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 Weighted 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 one inventory layer initially consumed by the issue transaction. The costs of those inventory layers are held separately within the WIP layer.
FIFO/LIFO costing is processed at the inventory organizational level. Under FIFO/LIFO cost systems, the unit cost of an item is the value of one receipt in one layer, selected by the FIFO or the LIFO rule. Each receipt of material to inventory has its own unit cost. Each receipt of material is valued at the purchase order price. Each receipt or assembly completion creates either a new layer for each organization.
Layer creation is minimized for item and organization combinations. Layer creation transactions following a transaction for the same type, cost, and cost group for the same organization. Do not create single layers as in previous versions of Oracle Cost Management. The item quantity is added to the last layer created. New layers are created when the next transaction is of a different type, cost, or cost group.
Note: New layers are created for transactions where the cost is user-defined, rather than system calculated. This includes transactions that meet all the qualifying conditions and have an equal cost value.
Other features include:
If an organization is defined as a FIFO costing organization, all inventories of the organization are valued at FIFO. You cannot specify that some inventory items are costed at FIFO, while others are costed at standard or weighted-average, for example.
You can only specify only one cost flow assumption for an organization. All inventory items of an organization must be costed at FIFO or at LIFO. You cannot specify some items to be costed at FIFO and other items to be costed at LIFO.
FIFO/LIFO costing is based on purchase order prices. Neither invoices nor acquisition costs are considered when costing a receipt from a supplier.
For purchased items, each receipt creates a layer cost. For manufactured items, each completion creates a layer. All assemblies in that layer have the same unit cost.
Note: FIFO/LIFO costing cannot be applied to repetitively manufactured items. Therefore, you cannot define repetitive schedules in an organization that is defined as a manufacturing FIFO/LIFO cost organization.
This same FIFO/LIFO cost is used to value transactions. You can reconcile inventory and WIP balances to your accounting entries.
Note: Under layer costing, you cannot share costs; FIFO/LIFO costs are maintained separately in each inventory organization.
You can perpetually value inventory at a FIFO/LIFO cost. When an organization uses FIFO or LIFO costing methods, inventory costs are maintained in layers, each with its own costs. 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.
FIFO/LIFO costing enables you to:
Approximate actual material costs
Value inventory and transact at layer cost
Maintain layer costs
Automatically interface with your general ledger
Reconcile inventory balances with general ledger
Analyze profit margins using an actual cost method
The first layer cost is cost of the first layer with a positive quantity. The layer item cost is the unit cost shared by the layer quantity. It is the average unit cost of a layer.
Layer Item Cost = layer's acquisition cost / layer's quantity
FIFO item cost is the weighted - average of all inventory layer costs divided by the sum of layer quantities.
For example:
| Layer 1 LQ1 = 20 ea. | LC1 = $2/each |
| Layer 2 LQ2 = 10 ea. | LC2 = $1.40/each |
FIFO Item cost = ($2*20 + $1.40*10) / (20+10) = $1.80
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.
Under layer costing, all asset purchased items in inventory are valued based on their purchase order cost. This results in item unit costs that reflect the layer of the purchase order unit costs for all quantity on-hand.
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 a component or subassembly to its current state of completion. Totals costs for an item are calculated by summing the 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 layer costs, you update the layer regardless of the subinventory.
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 layer cost adjustment account that you specify. Items in WIP are not revalued by a layer cost update, nor are expense items or any item in an expense subinventory.
You can also perform a mass changes for multiple layers in a group for the cost, account number, and reason values.
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 be included in the layer cost.
Material overheads are associated to items in a layer. As in standard costing and in average 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 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 costing and in 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 a layer costing organization and delivered to the destination subinventory, you can choose whether 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 or if they are to remain separate and elementally visible.
Note: Combining all cost elements into the material cost element assures that 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.
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 you set up 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.