Oracle Average Cost update

Overview of 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 Oracle Cost Management's average costing functionality, you can perpetually value inventory at an average cost, weighted by quantity (inventory cost = average unit cost * quantity).

For purchased items, this is a weighted average of the actual procurement cost of an item. For manufactured items, this is a weighted average of the cost of all resources and materials consumed.

Note: Weighted average costing cannot be applied to repetitively manufactured items. Therefore, you cannot define repetitive schedules in an organization that is defined as a manufacturing average cost organization.

This same average cost is used to value transactions. You can reconcile inventory and work in process balances to your accounting entries.

Note: Under average costing, you cannot share costs; average costs are maintained separately in each organization. Average costing enables you to:

approximate actual material costs value inventory and transact at average cost maintain average costs automatically interface with your general ledger reconcile inventory balances with general ledger analyze profit margins using an "actual" cost method Inventory allows negative on-hand quantity balances without adversely affecting average costs.

Charge Resources to Work in Process at Actual Cost

You can charge work in process 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.

Complete Assemblies at an Average Cost

When you complete assemblies into inventory, costs are relieved from work in process and inventory is charged using a cost that is calculated based upon a combination of several options.

Inventory Valued at Average Cost

Under average costing, all asset purchased items in inventory are valued based on their purchase order cost. This results in item unit costs that reflect the weighted average of the purchase order unit costs for all quantity on-hand.

There is only one average unit cost for each item in an organization. The same item in multiple subinventories within the same organization has the same unit cost.

Perpetual Recalculation of Unit Cost

For the transactions listed below, the transaction unit cost may be different from the current unit cost for an item. In such cases, after the transaction has been processed, the item's unit average cost is automatically recalculated. As a result, at any time, inventory is valued at a current, up-to-date average unit cost.

Purchase order delivery to subinventory

Return to vendor

Transfer between organizations where the receiving organization uses average costing

Miscellaneous and account receipts

Miscellaneous and account issues

Average cost update

Assembly completion

See: Inventory Average Cost Transactions.

Cost Element Visibility

For tracking and analysis purposes, you can see cost details by cost element in two ways:

For unit costs, as a breakout of the total unit cost into each of the five cost elements. From this detail, you can determine the value of labor, overhead, and material components in inventory.

For work in process, as all job charges (including previous level subassemblies) and relief in cost element detail.

Average Cost Updates

When you update average costs, items in all asset subinventories in your organization and inventory in intransit that is owned by your organization are updated (revalued) by changing the unit cost to the new specified cost.

You can change costs by cost element and can choose one, several, or all cost elements at the same time. The offset to the change in inventory value resulting from a cost update is posted to the average cost adjustment account(s). Items in work in process are not revalued by an average cost update, nor are expense items or any item in an expense subinventory. See: Updating Average Costs.

Material Overhead Application

You can add costs (receiving, stocking, material movement, and handling) using material overhead. You can define as many material overheads as required and have that additional cost be included in the average unit cost.

Material overheads are associated to items on an item-by-item basis. As under standard costing, you can define default material overheads to apply to selected categories of items or all items in your organization.

Specifically, you can charge material overhead when you perform any of the following three transactions:

deliver purchased items to subinventory complete assemblies from WIP to subinventory

receive items being transferred from another organization and deliver to subinventory

Material overhead is applied at the rate or amount in effect at the time of the transaction. On-hand balances are not revalued when the rate or amount of a material overhead is redefined.

Transfers between Organizations

You can transfer items in inventory to a subinventory in a different organization. This is done using a direct transfer or through an intransit transfer, just as in standard or inventory average costing. Because item unit costs are held elementally, like standard costs, elemental detail is available for items being transferred whether they are in subinventory or in intransit.

When such an item is received into an average costing organization and delivered to the destination subinventory, all of its cost elements from the shipping organization, plus freight, plus transfer charges, if any, are combined into the material cost element in the receiving organization.

Attention: All cost elements are combined into the material cost element so the receiving organization does not have another organization's overhead (over which they have no control and for which they have no absorption) combined with their own.

You can earn material overhead on the delivery as stated above. That amount goes into the material overhead cost element.

Attention: If either freight or transfer charges are expressed as a percent of the transaction value, this amount is calculated based on the average cost at the time the change-of-ownership transaction is costed and not when the transaction actually occurs.

Transaction and Cost Processing

The transaction processor, which affects current on-hand quantities of items, can be set up to run either periodically (in the background) or on-line (quantities updated immediately). Oracle strongly recommends that the transaction processor be set to run on-line. The cost processor is always run in the background at user-defined intervals.

Transaction Backdating

You can backdate transactions the same as in inventory average costing. If you backdate transactions, the next time transactions are processed, the backdated transactions are processed first, before all other unprocessed transactions. Previously processed transactions, however, are not rolled back and reprocessed.

Updating Average Costs

For average cost organizations only, you can directly update the average cost of items to include additional costs, such as freight or invoice price variances. You can update one or more cost elements or levels (this and previous) individually or to the total unit cost. Any change made to the total unit cost is spread to all cost elements and levels in the same proportion as existed prior to the update.

a new average cost - enter the new cost by cost element and level (and the new total unit cost is automatically calculated), or enter a new total cost (the amount of change will automatically be proportioned across all cost elements and levels); onhand inventory in all subinventories in the cost group will be revalued. If you are updating the cost of an item in common inventory, the cost of that item in intransit owned by the current organization will also be updated.

the percentage change in the unit cost - select cost element(s) and level(s) to adjust up or down (and the new total unit cost will be automatically calculated), or adjust the total (the percentage change will automatically be applied to all cost elements and levels); onhand inventory in all subinventories in the cost group will be revalued.

the value change by which onhand inventory is to be incremented or decremented - select cost element(s) and level(s) to be adjusted or adjust the total and the system will revalue onhand inventory by that amount and recalculate the item's average cost for the cost group. You cannot change the average cost in this way unless the item has quantity on hand.

Additional Information: Average cost update transactions are inserted into the Open Item Interface in Oracle Inventory. Update transaction details can be viewed using the Transaction Interface Details window. This window is accessed using the Cost Detail button from the Oracle Inventory Transaction Interface window. See: Viewing and Updating Transaction Open Interface.

Prerequisites

   Set the CST: Average Cost Option profile option. See: Cost Management Profile Options.

If you set this profile option to Inventory Only, you can update only the total unit costs. If you set this profile option to Inventory and Work in Process, you can update either the total unit cost, or costs by level and / or element, but not both.

   To update total unit average costs:

1. Navigate to the Update Average Cost window.

2. Select a transaction date. You can select any date within an open period, up to and including the current date.

3. Select the Average cost update in the Type field.

4. Optionally, select a Source type for the transaction. Source types define origins for transactions.

5. Select an average cost update Adjustment Account.

If you increase average costs, debit your subinventory accounts and credit the specified adjustment account. If you decrease average costs, the reverse adjustments are generated.

You must select an Adjustment Account even though it can be overwritten later.

6. If you are updating costs using a percentage change, enter a default to use as the percentage change for individual item costs.

7. Select the item for the average cost update.

8. Select a Cost Group.

If the Project References Enabled and Project Cost Collection Enabled parameters are set in the Organization Parameters window in Oracle Inventory, you can select a cost group. See: Organization Parameters Window and Defining Project Information.

If these parameters are not set the Common group is used.

9. Update the total unit average cost. Do one of the following:

Enter a New Average Cost. This value cannot be negative. On-hand inventory in all subinventories and intransit are revalued.

Enter a percentage change in the item's average cost. The item cost is updated by this percentage value. On-hand inventory in all subinventories and intransit is revalued.

Enter the amount to increase or decrease the current on-hand inventory value. To decrease the value, enter a negative amount. However, you cannot enter a value that drives the inventory value negative.

On-hand inventory is revalued by this amount and the item's average cost is recalculated by dividing the on-hand quantity into the new inventory value. You cannot change the average cost value by this method unless the item has quantity on-hand.

The offset to the inventory revaluation in all cases above is booked to the average cost adjustment account(s) specified at the time the update is performed.

10. If you do not want to use the default material, material overhead, resource, overhead, and outside processing adjustment accounts for the current item, open the Accounts alternative region and override the defaults.

11. Open the Value Change alternative region and review the change in inventory value.

12. Optionally, open the Comments alternative region and enter a reason for the transaction. Use a reason code to classify or explain the transaction.

13. Optionally, enter up to 240 characters of reference text.

14. Optionally, choose the Cost Elements button to update average costs by element level.

   To update average costs by element and / or level:

Note: This section is only relevant if you set the CST: Average Cost Option to Inventory and Work in Process.

1. Navigate to the Cost Elements window. Do this by choosing the Cost Elements button from the Update Average Costs window.

2. For each level and / or element, do one of the following:

Enter a New Average Cost. On-hand inventory in all subinventories and intransit is revalued.

Enter a percentage change in the item's average cost. The item cost is updated by this percentage value. On-hand inventory in all subinventories and intransit is revalued.

Enter the amount to increase or decrease the current on-hand inventory value. On-hand inventory is revalued by this amount and the item's average cost is recalculated by dividing the on-hand quantity into the new inventory value. You cannot change the average cost value by this method unless the item has quantity on-hand.

The offset to the inventory revaluation in all cases above is booked to the average cost adjustment account(s) specified at the time the update is performed.

3. Save your work.