Cost Management provides two Periodic Costing methods:
Periodic Average Costing
Periodic Incremental LIFO Costing.
Determine your Periodic Costing methods in setting up. See: Choosing Periodic Cost Method
Oracle Cost Management requires that you use one of the perpetual accounting methods. However, you can choose to post either periodic distributions or perpetual costing distributions to the General Ledger. While it is not recommended, you can also post both distributions to the General Ledger. See: Processing Periodic Cost Distribution
Average Cost
For both Periodic Costing methods, (weighted) average costs are calculated in the following manner:
On a per item basis, within a period, cost owned transactions are costed first. Then the cost-derived transactions are calculated by averaging the accumulated amount and units for the period. This usually means that the system processes receipts into inventory before costing cost-derived transactions such as issues to jobs.
In Periodic Average Costing, the weighted average calculation adds the opening Inventory Value amounts and units to the current period's cost-owned transactions before calculating the cost-derived transaction costs.
Cost-derived transactions change quantities but not item unit costs.
The derived cost and the ending Inventory Value are used as the beginning Inventory Value of the next period.
Periodic item cost is not calculated for each cost-owned inventory transaction. It is calculated only after processing all the cost-owned transactions, which results in posting a variance once, not for every transaction. The application posts a variance only when quantity is zero or the cost is negative (when the Inventory Value is > 0 and Quantity is < 0, or vice versa) after processing all cost-owned transactions. Variance absorbs remaining inventory value, and the inventory value becomes 0.
No variance generated:PO Receipt of 5 units @ $5 each
RTV of 4 units @ $6
Miscellaneous receipt of 10 units without cost
| PO receipt 5@ $5 | Inventory Value 25, Quantity 5 |
| RTV of 4@ $6 | Inventory Value 1, Quantity 1 |
| Calculate Cost | Periodic Cost 1, Variance 0 |
| Misc Receipt 10 | Inventory Value 11, Quantity 11 |
PO receipt of 5 units @ $5 each
RTV of 5 units @ 4 each
Periodic Cost update: New cost: $6
Miscellaneous receipt of 10 units without cost
| Cost Update | Periodic Cost 6, Inventory Value 0 |
| PO receipt 5 @ $5 | Inventory Value 25, Quantity 5 |
| RTV of 5 @ $4 | Inventory Value 5, Quantity 0 |
| Calculate Cost | Periodic Cost 6 (Period Beginning Cost), Variance 5, Inventory Value 0 |
| Misc Receipt 10 | Inventory Value 60, Quantity 10 |
PO receipt of 5 units @ $5 each
RTV of 3 units @ $9 each
Miscellaneous Receipt of 10 units without cost
| PO receipt 5 @ $5 | Inventory Value 25, Quantity 5 |
| RTV of 3 @ $9 | Inventory Value -2, Quantity 2 |
| Calculate Cost | Periodic Cost 0, Variance - 2, Inventory Value 0 |
| Misc Receipt 10 | Inventory Value 0, Quantity 12 |
PO receipt of 5 units @ $5 each
RTV of 6 units @ $4 each
Miscellaneous Receipt of 10 units without cost
| PO receipt 5 @ $5 | Inventory Value 25, Quantity 5 |
| RTV of 6 @ $4 | Inventory Value 1, Quantity -1 |
| Calculate Cost | Periodic Cost 0, Variance 1, Inventory Value 0 |
| Misc Receipt 10 | Inventory Value 0, Quantity 9 |
PO receipt of 5 units @ $5 each
RTV of 6 units @ $4 each
Non-rework completion of 3 units @ $6 each
Issue to rework job of 5 units
Completion from rework of 5 units @ $8 each
Miscellaneous Receipt of 10 units without cost
| PO receipt 5 @ $5 | Inventory Value 25, Quantity 5 |
| RTV of 6 @ $4 | Inventory Value 1, Quantity - 1 |
| Non-Rework Completion | Inventory Value 19, Quantity 2 |
| Cost Calculation | Periodic Cost 9.5, Variance 0, Inventory Value 19 |
| Rework Issue | Inventory Value -28.5, Quantity -3 |
| Rework Completion | Inventory Value 11.5, Quantity 2 |
| Cost Calculation | Periodic Cost 5.75, Quantity 2, Variance 0 |
| Misc Receipt | Inventory Value 69, Quantity 12 |
The Periodic Incremental LIFO (last-in first-out) costing method provides support for periodic valuation of inventory for both fiscal and managerial reporting purposes.
With this costing method, the costs of the most recently acquired items are relieved from inventory first. This results in financial statements that match current costs with current revenues.
Periodic Incremental LIFO is useful for situations where the current replacement cost of inventory exceeds historical values.
Note: Periodic Incremental LIFO meets the statutory requirements for Italian manufacturing and distribution companies.
Periodic Incremental LIFO also allows valuation of inventory according to Lower of Cost or Market principles. To do this, you replace the calculated LIFO item cost with the market value, if the market value of an item is lower. The costing information generated can be used to produce detailed and summary LIFO costing reports, where required.
You use the Item Cost Inquiry screen to compare the calculated LIFO item cost with a published market value. See: Making Item Cost Inquiries.
For more information on calculating a LIFO item cost, See: Periodic Incremental LIFO Calculations.
If the market value is less than the calculated LIFO item cost, then you can enter that value along with a mandatory justification. This market value replaces the calculated LIFO item cost for quantities in all period cost layers and in the Incremental LIFO Valuation reports run at this time.
You can update and remove the market value and justification until the period is closed.
The inventory valuation that is carried forward is now based on that market value. Previous layers do not figure in future calculations, but they are not purged, so that you can still run reports from prior periods, for auditing purposes and to maintain historical records of Incremental LIFO quantities.
See: Periodic Incremental LIFO Business Example.
Cost Management calculates Periodic Incremental LIFO in this manner:
Items received into inventory are costed at the weighted average of the period in which they are received.
For any period where items received (purchased or manufactured) exceed items issued (or scrapped), a period cost layer is created to record the weighted average per item and the quantity.
In periods where items issued exceed items received, further issues are then made from prior existing period cost layers in LIFO order.
The inventory value at any point consists of the remaining items in the period cost layers at their average costs (that is, each year's remaining units at the average cost of that period), except where a market value has been used. See: Market Value.
Whenever a period ends with an inventory value of zero, prior period cost layers are no longer used in calculations, but the information remains available for historical purposes.
The LIFO item cost is calculated using an average calculation (inventory value/total quantity) for inventory valuation. The item cost is used for comparison to a potential market value.
Note: The LIFO item cost used for purposes of valuation differs from the item cost that might be removed from inventory.
You can run the cost processors and produce inventory valuation reports using both Periodic Costing methods. If changing Periodic Cost methods is permitted by the accounting rules of your country, you may then decide which report to submit. You can use the two periodic methods simultaneously by associating cost types designated for both Periodic Costing methods, with the same legal entity (See: Selecting an Item/Cost Type Association). To compare the values, run the Acquisition Cost processor, the Periodic Cost processor, and reports for the legal entity, using cost types designated for one method first, and the other method second. In Periodic Costing, the item cost is held at the cost type/organization cost group/period combination.