Computation of Product Cost under Oracle ERP Systems

Computation of Product Cost: Product cost can be segregated into the following:

1. Material Cost
2. Overheads

Computation of Material Cost:

1. Standards for Raw material costs will have to be set up in the system based on the existing process being followed. Once the system is in use, Standard costs can be set on the basis of Actual Costs. Variance will be calculated based on these standard costs.

2. Actual costs for ingredients (Raw materials) will be computed at period end based on the following transactions:

• Purchase Orders and Supplier Invoices
• Material issues from inventory
• Material receipts in inventory
• Material transfers/adjustments etc.

3. Raw materials as well as finished goods will be valued based on Period Moving Average Cost (PMAC). It is the most accurate method of inventory valuation which takes into account previous month’s closing inventory value along with current month’s inventory transactions.

GAP: In OPM Costing, simple moving average cannot be used for inventory valuation. It can be done only at the period end after taking into account all the inventory transactions for the period.

Computation of Overheads:

Direct and Indirect overheads are incurred to produce the finished goods from the Raw materials. At GPL we propose to use Resource based absorption.

1. All the overheads will be modeled as resources and will be absorbed in the product cost on the basis of actual labor hours / machine hours consumed during the production batch. A separate Resource class will be created for each overhead to be consumed.

2. These Resources will be mapped to every production activity in the routing attached to the recipe.

3. Resource absorption rate will be computed on the basis of the actual overhead expenses incurred which will be captured in relevant Account balances in Oracle GL module.

4. The account code combinations will be tagged with the relevant Resource Class. The account balances will be obtained from the Standard Trial Balance report or a custom report can be developed for it. The account balance to be absorbed can be decided by the Cost Accountant based on the capacity utilization factor of the plant.

5. The computation of capacity Utilization factor will not be captured in the system.