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 method, you can perpetually value inventory at an average cost, weighted by quantity (inventory value = 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 WIP balances to your accounting entries.
Note: Under average costing, you cannot share costs; average costs are maintained separately in each inventory 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.
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.
When you complete assemblies into inventory, costs are relieved from WIP, and inventory is charged using a cost that is calculated based upon a combination of several options.
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 onhand.
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.
For the following transactions, the transaction unit cost may be different from the current unit cost for an item:
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
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.
See: Average Cost Transactions.
Elemental costs for manufactured items are kept at two levels: this level and previous level. This level costs are those costs incurred in producing the part at the current bill of material level. Previous level costs are those incurred at lower levels. This level costs might include labor and overhead supplied to bring an assembly to a certain state of completion. Previous level costs might include material and labor and outside processing costs incurred to bring an item to its current state of completion. Totals costs for an item are calculated by summing this level and previous level costs as shown in the following table.
| Costs in Dollars | Material | Material Overhead | Resource | Outside Processing | Overhead |
|---|---|---|---|---|---|
| Previous Level | 100 | 20 | 25 | 27 | 5 |
| This Level | 0 | 2 | 3 | 3 | 1 |
| Total Costs | 100 | 22 | 28 | 30 | 6 |
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 WIP, as all job charges (including previous level subassemblies) and relief in cost element detail.
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 that you specify. Items in WIP are not revalued by an average cost update, nor are expense items or any item in an expense subinventory. See: Updating Average Costs.
You can add costs (receiving, stocking, material movement, and handling) using material overhead. You can define as many material overheads as required and include that additional cost in the average unit cost.
Material overheads are associated to items on an item-by-item basis. As in 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.
You can set up the transaction processor, which affects current on-hand quantities of items, to run either periodically (in the background) or on line (quantities updated immediately). Oracle strongly recommends that you set the transaction processor to run on line. The cost processor is always run in the background at user-defined intervals.
You can backdate transactions. 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.