Defining overhead:You can use material overhead and overhead cost subelements to add indirect costs to item costs on either a percentage basis or as a fixed amount in both standard and average costing organizations.
Each overhead subelement has a default basis, a default activity, and an absorption account. The overhead absorption account offsets the corresponding overhead cost pool in the general ledger.
You can base the overhead charge on the number of resource units or percentage of resource value earned in the routing operation. You can also set up move-based overheads where the rate or amount is charged for each item moved in an operation. To do this, use the Item or Lot basis types.
You can base the material overhead charge on a percentage of the total value, which is earned when you receive purchase orders or perform WIP completion transactions. You can also use the Item or Lot basis types.
You can apply each of these subelements, using different basis types, for increased flexibility. Material overhead is earned when an item is received into inventory or completed from work in process. Overhead, based upon resources, is earned as the assembly moves through operations in work in process.
Material Overhead is earned by an item during purchase order receipt, inter-organization receipt, and WIP completion transactions. You can choose to decide if material overhead is to be earned during purchase order receipt, inter-organization transactions, and assembly returns and completions for non-standard costing organizations. You have the flexibility to decide if the transaction is going to earn material overhead, depending on the item type.
Note: If you use Oracle Bills of Materials, you must first define the bill of material parameters to use the overhead cost element in the Overhead window. If the bills of material parameters are not set up, you only have access to material overhead cost element. See: Defining Bills of Material Parameters.
To define, update, or delete cost information, the Overheads: Maintain security function must be included as part of the responsibility. See: Cost Management Security Functions.
Defining overhead:Navigate to the Overheads window.
Enter an overhead name.
Select a cost element:
Material Overhead: Define material overhead.
Overhead: Define resource and move-based overhead. This is only available if Bills of Material is installed.
Select an overhead absorption account.
This is the offset account for any cost earned to the inventory or work in process value.
Select a default basis type to be used as a default for the overhead being defined.
This basis type is used to determine how the overhead cost is earned and how it is applied to product costs. See: Default Basis Types.
Select a default activity to use for this overhead.
Activities are processes or procedures that consume costs and time. Your activities may be directly related to building your items, such as runtime or setup time; or they may be indirect, such as purchase order generation, payroll, and engineering activities. The goal of activity based cost accounting is to accurately identify your product costs, especially overhead costs. See: Defining Activities and Activity Costs
Note: Negative item costs are not supported in Oracle Cost Management.
Select an expenditure type.
If the Project Cost Collection Enabled parameter in the Organization Parameters window is set, you must associate an expenditure type with each subelement. See: Organization Parameters Window.
You can only select expenditure types that belong to the Burden Transactions expenditure class.
Optionally, select a date on which to inactivate a material overhead or overhead.
An inactive overhead subelement cannot be used to define an overhead cost (when defining item costs) or associated with a resource (when defining a resource).
You can continue to use item costs previously defined for and resources previously associated with the inactive overhead subelement. The cost rollup will continue to roll up previously defined inactive overhead subelements.
Do one of the following:
To earn overheads and material overheads based on resource units or value, you must associate resources to overhead and material overhead for a specific cost type. Choose the Resources button to open the Resource Overhead Associations window.
To associate department and overhead combinations with a cost type, choose the Rates button to open the Overhead Rates window. This option is available for overheads only.
Save your work.
To associate resources to overhead for a cost type:Navigate to the Resource Overhead Associations window.
Select a cost type to associate resources to overhead with.
This is only necessary for material overhead and overhead subelements with a basis type of Resource Value or Resource Units.
Attention: You only apply these overheads when they are associated with a resource.
Select the resource.
Save your work.
To associate department and overhead combinations with a cost type:Navigate to the Overhead Rates window.
Select a cost type.
Select a department and enter an overhead rate or amount.
The department will be associated with the overhead being defined in the selected cost type. The specified overhead rate or amount will be used for that department. Rates and amounts are required for both resource and move (item or lot basis type) overheads.
Optionally, select an activity. The default is the activity selected as the default in the Overheads window. See: Defining Overhead.
Select the basis. The default is the basis selected as the default in the Overheads window. See: Default Basis Types.
Enter the percentage rate or the fixed amount, as appropriate for the basis. If the basis is resource value, enter a rate in this field. If the basis is resource units, item, or lot, enter an amount in this field.
Save your work.
To define material overhead absorption rules:You can decide if material overhead is to be earned during purchase order receipt and inter-organization transactions. You have the flexibility to decide if the transaction is going to earn material overhead, depending on the item type. The rules you define override the default material overhead absorption for purchase order receipt, assembly completion and return, and inter-organization transfers for Standard, Average, FIFO, and LIFO, costing organizations. The rules you define will not override material overhead absorption for work in process completion transactions in standard costing organizations.
Navigate to the Material Overhead Absorption Rules.
Select a valid Transaction from the list of values to specify a transaction that you wish to define a rule against.
Select an Item Type from the list of values. Valid values are Make items, Buy items, and All items.
Indicate whether the transaction earns material overhead.
Item M1 is being transferred from Organization O1 to Organization O2. The costs for the item are set up for both organizations as follows:
| Organization | Item | Cost Element | Cost |
|---|---|---|---|
| O1 (Sending) | M1 | Material | 12 |
| O1 (Sending) | M1 | Material Overhead | 2 |
| O2 (Receiving) | M1 | Material | 10 |
| O2 (Receiving) | M1 | Material Overhead (Transfer) | 2 |
| O2 (Receiving) | M1 | Material Overhead (Transportation) | 3 |
The following tables display distributions if the material overhead absorption rules have been set to earn material overhead for the receiving organization.
The accounting entries for the sending organization O1 are as follows:
| Account | Debit | Credit |
|---|---|---|
| Inter-organization Receivables | 19 | - |
| Intransit Inventory | - | 14 |
| Transfer Cost | - | 2 |
| Transportation Cost | - | 3 |
The accounting entries for the receiving organization O2 are as follows:
| Account | Debit | Credit |
|---|---|---|
| Inventory Valuation (Material) | 10 | - |
| Inventory Valuation (Material Overhead) | 5 (2 + 3) | - |
| Purchase Price Variance | 6 | - |
| Material Overhead Absorption | - | 2 |
| Inter-organization Payables | - | 19 (12 + 2 + 2 + 3) |
The accounting entries for the sending organization O1 are as follows:
| Account | Debit | Credit |
|---|---|---|
| Inter-organization Receivables | 16 | - |
| Intransit Inventory | - | 14 |
| Transfer Cost | - | 2 |
The accounting entries for the receiving organization O2 are as follows:
| Account | Debit | Credit |
|---|---|---|
| Inventory Valuation (Material) | 10 | - |
| Inventory Valuation (Material Overhead) | 5 (2 + 3) | - |
| Purchase Price Variance | 6 (3 + 3) | - |
| Material Overhead Absorption | - | 2 |
| Inter-organization Payables | - | 16 (12 + 2 + 2) |
| Freight | - | 3 |
The following tables display distributions if the material overhead absorption rules have been set to NOT earn material overhead for the receiving organization.
The accounting entries for the receiving organization O2 are as follows:
| Account | Debit | Credit |
|---|---|---|
| Inventory Valuation (Material) | 10 | - |
| Inventory Valuation (Material Overhead) | 5 (2 + 3) | - |
| Purchase Price Variance | 4 | - |
| Inter-organization Payables | - | 19 (12 + 2 + 2 + 3) |
The accounting entries for the receiving organization O2 are as follows:
| Account | Debit | Credit |
|---|---|---|
| Inventory Valuation (Material) | 10 | - |
| Inventory Valuation (Material Overhead) | 5 (2 + 3) | - |
| Purchase Price Variance | 4 (1 + 3) | - |
| Inter-organization Payables | - | 16 (12 + 2 + 2) |
| Freight | - | 3 |
Purchase Order Receipt Accounting Distribution Examples for a Standard Cost Organization.
A purchase order is received at a purchase order price of 10. The costs associated with item M1 are as follows:
| Cost Element | Cost |
|---|---|
| Material | 12 |
| Material Overhead | 2 |
The following table displays distributions if the material overhead absorption rules have been set to earn material overhead.
| Account | Debit | Credit |
|---|---|---|
| Inventory Valuation (Material) | 12 | - |
| Inventory Valuation (Material Overhead) | 2 | - |
| Purchase Price Variance | - | 2 |
| Receiving Inspection | - | 10 |
| Material Overhead Absorption | - | 2 |
The following table displays distributions if the material overhead absorption rules have been set to NOT earn material overhead.
| Account | Debit | Credit |
|---|---|---|
| Inventory Valuation (Material) | 12 | - |
| Inventory Valuation (Material Overhead) | 2 | - |
| Purchase Price Variance | - | 4 |
| Receiving Inspection | - | 10 |
Inter - organization Transfer Accounting Distribution Examples for Average Costing Organizations
Item M1 is being transferred from Organization O1 to Organization O2. The material overhead rate for item M1 in the receiving organization, O2, is 3 per item. The Transfer Cost is 2, while the Transportation Cost is 3. The costs for the item are set up for both organizations as follows:
| Organization | Item | Cost Element | Cost |
|---|---|---|---|
| O1 (Sending) | M1 | Material | 12 |
| O1 (Sending) | M1 | Material Overhead | 2 |
| O2 (Receiving) | M1 | Material | 10 |
| O2 (Receiving) | M1 | Material Overhead | 2 |
The following tables display distributions if the material overhead absorption rules have been set to earn material overhead for the receiving organization.
The accounting entries for the sending organization O1 are as follows:
| Account | Debit | Credit |
|---|---|---|
| Inter-organization Receivables | 19 | - |
| Intransit Inventory | - | 14 |
| Transfer Cost | - | 2 |
| Transportation Cost | - | 3 |
The accounting entries for the receiving organization O2 are as follows:
| Account | Debit | Credit |
|---|---|---|
| Inventory Valuation (Material) | 12 | - |
| Inventory Valuation (Material Overhead) | 10 (7 + 3) | - |
| Material Overhead Absorption | - | 3 |
| Inter-organization Payables | - | 19 (12 + 2 + 2 + 3) |
The re-averaged cost of M1 in receiving organization O2 is as follows:
| Cost Element | Cost |
|---|---|
| Material | 11 [(12 + 10)/2] |
| Material Overhead | 6 [(2 + 10)/2] |
The accounting entries for the sending organization O1 are as follows:
| Account | Debit | Credit |
|---|---|---|
| Inter-organization Receivables | 16 | - |
| Intransit Inventory | - | 14 |
| Transfer Cost | - | 2 |
The accounting entries for the receiving organization O2 are as follows:
| Account | Debit | Credit |
|---|---|---|
| Inventory Valuation (Material) | 12 | - |
| Inventory Valuation (Material Overhead) | 10 (2 + 3 + 3 + 2) | - |
| Material Overhead Absorption | - | 3 |
| Inter-organization Payables | - | 16 (12 + 2 + 2) |
| Freight | - | 3 |
The re-averaged cost of M1 in receiving organization O2 is as follows:
| Cost Element | Cost |
|---|---|
| Material | 11 [(12 + 10)/2] |
| Material Overhead | 6 [(2 + 10)/2] |
The following tables display distributions if the material overhead absorption rules have been set to NOT earn material overhead for the receiving organization.
The accounting entries for the receiving organization O2 are as follows:
| Account | Debit | Credit |
|---|---|---|
| Inventory Valuation (Material) | 12 | - |
| Inventory Valuation (Material Overhead) | 7 (2 + 2 + 3) | - |
| Inter-organization Payables | - | 19 (12 + 2 + 2 + 3) |
The re-averaged cost of M1 in receiving organization O2 is as follows:
| Cost Element | Cost |
|---|---|
| Material | 11 [(12 + 10)/2] |
| Material Overhead | 4.5 [(2 + 7/2] |
The accounting entries for the receiving organization O2 are as follows:
| Account | Debit | Credit |
|---|---|---|
| Inventory Valuation (Material) | 12 | - |
| Inventory Valuation (Material Overhead) | 7 (2 + 2 + 3) | - |
| Inter-organization Payables | - | 16 (12 + 2 + 2) |
| Freight | - | 3 |
The re-averaged cost of M1 in receiving organization O2 is as follows:
| Cost Element | Cost |
|---|---|
| Material | 11 [(12 + 10)/2] |
| Material Overhead | 4.5 [(2 + 7/2] |
Purchase Order Receipt Accounting Distribution Examples for an Average Costing Organization
A purchase order is received at a purchase order price of 10. The material overhead rate for item M1 in organization, O2, is 2 per item. The costs associated with item M1 are as follows:
| Cost Element | Cost |
|---|---|
| Material | 12 |
| Material Overhead | 2 |
The following table displays distributions if the material overhead absorption rules have been set to earn material overhead.
| Account | Debit | Credit |
|---|---|---|
| Inventory Valuation (Material) | 10 | - |
| Inventory Valuation (Material Overhead) | 2 | - |
| Receiving Inspection | - | 10 |
| Material Overhead Absorption | - | 2 |
The re-averaged cost of M1 in receiving organization O2 is as follows:
| Cost Element | Cost |
|---|---|
| Material | 11 [(12 + 10)/2] |
| Material Overhead | 2 [(2 + 2/2] |
The following table displays distributions if the material overhead absorption rules have been set to NOT earn material overhead.
| Account | Debit | Credit |
|---|---|---|
| Inventory Valuation (Material) | 10 | - |
| Receiving Inspection | - | 10 |
The re-averaged cost of M1 in receiving organization O2 is as follows:
| Cost Element | Cost |
|---|---|
| Material | 11 [(12 + 10)/2] |
| Material Overhead | 1 [(2 + 0/2] |
Assembly Completion and Return Accounting Distribution Example for an Average Costing Organization
A bill of material for item A consists of items B and C. The costs associated are as follows:
| Item | Cost Element | Present Average Cost |
|---|---|---|
| A | Material | 8 |
| B | Material | 5 |
| B | Material Overhead | 2 |
| C | Material | 5 |
| C | Material Overhead | 5 |
The material overhead rates for Item A are:
| Item | Cost Element | Present Average Cost |
|---|---|---|
| A | Material Overhead - 1 | 2 |
| A | Material Overhead - 2 | 3 |
The following table displays distributions, at assembly completion, if the material overhead absorption rules have been set to earn material overhead.
| Account | Debit | Credit |
|---|---|---|
| Inventory Valuation (Material) | 10 | - |
| Inventory Valuation (Material Overhead) | 7 | - |
| Inventory Valuation (Material Overhead) | 5 | - |
| WIP Valuation (Material) | - | 10 |
| WIP Valuation (Material Overhead) | - | 7 |
| Material Overhead Absorption | - | 5 |
The re-averaged cost of item A is as follows:
| Cost Element | Cost |
|---|---|
| Material | 9 [(8 + 10)/2] |
| Material Overhead | 6 [(5 + 7)/2] |
The following tables depict the material overhead absorbed at a different rate than the standard rate in the current organization:
| Item | Cost Element | Present Average Cost |
|---|---|---|
| A | Material Overhead - 1 | 1 |
| A | Material Overhead - 2 | 2 |
| Account | Debit | Credit |
|---|---|---|
| Inventory Valuation (Material) | 10 | - |
| Inventory Valuation (Material Overhead) | 7 | - |
| Inventory Valuation (Material Overhead) | 3 | - |
| WIP Valuation (Material) | - | 10 |
| WIP Valuation (Material Overhead) | - | 7 |
| Material Overhead Absorption | - | 3 |
The re-averaged cost of item A is as follows:
| Cost Element | Cost |
|---|---|
| Material | 9 [(8 + 10)/2] |
| Material Overhead | 5 [(7 + 3)/2] |
The following table displays distributions, at assembly completion, if the material overhead absorption rules have been set to NOT earn material overhead.
| Account | Debit | Credit |
|---|---|---|
| Inventory Valuation (Material) | 10 | - |
| Inventory Valuation (Material Overhead) | 7 | - |
| WIP Valuation (Material) | - | 10 |
| WIP Valuation (Material Overhead) | - | 7 |
The re-averaged cost of item A is as follows:
| Cost Element | Cost |
|---|---|
| Material | 9 [(8 + 10)/2] |
| Material Overhead | 3.5 [(7 + 0)/2] |
