Periodic Average Costing

Understanding Periodic Item Cost Calculation

Cost Owned and Cost Derived Transactions

An Oracle White Paper

ABSTRACT

Periodic Average Costing is a period end process which calculates the weighted
average cost across all the inventory organizations in a given PAC cost group. It is
important to note that all the cost owned transactions are processed first to calculate
accurate PAC item cost at the end of the PAC period. All the cost derived transactions
are issued at the calculated PAC item cost in that PAC period.

This behavior of using cost owned transactions to arrive at the Periodic cost of an item
is explained in this white paper by using various transactions types and multiple
scenarios. Explanation has been provided to differentiate cost owned and cost derived
transaction types and also to understand the table and column related details for better
clarification and to assist in de-bugging purposes.

SCOPE

This paper has been authored keeping in view an audience familiar with Oracle Cost
Management in general and Periodic Average Costing in particular.
An attempt has been made to explain the periodic item cost calculation and the
significance of cost owned and cost derived transaction in the process.

COST OWNED TRANSACTIONS

 Transactions that carry their own costs.

 Used to compute periodic weighted average cost.

 These transactions will be processed first to calculate the period weighted

average item costs (PWAC).

 It includes:
a) PO Receipt,
Return To Vendor,
PO Distribution Adjustment,
MISC transactions with a value,
Inter-Organization Transfer.
Referred as Group 1 transactions.

b) This includes
WIP Scrap,
 Assembly Return,
WIP Completion
However these Cost Owned transactions require that previous level transactions
are processed first. Referred to as Group 1' transactions.

COST DERIVED TRANSACTIONS

 Transactions that are transacted at the newly computed periodic weighted

average cost.

 These transactions do not carry their own costs and do not contribute towards
periodic weighted average cost calculation.

 It includes:
Account Issues,
WIP issues,
Return from WIP,
Material Issues,
Cycle Count Adjustment,
Physical Adjustment,
Sub-Inventory Transfer,
Sales Order Issues,
Misc. transactions w/o a user entered cost, And more..

RELEVANT SETUPS
We have 2 Inventory organizations defined as below for Legal Entity – Vision
Operations under the below cost group/ cost type:

Cost Group: DS_CG1

Cost Type: DS_PAC1
 PST – Standard Costing Org
 PAV – Average Costing Org

Example transactions are performed in the above Organizations/ Cost Group/ Cost
Type, for an Inventory asset item type assigned to the above organizations.
Refer figure below.
FIG 1.1 – Org Cost Group/ Cost Type Associations

FIG 1.2 – Item Definition

Scenario 1 – Transaction Type: Miscellaneous

CASE 01

Details/Organization PST (Standard Costing) PAV (Average Costing)

Name

Quantity & Cost 0qty @ $20 (Frozen cost of 0qty @ $0

item defined at the time of
Item definition)

Do a Miscellaneous Receipt 100 qty 100 qty @ $25

Quantity & Cost after above 100 qty @ $20 (Frozen) 100 qty @ $25

 The receipt done in the Standard costing org was at the frozen cost itself and we
did not define a cost at the time of receipt, hence this falls under the category of
Cost Derived Transaction.

 The Miscellaneous Receipt done in PAV has a unit cost of $25 attached to it.
Since this is the only Cost Owned Transaction in this case, the cost provided at
the time of the transaction becomes the only basis for the Periodic Item cost
calculation.

ORG: PST

FIG 1.3 – Frozen cost defined for item PAC 01 in Standard Costing Org PST
FIG 1.4 – Miscellaneous Receipt done in PST

ORG: PAV

FIG 1.5 – Miscellaneous Receipt done in PAV by providing unit cost as $25

Item cost details for Item PAC01 after CASE 01

Table: cst_pac_item_costs

BUY_QUANTITY MAKE_QUANTITY ISSUE_QUANTITY TOTAL_LAYER_QUANTITY ITEM_COST

100 NA -100 200 25

BEGIN_LAYER_QUANTITY+BUY_QUANTITY + MAKE_QUANTITY – ISSUE

QUANTITY = TOTAL_LAYER_QUANTITY
0+100 + 0 – (-100) = 200

 Issue Quantity of -100 above denotes the Cost Derived transaction – The
Miscellaneous Receipt of 100 done in PST (Standard Costing)

 Buy Quantity of 100 denotes the Cost Owned Transaction - The Miscellaneous
Receipt of 100 done in PAV (Average Costing)

 Note: The item is newly created and hence would not have any
begin_layer_quantity in the cst_pac_quantity_layers table. If there is a beginning
 layer quantity, this would be considered while arriving at the total layer quantity.

 PAC ITEM COST: 25

[100 * 25]/ 100 = 25

FIG 1.6 – Periodic Item cost of PAC01 from Item cost inquiry form

FIG 1.7 – Item cost details in the cst_pac_item_costs table

Some Points to note & remember:

 BUY_QUANTITY column stores details regarding Cost Owned Transactions

 A Cost Owned Receipt would be a positive value

 A Cost Owned Issue would be a negative value

 ISSUE_QUANTITY column stores details regarding the Cost Derived

transactions.

 A Cost Derived Receipt would be a negative value

 A Cost Derived Issue would be a positive value

Scenario 1 – Transaction Type: Miscellaneous

CASE 02

Details/Organization Name PST (Standard Costing) PAV (Average Costing)

Quantity & Cost 0qty @ $20 (Frozen cost of 0qty @ $0

item defined at the time of
Item definition)

Do a Miscellaneous Receipt 100 qty 100 qty @ $25

Quantity & Cost after above 100 qty @ $20 (Frozen) 100 qty @ $25

Do a Miscellaneous Issue 50 qty 50 qty @ $25

 Now, we make a Miscellaneous issue of item PAC01 in PST for qty:50 - Note
that this would be a cost derived transaction, as again, the frozen item cost will
be the transaction cost and no unit cost can be provided at the time of the issue.
 And in PAV, an issue for qty:50 providing same unit cost of 25 - Note that this
would be a cost owned transaction
 The Total layer quantity and the Periodic Item cost after the above are as below:

FIG 1.8 - Miscellaneous Issue done in PST

FIG 1.9 - Miscellaneous Issue done in PAV with unit cost given as $25

Item cost details for Item PAC01 after CASE 02

Table: cst_pac_item_costs

BUY_QUANTITY MAKE_QUANTITY ISSUE_QUANTITY TOTAL_LAYER_QUANTITY ITEM_COST

50 (100 – 50) NA -50 (-100+50) 100(50+0-(-50)) 25

BEGIN_LAYER_QUANTITY+BUY_QUANTITY + MAKE_QUANTITY – ISSUE

QUANTITY = TOTAL_LAYER_QUANTITY
0+50 + 0 – (-50) = 100
PAC ITEM COST: 25
[(100 * 25 ) – (50 * 25)]/ 50 = 25
 Issue Quantity of -50 is after considering the Miscellaneous Issue of 50 done in
PST (Standard Costing) – Cost Derived
 Buy Quantity of 50 is after considering the Miscellaneous Issue of 50 done in
PAV(Average Costing) – Cost Owned
 Item cost calculation takes into consideration the Cost Owned only which is very
clear from the above cost calculation
FIG 1.9 – Periodic Item cost of PAC01 from Item cost inquiry form

FIG 1.10 – Item cost details in the cst_pac_item_costs table

Scenario 1 – Transaction Type: Miscellaneous

CASE 03
Details/Organization Name PST (Standard Costing) PAV (Average Costing)

Quantity & Cost 0qty @ $20 (Frozen cost of 0qty @ $0

item defined at the time of
Item definition)

Do a Miscellaneous Receipt 100 qty 100 qty @ $25

Quantity & Cost after above 100 qty @ $20 (Frozen) 100 qty @ $25

Do a Miscellaneous Issue 50 qty 50 qty @ $25

Do a Miscellaneous Issue - 25 qty @ $15

 In this case, we are doing a miscellaneous issue in PAV organization with a

different item cost of say $15.
 This will once again be a Cost Owned Transaction and the Periodic Item cost is
re-averaged as below

FIG 1.11 - Miscellaneous Issue done in PAV with unit cost given as $15

Item cost details for Item PAC01 after CASE 03

Table: cst_pac_item_costs

BUY_QUANTITY MAKE_QUANTITY ISSUE_QUANTITY TOTAL_LAYER_QUANTITY ITEM_COST

25(50-25) NA -50 75(25+0-(-50)) 35

BEGIN_LAYER_QUANTITY+BUY_QUANTITY + MAKE_QUANTITY – ISSUE
QUANTITY = TOTAL_LAYER_QUANTITY
0+25 + 0 – (-50) = 75
PAC ITEM COST: 35
[(50 * 25) – (25*15)]/ 25 = 35
Since there has been a Cost Owned Issue transaction, this will also be considered to
recalculate the PAC.
Cost Owned Transactions Value => 50*25 = 1250
Cost of the Misc Issue => 25*15 => 375
PAC => (1250-375)/25 = 35

FIG 1.12 – Periodic Item cost of PAC01 from Item cost inquiry form

FIG 1.13 – Item cost details in the cst_pac_item_costs table

Scenario 1 – Transaction Type: Miscellaneous

CASE 04
Details/Organization Name PST (Standard Costing) PAV (Average Costing)

Quantity & Cost 0qty @ $20 (Frozen cost of 0qty @ $0

item defined at the time of
Item definition)

Do a Miscellaneous Receipt 100 qty 100 qty @ $25

Quantity & Cost after above 100 qty @ $20 (Frozen) 100 qty @ $25

Do a Miscellaneous Issue 50 qty 50 qty @ $25

Do a Miscellaneous Issue - 25 qty @ $15

Do a Miscellaneous Issue - 15 qty and provide no unit

cost at the time of issue

 In this final case involving a miscellaneous transaction, we do a Miscellaneous

Issue of the item PAC01 in PAV alone for Quantity 15 without providing a unit
cost.
 Note that this is now a Cost Derived Transaction
FIG 1.14 - Miscellaneous Issue done in PAV with no unit cost

Item cost details for Item PAC01 after CASE 03

Table: cst_pac_item_costs
BUY_QUANTITY MAKE_QUANTITY ISSUE_QUANTITY TOTAL_LAYER_QUANTITY ITEM_COST

25 NA -35 (-50+15) 60(25+0-(-35)) 35

BEGIN_LAYER_QUANTITY+BUY_QUANTITY + MAKE_QUANTITY – ISSUE
QUANTITY = TOTAL_LAYER_QUANTITY
0+25 + 0 – (-35) = 60
PAC ITEM COST: 35
- As there has been no Cost Owned Transactions in this run, the earlier derived PAC of
35 is retained.

FIG 1.14 – Periodic Item cost of PAC01 from Item cost inquiry form

FIG 1.15 – Item cost details in the cst_pac_item_costs table

Scenario 2 – Transaction Type: Purchase Order

In this scenario, we raise a Purchase Order for a new Item PAC02 in PAV org. Since
this is a transaction with its own cost, the transaction would fall into the ‘Cost Owned
transaction’ category and contribute towards the Periodic Item cost calculation.

FIG 2.1 – Raise a PO for Asset Item PAC 02 for Qty 10 @ $ 20

Fig 2.2 – PO Receipt Accounting in PAV Org

FIG 2.3 – Item cost details in the Periodic Item cost form after Receipt & Delivery in
PAV and running the Periodic Acquisition Cost Processor and the Periodic Average
Cost Processor

Fig 2.4 – Item cost details in the cst_pac_item_costs table

Since item PAC02 is a new item, the item cost calculation is as earlier:
BEGIN_LAYER_QUANTITY+BUY_QUANTITY + MAKE_QUANTITY – ISSUE
QUANTITY = TOTAL_LAYER_QUANTITY
0+10 + 0 – 0 = 10

Cost Owned Transaction: PO Receipt of 10 Qty @ $20 => PAC of item is $20

[10*20]/10 = 20
Scenario 3 – Transaction Type: Sales Order Issue

In this scenario, we raise a Sales Order for the Item PAC02 in PAV org. This transaction
takes the existing cost and does not update the transaction cost. Hence, this transaction
would fall into the ‘Cost Derived transaction’ category.

Fig 3.1 – Create a Sales order for the item PAC02

Fig 3.2 – View the accounting for the SO Issue in PAV Org
FIG 3.3 – Item cost details in the Periodic Item cost form after Receipt & Delivery in
PAV and running the Periodic Acquisition Cost Processor and the Periodic Average
Cost Processor

Fig 3.4 – Item cost details in the cst_pac_item_costs table

As per Scenario 3, we have done a PO Receipt for PAC 02 and arrived at the PAC of
$20. This is maintained after Scenario 4, since the SO Issue is a cost derived
transaction. The Periodic Layer Quantity is updated as below:

BEGIN_LAYER_QUANTITY+BUY_QUANTITY + MAKE_QUANTITY – ISSUE

QUANTITY = TOTAL_LAYER_QUANTITY
0+10 + 0 – 5 = 5

Cost Owned Transaction: PO Receipt of 10 Qty @ $20 => PAC of item is still $20

[10*20]/10 = 20
Scenario 4 – Transaction Type: WIP Completion & WIP Component Issue

To understand this scenario, I have created a new item name ‘PAC_WIP1’ which is an
assembly item. This assembly has one component in its BOM which is the PAC02 item
used in Scenarios 2 and 3. It also has a routing and resource associated attributing to
the completion cost of $22.

Cost of Component PAC02 - $20

Cost of Resource Res_01 - $2
Assembly cost of PAC_WIP1 = $22

Fig 4.1 – BOM & Routing of Assembly item PAC_WIP1

Fig 4.2 – Item cost of PAC02 unaffected after the WIP Component issue as this is a
‘Cost Derived’ transaction. The PAC of item PAC02 stays at 20 while the total layer
quantity becomes 4

BEGIN_LAYER_QUANTITY+BUY_QUANTITY + MAKE_QUANTITY – ISSUE

QUANTITY = TOTAL_LAYER_QUANTITY
0+10 + 0 – 6 = 4

Cost Owned Transactions: PO Receipt of 10 Qty @ $20 => PAC of itemPAC02 is $20

[10*20]/10 = 20

Fig 4.2 – The WIP Completion transaction of PAC_WIP1 is a ‘Cost Owned transaction’.
The completion cost of $22 becomes the PAC of the item as well, depicted as below in
the PAC Item cost inquiry screen as well as in cst_pac_item_costs table

BEGIN_LAYER_QUANTITY+BUY_QUANTITY + MAKE_QUANTITY – ISSUE

QUANTITY = TOTAL_LAYER_QUANTITY
0+0 + 1 – 0 = 1

The assembly item, since is a Make item, you can view this completion quantity of 1
under the make_quantity column and the item_make_cost also populated as $22

Cost Owned Transactions: WIP Completion of 1 Qty @ $22 => PAC of item is $22

[1*22]/1 = 22
OBSERVATIONS

 BUY_QUANTITY column stores details regarding Cost Owned Transactions

 A Cost Owned Receipt would be a positive value

 A Cost Owned Issue would be a negative value

 ISSUE_QUANTITY column stores details regarding the Cost Derived

transactions.

 A Cost Derived Receipt would be a negative value

 A Cost Derived Issue would be a positive value

 Table mtl_pac_actual_cost_details would store details as to the nature of the

transactions under the txn_category column specific to each transaction_id.

 The txn_category details are also available in the cst_pac_period_balances

table.

Transaction Categories in PAC

TXN_CATEGORY TXN_CATEGORY Value

1 Period Beginning

2 Cost Update(s): New Cost or Percent Change

3 Cost Owned Transaction(s)

5 Cost Update(s): Value Change

7 Rework Completion(s)

6 Rework Issue(s)

4 Non-Rework Completion(s)

9 Cost Derived Transaction(s)

10 Period Ending

8 Inter-Organization Transaction(s): Iteration Process

White Paper: Periodic Average Costing – Understanding Periodic Item cost Calculation, Cost Owned and Cost Derived Transactions
JUNE 2012
Author: Divya S Sudhakaran
Contributing Authors: N/A

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