Usage Department
10 R1 LAM 1 DSR1
20 A1 FIX 1 DSR2
Fig 7. Routing for RA1
Routing for ORA1 has 2 operations defined – 10 and 20.
Resources SAW and FIX are attached to operations 10 and 20 respectively.
Item O1 is worked upon in operation 10 and RA1 in operation 20.
Usage of Resource SAW is set to 0.9 and that of Resource FIX is set to 1.

Operation Component Resource Resource Usage Department


10 O1 SAW 0.9 DSR3
20 RA1 FIX 1 DSR2
Fig 8. Routing for ORA1

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 Æ Setup Æ Subelements Æ Overheads Æ Rates (B)

8
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 Æ Routings Æ Resources Æ 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.

The Navigation used is as follows:


Cost Æ Setup Æ Subelements Æ Overheads Æ Resources (B)

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 Æ Routings Æ Resources Æ Overheads (B)

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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.

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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.13. Item Costs of A1

Let us look at the output of the Cost Rollup Report, which is the Bills of Material Indented
Cost Report. The yield factor of 0.7 set against RA1 would come into play now. This means that
for every 1 unit of RA1 used in the making of ORA1, 0.7 units would effectively get utilized and
the remaining 0.3 units would go unutilized or waste. So, in order to see that 1 unit of RA1
effectively gets utilized, 1/0.7 or 1.428 units should be used. This value would get percolated to
the next level of BOM too i.e. to R1 and A1.
Cost computations would also get carried out accordingly.
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
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
..2 20 A1 SECOND LEVEL ITEM A Buy Y N Y N 1.0000 Ea 1.0000 0.000000 1.428571 15.60000
Material MATERIAL Item USD 12.000000 1.000000 17.142857 17.14286
Material Over Mat'lHndlg Ttl value USD 0.300000 17.142857 0.300000 5.14286
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.

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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.15. Item Costs of R1

The computations pertaining to this item for the cost rollup have been made a bit more complex
with the inclusion of a yield factor of 0.8 against this item in the BOM of RA1.
While rolling up costs associated with R1, system would look at both the yield factors i.e. 0.7 of
RA1 and 0.8 of R1.
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
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
..2 10 R1 2nd LEVEL ITEM A Buy Y N Y N 0.8000 Ea 1.000000 0.000000 1.785714 12.00000
Material MATERIAL Item+ USD 10.000000 1.000000 17.857143 17.85714
Material Over Mat'lMgmt Item+ USD 2.000000 1.785714 2.000000 3.57143

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.

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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.17. Item Costs of RA1

As Resources and Overheads are expended in making the sub-assembly RA1, the rolled up
costs would include the same along with the Material Overhead cost defined initially.

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
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
.1 20 RA1 SUB-ASSEMBLY A Make Y Y Y N 0.7000 Ea 1.000000 0.000000 1.428571 314.60000
Material Over Mat'lHndlg Item+ USD 4.000000 1.428571 4.000000 5.71429
10 Resource LAM DSR1 Y Item+ HR 1.000000 1.000000 1.428571 12.00000 17.14286
10 Overhead Mgmt DSR1 Res value USD 9.000000 17.142857 9.000000 154.28571
20 Resource FIX DSR2 Y Item+ HR 1.000000 1.000000 1.428571 16.00000 22.85714
20 Overhead Mgmt DSR2 Res value USD 9.000000 22.857143 9.000000 205.71429
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.19. Item Costs of O1

For a change, there is no yield factor linked to this item.


Hence, the costs defined would directly get considered for roll up.

Include in Rollup
| Based on Rollup
| | Asset/Costed
Op Item/ Description/ Last Mak | | | 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
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
.1 10 O1 FIRST LEVEL ITEM A Buy Y N Y No 1.0000 Ea 1.000000 0.000000 1.000000 25.00000
Material MATERIAL Item+ USD 18.000000 1.000000 18.000000 18.00000
Material Over Mat'lMgmt Item+ USD 7.000000 1.000000 7.000000 7.00000
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
Hence, a total of 1.9 resource units are used.
This value gets multiplied with the rate of 2 and results in a value of $3.8.

Fig.21. Item Costs of O1

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 ORA1 MAIN ASSEMBLY A Make Y Y N Ea 1.000000 0.000000 1.000000 667.52857
Material MATERIAL Item+ USD 5.000000 1.000000 5.000000 5.00000
Material Over Mat'lHndlg Res units USD 2.000000 1.900000 2.000000 3.80000
10 Resource SAW DSR3 Yes Item+ HR 0.900000 1.000000 0.900000 20.00000 18.00000
10 Overhead MfgMgmt DSR3 Res units USD 7.000000 0.900000 7.000000 6.30000
20 Resource FIX DSR2 Yes 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
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 = $5
Material Overhead Cost = $2 * 1.9 = $3.8
Resource Costs
--- SAW = $20 * 0.9 = $18
--- FIX = $16
Overhead Costs

15
--- MfgMgmt = $7 * 0.9 = $6.3
--- Mgmt = $16 * 9 = $144

A summation of all the extended costs discussed above results in the rolled up cost of ORA1,
which is $667.52857.

Shrinkage Rate
=============
This case could have been made more interesting by bringing ‘Shrinkage Rate’ into picture.
Enter the manufacturing shrinkage rate as 0.2 for the Finished Good ‘ORA1’.

This can be done using the following Navigation:


Cost Æ Item Costs Æ Item Costs Æ Item Costs Summary Æ Item Costs Details.

Fig 23. Shrinkage Rate of ORA1

Cost rollup uses the value entered here to determine the incremental component requirements
due to the assembly shrinkage of the current item.
Shrinkage Rate cannot be entered for items that do not base costs on a rollup of the item’s bill of
material and routing (buy items).

Note:- This value is different from the ‘Shrinkage Rate’ entered in the MPS/ MRP Planning Tab of
the item Master. Shrinkage Rate is considered for Planning purposes by MRP / MPS.

Let us now understand the implication of this MFG Shrinkage Rate.

All the costs displayed in the ‘extended cost’ column of the earlier Indented Bill of Material Report
would get multiplied by the following factor:

1 / (1 – manufacturing shrinkage)

Hence the final cost of ORA1 would become:

$667.52857 * 1/(1-0.2) = $834.411

Cost Update
==========
As understood earlier, Standard Costing uses the cost of an item that exists in the ‘Frozen’ cost
type only for accounting all transactions pertaining to the Organization.
Hence, the rolled up cost in Pending cost type needs to be updated to Frozen Cost type.
This is accomplished by running the ‘Update Standard Costs’ concurrent request.

The Navigation used for this purpose is as follows:

16
Cost Æ Item Costs Æ Standard Cost Update Æ Update Costs.

The standard cost update procedure enables users to define and roll up pending costs, simulate
changes to standard costs for “what if” analysis and then update pending costs to the Frozen
standard cost type.

It is advisable to run cost update at the beginning of the inventory accounting period before
transactions have started for the new period. At this juncture, it would be apt to introduce a new
feature, Cost Cut-Off Date, that is available since Oracle Applications 11.5.7(DMF Family Pack
G).

Cost Cutoff Date


------------------------

This functionality is developed to allow businesses the option of changing labor rates and
overhead rates at the beginning of the accounting period while transactions in the next period
wait for these new costs to be completed. This feature exists for all the perpetual costing
methods available in Release 11i: Standard, Average, FIFO and LIFO. This will allow period
close, cost updates and rate changes to occur without impacting or interrupting business
operations.

When using the Cost Cutoff Date, all cost processing for the new accounting period is stopped for
that organization. This provides accountants with the opportunity of closing the previous period.
Once the new costs are set, then the costing is started for the new period. This occurs by
changing the cost cutoff date to a date in the future.

To use this functionality, the Cost Cutoff Date field must be populated with a date in the
Organization Parameters form.

The Navigation Path is as follows:


Inventory Æ Setup Æ Organizations Æ Parameters Æ Costing Information (T).

With this new functionality, the Standard Cost Update can now run in one organization while
other organizations are still costing transactions. Standard Cost Workers are launched based on
organization, so this improves the speed of costing transactions.

Example
-------------
Let us understand the functionality of this feature with the help of an example.
Assume December 2003 and January 2004 to be 2 accounting periods respectively.
Suppose the cost cut-off date is set to 01-01-2004. New standard costs can be established prior
to 01-01-2004, say in December 2003. These costs will not impact the December costing
activities, as they will not be active until January 1, 2004. Also, no transactions that occur from
January 1, 2004 are costed. This will allow the accountants to complete the costing for the
December transactions, close the period, and run the reports for review.

Now, a standard cost update can be performed using the new cost type for January 2004.This
will update the cost of the costed items up to December 31, 2003. The reports can then be rerun
with the same quantity and newly updated costs. Even at this stage, January 2004 transactions
would not be costed. Costing in the new period would not happen till the costing of the previous
period is finished. The uncosted transactions will remain in the

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MTL_MATERIAL_TRANSACTIONS with costed_flag = N waiting for a cost worker to process
them. The Cost Manager will spawn no cost worker until the Cutoff Date is changed.

To cost the January 2004 transactions once period of December 2003 is properly closed, the
Cost Cutoff Date is changed. This can be changed to the start of the next period or next quarter
or next year --- whenever the rates need to be changed next. Once changed, the cost
processing begins for the transactions that have been waiting.

For standard costs, the processing of the transactions is immediate. For Average, FIFO, and
LIFO costing the process takes longer because of the need to process the transactions
sequentially to keep the costs accurate.

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.

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These accounts are as represented below:

SUB1 SUB2 SUB3 Discrete


Material 01-000-1410-0000-000 01-000-1410-1100-000 01-000-1410-1200-000 01-000-1410-0000-000
Material Overhead 01-000-1420-0000-000 01-000-1420-1100-000 01-000-1420-1200-000 01-000-1420-0000-000
Overhead 01-000-1430-0000-000 01-000-1430-1100-000 01-000-1430-1200-000 01-000-1430-0000-000
Resource 01-000-1440-0000-000 01-000-1440-1100-000 01-000-1440-1200-000 01-000-1440-0000-000
Outside Processing 01-000-1450-0000-000 01-000-1450-1100-000 01-000-1450-1200-000 01-000-1450-0000-000
Fig 24. Accounts of Subinventories and Accounting Class

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.

Fig 25. Transaction Summary of Receiving transaction

As shown in the screenshot, a quantity of 10 of item A1 is received with destination type


Receiving and delivered with destination type Inventory.

Fig 26. Accounting of Receiving transaction

As the PO has been raised for 10 quantities with a unit price of $14, the Receiving
Inspection account would get debited by an amount of $140 and the same amount would
credit the Inventory AP accrual account.

The Navigation for defining the Receiving Inspection Account is as follows:

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Inventory Æ Setup Æ Organizations Æ Receiving Parameters

Fig 27. Navigation for defining Receiving Inspection Account

The Navigation for defining the Inventory AP Accrual account is as follows:


Inventory Æ Setup Æ Organizations Æ Parameters Æ Other Accounts (T)

Fig 28. Navigation for defining Inventory AP Accrual account

After receiving the Purchase Order, a delivery is made to subinventory SUB2.


The accounting distributions generated are as follows:

Fig 29. Accounting Distributions of Receiving transaction

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Fig 30. Accounting Distributions of Receiving transaction

As the Receiving Inspection account got debited by $140 by the receiving transaction,
the same amount would credit it during the Delivery transaction. Hence the transaction
value column displays a value of –140 against the Receiving Inspection account. The
other account that gets credited is the overhead absorption account.
As noted earlier, material overhead cost of item A1 is $3.6 and since 10 quantities have
been delivered, this account gets credited by an amount of $36. This account represents
the absorption account of Material Overhead, Mat’l Hndlg, used for Material overhead
cost of A1 (Refer to Fig.13 which displays the Mat’lHndlg sub-element).

The Navigation used for defining the Absorption account for a Material Overhead or an
Overhead is as follows:
Cost Æ Setup Æ Sub-Elements Æ Overheads

Fig 31. Navigation for defining Overhead Absorption Account.

The Material Account of SUB2, 01-000-1410-1100-000, would get debited by $120 and
the Material Overhead account, 01-000-1420-1100-000 would get debited by $36. These
figures are arrived based on the Costs defined for item A1 as shown in Fig. 13.
The difference between the transaction values of Receiving Inspection Account and
Material account of subinventory SUB2 is debited to the purchase Price Variance
account.

The Navigation for defining the Inventory AP Accrual account is as follows:


Inventory Æ Setup Æ Organizations Æ Parameters Æ Other Accounts (T)

21
Refer to Fig.28 for the same.
Note:- Purchase Price Variance calculation does not consider Material Overhead
------- Cost of the item.

Note:- Purchase Price Variance account would have got credited if transaction
-------- value against Receiving Inspection account was less than $120 or if
transaction value against Material account was more than $140.

2) A Return transaction is performed to return 2 faulty quantities of A1 to the supplier based


on the same PO.

2 more lines would get added to the Receipt Transaction Summary as follows:

Fig 32. Transaction Summary of Return-to-Supplier transaction

Thus, the 2 quantities are first returned to Receiving and then to the Supplier.
The accounting entries created at the Receiving level would exactly display a reversal of
the earlier ‘Receiving’ accounting entries.

Fig 33. Accounting of Return-to-Supplier transaction

The Receiving Inspection account would get credited by an amount of $28 as 2 quantities
are being returned at a price of $14.
The same amount would debit the Inventory AP accrual account.

Similarly, the ‘Return to Supplier’ transaction distributions also display an exact reversal
of the earlier PO Receipt transactions.

22
Fig 34. Accounting Distributions of Receiving transaction

Fig 35. Accounting Distributions of Receiving transaction

The Receiving Inspection account would get debited by an amount of $28 and the
Overhead absorption account by $7.2 i.e. $3.6 * 2quantities.
As the Material Cost of item A1 is $12, $24 would credit Material account.
$7.2 would credit material Overhead account, as Material Overhead Cost of A1 is $3.6.
Purchase Price Variance account is hit by the difference between Material account and
Receiving Inspection account.

Now, the onhand quantity of item A1 is 8 in subinventory SUB2

3) A Miscellaneous Receipt is generated for Receiving 10 quantities of item R1 into


subinventory SUB1.

The charge account entered during Miscellaneous Receipt is 01-580-7740-0000-000.

Fig 36. Charge Account for Miscellaneous Receipt

Please note that R1 has a material cost of $10 and Material Overhead Cost of $2
defined. Refer to Fig. 15.

23
Fig 37. Accounting Distributions of Miscellaneous Receipt transaction
As 10 quantities are being received, material account of subinventory SUB1 is debited by
$100.
Similarly Material Overhead account is debited by $20.
The charge account entered during Receipt is credited by $120.

4) A subinventory transfer of 8 quantities of R1 is carried out from subinventory SUB1 to


SUB2.

Fig 38. Subinventory transfer transaction

As material is being moved from SUB1 to SUB2, the accounts of SUB2 would get debited
and those of SUB1 would get credited.

Fig 39. Accounting Distributions of Subinventory transfer transaction

Material accounts are hit by a value of $80 as 8 quantities with a cost of $10 each are
being moved. Material Overhead accounts are hit by a value of $16 as 8 quantities with a
cost of $2 each are being moved.

5) As per the earlier 4 transactions carried out, the onhand quantity of A1 and R1 in
subinventory SUB2 is 8 each.

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 10 R1 2nd LEVEL ITEM A Buy Y N Y N 0.8000 Ea 1.000000 0.000000 1.250000 12.00000


Material MATERIAL Item+ USD 10.000000 1.000000 12.500000 12.50000
Material Over Mat'lMgmt Item+ USD 2.000000 1.250000 2.000000 2.50000

.1 20 A1 SECOND LEVEL ITEM A Buy Y N Y N 1.0000 Ea 1.000000 0.000000 1.000000 15.60000


Material MATERIAL Item+ USD 12.000000 1.000000 12.000000 12.00000
Material Over Mat'lHndlg Ttl value USD 0.300000 12.000000 0.300000 3.60000
---------------
314.60000
========
Fig 40. Cost Rollup for item RA1
Hence the total cost of item RA1 after the rollup is $314.6
This cost is split across the cost elements as follows:

Material $24.5
Material Overhead $6.1 + $4
Overhead $252
Resource $28
Fig 41. Element-wise Cost split for item RA1

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
Fig 42. Accounting Distributions of WIP Assembly Completion transaction

Fig 43. Accounting Distributions of WIP Assembly Completion transaction

The subinventory accounts of SUB3 would get debited as material is delivered to this
subinventory after completion. On the other hand, all accounts of WIP Accounting Class
are credited.
As 3 quantities are completed, the amounts in Fig. 41 get multiplied by 3 and debit the
corresponding cost elemental accounts of subinventory SUB3.
The same behaviour is exhibited by the WIP Accounting Class accounts too while getting
credited, except for the Material Overhead account. This account gets debited by the
rolled up Material Overhead Cost only, which is $18.3 ($6.1 * 3)
The Material Overhead cost of $4 defined for the sub-assembly RA1 is charged
separately to the overhead absorption account of ‘Mat’lHndlg’ sub-element.

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This behaviour is exhibited because Material Overheads of the sub-assembly (RA1 in
this case) that is being completed are not charged to the job. They are charged
separately to the Overhead Absorption account of the specific Material Overhead sub-
element.
However, the same is charged to the Material Overhead account of the Inventory
Valuation accounts (Subinventory accounts).

1) The job in the previous transaction was completed for 3 quantities only though the start
quantity was 5 due to faulty work during operations 10 and 20.
Thus we would scrap the remaining 2 quantities, one at operation 20 and the other at
operation 10.
Let us first look at the Distributions generated due to the WIP Assembly scrap transaction
performed at operation 20.

Fig 44. Accounting Distributions of WIP Assembly Scrap transaction at operation 20

As far as WIP Accounting Class is concerned, the accounting distributions generated are
almost same as the ones generated for assembly completion transactions as the
assembly is put to scrap after completion of the last operation.
As a result, all the resources used in the routing are used up and also all the
corresponding Overheads are incurred.
However, the only difference occurs due to the Material Overhead cost defined for the
subassembly RA1. This is because Material Overheads are incurred only when the item
is completed into a subinventory in case of WIP transactions and received in a
subinventory in case of Purchasing transactions.
Hence, the accounting entries generated on the credit side are same as the ones
provided in fig. 41 . Material Overhead account does not include the $4 defined at sub-
assembly level.
The corresponding account that is hit on the debit side is the Scrap account entered
during the Scrap transaction.

The Navigation for defining scrap account for specific transaction is as follows:
WIP Æ Move Transactions Æ Move Transactions.

The scrap account can be provided in the Move Transactions form only if the option
‘Require Scrap Account’ is checked in the WIP Parameters form.

The Navigation for the same is as follows:


WIP Æ Setup Æ Parameters Æ Move Transaction (T)
The distributions generated due to scrap transaction performed at operation 10 are as
follows:

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Fig 45. Accounting Distributions of WIP Assembly Scrap transaction at operation 10

As 1 quantity of assembly RA1 is scrapped at operation 10, Material, Material Overhead,


Resource and Overhead costs associated with Operation 10 would only get considered.
The costs associated with Operation 20 would not come into picture. Also, as in the
previous scrap transaction, the material overhead cost defines at subinventory level, $4,
is not considered.
Component R1 and Resource LAM are attached to operation 10 of the routing. The
corresponding overhead associated with LAM is ‘Mgmt’. Refer to Fig.7.

From Fig.40, Material and Material Overhead costs rolled up for item R1 are $12.5 and
$2.5 respectively.
Resource cost incurred due to usage of resource LAM is $12.
Similarly, Overhead cost due to Mgmt is $108.
Based on above costs, corresponding accounts of WIP Accounting Class are hit.
Scrap account entered during the scrap transaction is 01-000-7730-0000-000.This
account gets debited.

2) The last transaction that is undertaken is the shipment of 2 completed quantities of the
sub-assembly RA1 from subinventory SUB3.
Booking a Sales Order in Order Management module of the Applications carries out this
transaction. It actually comprises 2 steps wherein the 2 quantities are first moved to
‘Staging’ subinventory and then shipped from there.

The distributions generated due to the first step where material is moved from
subinventory SUB3 to subinventory Staging1 are as follows:

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Fig 46. Accounting Distributions of Sales order Pick transaction

A close look at the distributions would indicate that they are very similar to the ones
generated by a subinventory transfer transaction.
This is because the Sales Order Pick transaction transfers material from one
subinventory to the other.
Hence, the accounts of SUB3 would get credited and the corresponding accounts of
Staging1 would get debited.
As 2 quantities are being transferred, the values in Fig. 41 would get multiplied by 2 and
the same would hit the accounts.
The second step would involve shipment of quantities from the Staging subinventory. The
distributions generated for the same are as follows:

Fig 47. Accounting Distributions of Sales Order issue transaction

As material is moving from Staging Subinventory, valuation accounts of this subinventory


would get credited. Note that these were the same accounts that got debited by the Sales
Order Pick transaction.

29
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 Æ Setup Æ Organizations Æ Parameters Æ 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 DEBIT CREDIT
Receiving Inspection @ PO cost XX

Inventory A/P Accrual account @ PO Cost XX

PO Delivery
ACCOUNT DEBIT CREDIT
Subinventory – Material Account @ PO Cost XX
Subinventory – Material Overhead Account XX
Receiving Inspection @ PO cost XX
Material Overhead Absorption Account XX
Purchase Price Variance (Favorable/Unfavorable) XX XX

Return to Supplier from Receiving


ACCOUNT DEBIT CREDIT
Receiving Inspection @ PO cost XX

Inventory A/P Accrual account @ PO Cost XX

Return to Supplier from Subinventory


ACCOUNT DEBIT CREDIT
Subinventory – Material Account @ PO Cost XX
Subinventory – Material Overhead Account XX
Receiving Inspection @ PO cost XX
Material Overhead Absorption Account XX
Purchase Price Variance (Favorable/Unfavorable) XX XX

30
Miscellaneous Receipt
ACCOUNT DEBIT CREDIT
Subinventory – Material Account@ standard cost XX
Subinventory–Material Overhead Account@standard cost XX
Entered G/L account @ standard cost XX

Subinventory transfer
ACCOUNT DEBIT CREDIT
From Subinventory – Material Account@ standard cost XX
From Subinventory – Material Overhead Account@ XX
standard cost
To Subinventory – Material Account@ standard cost XX
To Subinventory – Material Overhead Account@ standard XX
cost

WIP Assembly Completion


ACCOUNT DEBIT CREDIT
Completion Subinventory accounts (Inventory Valuation) XX
WIP accounting class valuation accounts (wip valuation) XX
Overhead Absorption Account XX

WIP Assembly Scrap


ACCOUNT DEBIT CREDIT
Scrap Account XX
WIP accounting class valuation accounts (wip valuation) XX

Sales Order Pick


ACCOUNT DEBIT CREDIT
From Subinventory Accounts at Standard Cost XX
To Subinventory Accounts at Standard Cost (Staging) XX

Sales Order Issue


ACCOUNT DEBIT CREDIT
Cost of Goods Sold account. XX
From Subinventory Accounts at Standard Cost (Staging) XX

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White Paper: A Guide to Standard Costing
November, 2003
Author: Dhannawada Sreenivasa Rao
Contributing Authors: N/A

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Copyright © 2003 Oracle Corporation


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