Cost component class determination in Oracle EBS R12

I went through the sheets and my observations are as follows:



1. Firstly there are certain resources that might be used commonly between plants, such as dispensing machine to be used for both Soft Gel facility and General Manufacturing Facility. When these resources are used in production batches in the system, their usage time (machine hours) will be segregated by plant. Accordingly the Resource Cost per unit can also be segregated by plant.

2. The above has prompted me to think that it will be a better option to have uniform Cost Component Classes (instead of Potent -Granulation and General Manufacturing Facility-Granulation) let us have only one Granulation. Now, in this case how will we segregate the Resource Cost and Resource Usage.

3. The Usage will be sum of all the machine hours for the Granulation Resources for that plant from all the batches, this can be done at the batch level and plant level by the system.

4. The Cost will be GL balance in an account code, which will have plant in the location segment which will differentiate the Granulation expenses plant wise.

5. So I feel we can go with one cost component class for all the plants instead of segregating them plant wise. So our Cost component classes will be exact replica of the master Cost center list, to be used across the plants. Please give this a thought and let me know. In case of Quality Assurance QAD, General Plant Overhead GPO and Warehouse Overhead also we can use the same approach.

6. This will let us have only one master sheet for the Cost Component Class in the SON OPM Costing template. Here we have to focus on two things:

1. Max length of Cost component class field can be 16 characters max in system, so accordingly please modify the Cost Component Class names.

2. The field sort sequence should be as per our final cost sheet ( We want to see Material Cost first, then Labour, then various Operations etc)

3. Max length of the Description column is 40 so accordingly please reduce the field. We can use the Cost Center name in the description.

7. We will need to have a separate Cost component Class for Labour-Night since we need the Resource Usage and Expense separately. So we will have a primary cost component class – Direct Labour with two attached Cost component classes (Labour-Day and Labour-Night). This will help us in seeing the Labour Cost as an aggregate along with the breakup into Day and Night in the Cost sheet.

8. In the OPM Costing Template - ‘Definition of Resource Cost Sheet’, the Inventory Organization names will need to be consistent with what Manufacturing folks are using in their master data. So if Potent-1 is used, it should be used consistently across all masters.

9. In OPM Costing Template – ‘Resource Cost Sheet’, we will have to repeat all the resources for the Cost Type – ‘Standard’. I have also updated the values for Calendar and Cost Type. Please use these in the other sheets.

10. In the MFG Gen Data Master sheet in the ACTIVITY Tab, the Analysis Code has to be provided. I suggest we can use Direct (DIR) since all are production activities. We can have a call or discussion on Video Conference or phone on any of the above points. I have attached the data for Potent 1 modified as per the comments above.

For replacing the Cost Component Class names please use find and Replace, it works quick

On the basis of the control, how a company may be classified?

On the basis of the control, we can classify company as Holding and Subsidiary companies

Holding and Subsidiary companies (Sec 4)

A company shall be deemed to be subsidiary of another company if: -

1. That other company controls the composition of its board of directors; or

2. That other company holds more than half in face value of its equity share capital

3. Where the first mentioned company is subsidiary company of any company, which that other’s subsidiary. eg Company B is subsidiary of the Company A and Company C is subsidiary of Company B, therefore Company C is subsidiary of Company A.

The control of the composition of the Board of Directors of the company means that the holding company has the power at its discretion to appoint or remove all or majority of directors of the subsidiary company without consent or concurrence of any other person.

On the basis of the ownership, a company can be classified as

· Government Companies

· Non Government Companies

· Foreign Companies


Government Companies

It means any company in which not less than 51% of the paid up share capital is held by the Central Government or any State Government or partly by the Central Government and partly by the one or more State Governments and includes a company which is a subsidiary of a government company. Government Companies are also governed by the provisions of the Compa­nies Act. However, the Central Government may direct that certain provisions of the Companies Act shall not apply or shall apply only with such exceptions, modifications and adaptions as may be specified to such government companies.

Non Government Companies

It is controlled and operated by a private capital

Foreign Companies

By this, we mean a company incorporated in a country outside India under the law of that other country and has established the place of business in India.

There is another important type of company which is called as One Man Company

One man company is a company in which one man holds practically the whole of the share capital of the company, and in order to meet the statutory requirement of minimum number of members, some dummy members who are mostly his friends or relations, hold just 1or 2 shares each. It is like any other company is a legal entity distinct from its members. The dummy members are usually nominees of the principal shareholder who is the virtual owner of the business and who carries it on with limited liability.

How overhead is impacting in manufacturing activity

Overhead costs can be substantial in manufacturing and service organizations. As indicated in the following News Note, the ability to estimate and correctly apply overhead is a major factor in the relative success of custom producers.

Actual overhead incurred during production is included in the Manufacturing Overhead control account. If actual overhead is applied to jobs, the cost accountant will wait until the end of the period and divide the actual overhead incurred in each designated cost pool by a related measure of activity or cost driver. Actual overhead would be applied to jobs by multiplying the actual overhead rate by the actual measure of activity associated with each job.

More commonly, overhead is applied to jobs using one or more annualized predetermined overhead application rates. Overhead is assigned to jobs by multiplying the predetermined rate by the actual measure of the activity base that was incurred during the period for each job. This method is normal costing.

Why businesses must find ways to minimize costs?

To make profits given the present competitive environment and consumer focus on product price and quality, businesses must find ways to minimize costs. Costs can be reduced without reducing quality by decreasing the number of non- value-added organizational activities. 

 

Process mapping can be performed to see all the VA and NVA activities that take place in the production of a product or the performance of a service. Value is added to products only during the times when processing (manufacturing company), performance (service company), or display (retail company) is actually taking place. Inspection time, transfer time, and idle time all add to cycle time and cost, but not to value. The proportion of total cycle time spent in value-added processing is referred to as manufacturing cycle efficiency.

A third category of activities, known as business-value-added activities, also exists. Although not wanting to pay for these activities, customers know the activities are necessary expenses incurred by a business to conduct operations. In addition to activity analysis, activity-based management is also concerned with finding and selecting activity cost pools and identifying the set of cost drivers that best represents the firm’s activities and are the underlying causes of costs. 

Management should first investigate activities that reflect the major and most significant processes conducted by the company. These activities normally overlap several functional areas and occur horizontally across the firm’s departmental lines.

How to complete Registration of aCompany

Registration of the Company

Once the documents have been prepared, vetted, stamped and signed, they must be filed with the Registrar of Companies for incorporating the Company. The following documents must be filed in this connection: -

1. The Memorandum of Association duly signed by

subscribers and the Articles of Association, if any signed by subscribers to the Memorandum of Association

3. An agreement, if any, which the company proposes to enter into with any individual for appointment as its managing director or whole-time director or manager.

5. A statutory declaration in Form 1 by an advocate, attorney or pleader entitled to appear before the High Court or a company secretary or Chartered Accountant in whole - time practice in India who is engaged in the formation of the company or by a person who is named as a director or manager or secretary of the company that the requirements of the Companies Act have been complied with in respect of the registration of the company and matters precedent and incidental thereto.

4. In addition to the above, in case of a public company, the following documents must also be filed: -

1. Written consent of directors in Form 29 to agree to act as directors and their written consent to act as directors and take up qualification shares.

2. The complete address of the registered office of the company in Form 18. 5.

3. Details of the directors, managing director and manager of the company in Form 32.

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Traditional product costing and Throughput accounting

Traditional product costing :Labour costs and 'traditional' variable overheads are treated as variable costs.
Throughput accounting :They are not normally treated as variable costs.

Traditional product costing :Inventory is valued in the income statement and balance sheet at total production cost.
Throughput accounting :It is valued at material cost only.

Traditional product costing :Variance analysis is employed to determine whether standards were achieved.
Throughput accounting : It is used to determine why the planned product mix was not produced.

Traditional product costing : Efficiency is based on labor and machines working to full capacity.
Throughput accounting : Efficiency requires schedule adherence and meeting delivery dates.

Traditional product costing : Value is added when an item is produced.
Throughput accounting : It is added when an item is sold.

Advantages of backflush costing

Back flush costing is appropriate for organizations trying to keep inventories to the very minimum. In such circumstances, the recording of every little increase in inventory value, as each nut and bolt is added, is simply an expensive and non-value-added activity that should be eliminated.

Advantages of back-flush costing :

(a) It is much simpler, as there is no separate accounting for WIP.

(b) The number of accounting entries should be greatly reduced, as are the supporting vouchers, documents and so on.

(c) The system should discourage managers from producing simply for inventory since working on material does not add value until the final product is completed or sold.

Possible problems in backflush costing

Possible problems with back-flush costing are as follows:
The successful operation of back-flush costing rests upon predictable levels of efficiency and stable material prices and usage. In other words there should be insignificant cost variances.

(a) It is only appropriate for JIT operations where production and sales volumes are approximately equal.

(b) Some people claim that it should not be used for external reporting purposes. If, however, inventories are low or are practically unchanged from one accounting period to the next, operating income and inventory valuations derived from back-flush accounting will not be materially different from the results using conventional systems. Hence, in such circumstances, back-flush accounting is acceptable for external financial reporting. 

(c) It is vital that adequate production controls exist so that cost control during the production process
is maintained.

What is Backflush costing?

Backflush costing is  a  streamlined  cost  accounting method  that  speeds up, simplifies,  and minimizes  accounting effort  in  an environment  that minimizes  inventory balances,  requires  few  allocations, uses  standard  costs,  and has minimal variances from standard. During the period, this costing method records purchases of raw material and accumulates actual conversion costs. Then, at a predetermined trigger point such as (1) at completion of production or (2) on the sale of goods, an entry is made to allocate the total costs incurred to Cost of Goods Sold and to Finished Goods  Inventory using standard production costs.

The focus of accounting in a JIT system is on the plant’s output to the customer. Because each sequential activity in a production process is dependent on the previous activity, any problems will quickly cause the system to stop the production process. Individual daily accounting for the costs of production will no longer be necessary because all costs should be at standard, and variations will be observed and corrected almost immediately.

Additionally, fewer costs need to be allocated to products because more costs can be traced directly to their related output in a JIT system. Costs are incurred in specified cells on a per-hour or per-unit basis. Energy  is a direct production cost in a comprehensive JIT system because there should be a minimum of downtime by machines or unplanned  idle  time  for workers. Virtually  the only costs still being  allocated  are  costs  associated with  the  structure  (building  depreciation,  rent, taxes, and insurance) and machinery depreciation. The reduction of allocations provides more useful measures of  cost  control  and performance  evaluation  than have been traditionally available.

Backflush Costing in JIT System

Back flushing requires no data entry of any kind until a finished product is completed. At that time the total amount finished is entered into the computer system, which multiplies it by all the components listed in the bill of materials for each item produced. This yields a lengthy list of components that should have been used in the production process and which is subtracted from the beginning inventory balance to arrive at the amount of inventory that should now be left on hand. Back the entire production process. Given the large transaction volumes associated with JIT, this is an ideal solution to the problem.

However, there are some serious problems with back flushing that must be corrected before it will work properly. They are :

1. Production reporting : The total production figure entered into the system must be absolutely correct, or else the wrong component types and quantities will be subtracted from stock. This is a particular problem when there is high turnover or a low level of training to the production staff that records this information, which leads to errors.
2. Scrap reporting : All abnormal scrap must be diligently tracked and recorded; otherwise these materials will fall outside the black flushing system and will not be charged to inventory. Since scrap can occur anywhere in a production process, a lack of attention by any of the production staff can result in an inaccurate inventory. Once again, high production turnover or a low level of employee training increases this problem.
3. Lot tracing : Lot tracing is impossible under the back flushing system. It is required when a manufacturer need to keep records of which production lots were used to create a product in case all the items in a lot must be recalled. Only a picking system can adequately record this information. Some computer system allow picking and back flushing system to coexist, so that pick transactions for lot tracing purpose can still be entered in the computer. Lot tracing may then still be possible if the right software is available; however, this feature is generally present only on high-end systems.
4. Inventory accuracy : The inventory balance may be too high at all times because the back-flushing transaction that reliefs inventory usually does so only once a day, during which time other inventory is sent to the production process; this makes it difficult to maintain an accurate set of inventory records in the warehouse.