Oracle Applications User Group
Cost Management SIG
September 28th, 2010
Profit in Inventory with Oracle EBS
Jane Pruzinsky & Doug Volz
(based upon updated Collaborate10 Presentation - Jerry Devore & Doug Volz)
Agenda
 Profit in Inventory
 Example / Background
 Profit in Inventory
 Caveats
 Time Sensitive Setups
Background
 Using Release 12.06 at a global pharmaceutical company
 Discrete costing with multiple inventory orgs, currencies,
operating units and ledgers
 With internal transfers across most organizations, using
multiple primary and secondary ledgers
 Inter-company pricing with profit in inventory and
month-end elimination issues
Sample Financial Entities
Corporate
Consolidated
Ledger
Corporate Consolidated Ledger
(USD)
Secondary
Ledger
Switzerland
(CHE)
European
LSP’s
SLs
LSP’s
Korea
(KRW)
Asia-Pac
LEs
Swiss PL
(USD)
European PL
(USD)
Legal Entity
Korea LE
Asia-Pac
LEs
Swiss LE
Other
European
LEs
Operating
Unit
Korea OU
Asia-Pac
OUs
Switzerland
OU
Other
European
OUs
US OU
Asia-Pac
Dist. Centers
Swiss Dist.
Center
Europe
LSP Orgs
US LSP
Orgs
Switzerland
Org
Europe Dist.
Centers
US Dist.
Centers
Primary
Ledger
Inventory
Orgs
ORG
Korea
Item
Master
(ZZZ)
Slide 4
USA PL
(USD)
CORP
LE
Other
LEs
More R12 Background
 Primary and Secondary Ledgers




In Release 12 Subledger Accounting replaced Global AX
Primary to secondary ledger mapping is much better
Outside of Asia-Pac countries, all primary ledgers are in USD
Every month the primary ledgers are translated into the
secondary ledgers for local reporting requirements
Corporate
Consolidated
Ledger
Corporate Consolidated Ledger
(USD)
Secondary
Ledger
Switzerland
(CHE)
Korea
(KRW)
Asia-Pac
LEs
Swiss PL
(USD)
Slide 5
European
LSP’s
SLs
LSP’s
European PL
(USD)
USA PL
(USD)
Profit in Inventory
 Terms
 Current features
 Basic business needs and business scenarios
 Common solutions to solve the visibility and elimination of profit
in inventory
Slide 6
Profit in Inventory - Terms
 Two commonly used terms for profit in inventory
 ICP – Intercompany Profit
 PII – Profit in Inventory
Slide 7
CST: Transfer Pricing Profile Option
 No
 Yes, Price Not as Incoming Cost
 Yes, Price as Incoming Cost
Slide 8
Profit in Inventory – Current Features
(FOB Ship Example / CST: Transfer Price Option: Price Not as Incoming Cost)
Transfer
Price: $120
Sending Organization O1
Inventory Cost: $102
Event
INV
Valuation
(O1)
1. Shipment
102
FOB
Shipment
COGS
In-transit
(O1)
(O2)
102
120
Inter-Org
PPV
(O2)
Accrual
(O2)
18
120
I/C
Receivable
(O1)
INV
Valuation
(O2)
120
2. Receipt
3. I/C AR
Receiving Organization O2
Standard Cost: $120
120
Profit In
Inventory
(O2)
18
120
I/C Revenue
Accrual
I/C Payable
(O1)
(O2)
(O2)
120
4. I/C AP
120
Slide 9
120
Profit in Inventory – Current Features
 By using “Price Not as Incoming Cost” profit in inventory is
earned with the intransit shipment or receipt transaction
(depending on FOB setting)
 But it is never relieved during subsequent transfers
 And you don’t have a Profit in Inventory Value Report
Slide 10
Profit in Inventory – Basic Business Needs
 Two overall scenarios:
 Profit in inventory adjusted in local books
(eliminate in local books)
 Profit in inventory adjusted in consolidation ledger
(eliminate in consolidation books)
 Assumptions:
• use detailed transactions in local books
• use consolidated journals for top-level elimination
Slide 11
Profit in Inventory – Report in Local Books
Requirements




Profit in inventory recorded at a transactional level
Need profit in inventory adjusted out of detailed margin analysis
Accrued when receiving goods from source internal organization
Relieved whenever the goods are consumed:
• Misc. issue
• COGS
• Interco-COGS
• WIP Scrap, WIP Variances, PPV, etc.
Cost Margin Reporting drives this requirement
Slide 12
Profit in Inventory – Report in Local Books
 Solutions
 Use a material overhead sub-element in the Frozen or Average costs
 Allows you to earn ICP on PO and inter-org receipt transactions
 Add additional custom transactions to the material distributions layer
(mtl_transaction_accounts) for the relief of profit in inventory
 Create custom profit in inventory and WIP valuation reports
 Create custom material and WIP distribution accounting reports to use
the accounts from Subledger Accounting
 Caveats
 Customize the Margin Analysis Report to pick up the new COGS entries
 Potential throwaway if major changes are made to the business model
 Time-consuming and potentially expensive customization
Slide 13
Profit in Inventory – Report in Local Books
More Caveats with Average Costing
 For the end-of-month profit in inventory value report you need
to calculate the average ICP item cost for each month
• This calculation has to compare the transactional selling
price with the organization’s moving average item cost
• Accumulate by organization by item for the month
• Store it in a cost type
• Each month’s average ICP item cost may be different
Slide 14
Profit in Inventory – Report in Consolidated Books
Requirements
 Don’t want local tax authorities to see “real” margins
 Keep profit in inventory in the Margin Analysis Report
 Need to eliminate in the consolidated ledger (not in detail)
 Requires end of month Profit in Inventory Value Reports
 Require the ability to support the consolidated entry with
material transaction history or month-end inventory value
reporting
Slide 15
Profit in Inventory – Report in Consolidated Books
Solutions
 Create an item cost report to show the frozen costs in the source
organization and compare it to the target organization standard
costs, based on the Sourcing rules
 Use this intercompany item cost report to derive the
intercompany profit for your items, for input into your
intercompany profit cost type
• Conversely you could compare the transfer price list to the
receiving org’s standard cost
• For Average Costing you would have to calculate the end of
period intercompany profit per item and put it into the
respective cost type
• For Standard Costing you set the amount of intercompany
profit per item and not recalculate until you change your
transfer prices or your standard costs
Slide 16
Profit in Inventory – Report in Consolidated Books
 Solutions




Store your ICP values in a non-Frozen cost type
Add ability to calculate Receiving quantities at month-end
Add ability to calculate ICP Value in WIP at month-end
Report intercompany profit in inventory value at month-end for
Receiving, Subinventories, WIP and Intransit
•
•
Multiply the non-Frozen cost type by the stored quantities in the
Costing Snapshot table (CST_PERIOD_CLOSE_SUMMARY)
Multiply the non-Frozen cost type by the calculated quantities for
Receiving and WIP components in inventory
This Month’s
ICP Inventory
Value Reports
–
Last Month’s
ICP Inventory
Value Reports
Slide 17
=
Monthly
Change in
ICP Value
Profit in Inventory – Sample Reports (sample data only)
Slide 18
Profit in Inventory – Sample Reports (sample data only)
Slide 19
Profit in Inventory – Sample Reports (sample data only)
Monthly
Transaction
Quantities
X
ICP Item Cost
Slide 20
=
Monthly
Change in
ICP Value
Profit in Inventory – Sample Reports (sample data only)
 Solutions
 Use this transaction offset report to get the offset accounts:
• Most ICP is offset by Inter-Company COGS, but you also have
• Misc. account issues/receipts, scrap and other transactions
Slide 21
Profit in Inventory – Sample Reports (sample data only)
 Solutions
 Use this WIP Component ICP Variance report to estimate the
amount of ICP included in your WIP Variances
• Your WIP variances may be overstated by the ICP
Slide 22
Profit in Inventory – Sample Reports (sample data only)
 Solutions
 Use this report to monitor your Org-to-Org Shipments
• It compares Selling Price to Unit Costs to ICP / PII Amounts
Slide 23
Profit in Inventory – Report in Consolidated Books
Caveats
 Wise to use 3rd party tools to speed ICP item cost data entry
 Transfer price changes will cause inaccuracies
• The weighted average ICP has to be kept by organization, or,
• Revalue your ICP amounts with transfer price changes
• In the ideal world, store the ICP item costs:
– by item, org
– and keep track of the average ICP item costs to accurately
relieve profit in inventory and keep track of the original
currency rate and ICP amounts in use
Slide 24
Profit in Inventory – Report in Consolidated Books
Caveats Foreign Currency
 Currency changes will cause inaccuracies
• (i.e. Standard cost based on 1.3 USD/Euro, but inter-org
transfers use the current daily transaction rate of 1.5)
 Best practice to use the same exchange rates for your ICP
standard costs and your ICP monthly G/L translation
• ICP is eliminated to zero each month
• So it does not matter which FX rates you use
Slide 25
Inter-Company Setups are Time Sensitive
Slide 26
Time Sensitive Set-Ups
Setups Effective When Entered
 Shipping Network
 Inter-Company Relationships
 If missing a portion of the setup
• Transactions will not play correctly
• No way to fix
• i.e. you might relieve inventory but not create the A/R invoice
Slide 27
Time Sensitive Set-Ups – Shipping Network
Slide 28
Time Sensitive Set-Ups – Inter-Co Relationships
Slide 29
Thanks for allowing us to discuss these topics with you!
Slide 30