Oracle Applications User Group Cost Management SIG September 28 th, 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 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

Slide 4 Sample Financial Entities

Slide 5 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

Slide 6 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 7 Profit in Inventory - Terms  Two commonly used terms for profit in inventory  ICP – Intercompany Profit  PII – Profit in Inventory

Slide 8 CST: Transfer Pricing Profile Option  No  Yes, Price Not as Incoming Cost  Yes, Price as Incoming Cost

Slide 9 Profit in Inventory – Current Features (FOB Ship Example / CST: Transfer Price Option: Price Not as Incoming Cost) Event INV Valuation (O1) Sending Organization O1 Inventory Cost: $102 Receiving Organization O2 Standard Cost: $120 Transfer Price: $120 FOB Shipment COGS (O1) 1. Shipment102 In-transit (O2) Accrual (O2) Inter-Org PPV (O2) INV Valuation (O2) 2. Receipt 120 I/C Receivable (O1) I/C Revenue (O1) 3. I/C AR 120 I/C Payable (O2) 4. I/C AP 120 Accrual (O2) Profit In Inventory (O2)

Slide 10 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 11 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 12 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 13 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 14 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 15 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 16 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 17 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 Monthly Change in ICP Value –=

Slide 18 Profit in Inventory – Sample Reports (sample data only)

Slide 19 Profit in Inventory – Sample Reports (sample data only)

Slide 20 Profit in Inventory – Sample Reports (sample data only) Monthly Transaction Quantities ICP Item Cost Monthly Change in ICP Value X =

Slide 21 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 22 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 23 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 24 Profit in Inventory – Report in Consolidated Books  Caveats  Wise to use 3 rd 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 25 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 26 Inter-Company Setups are Time Sensitive

Slide 27 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 28 Time Sensitive Set-Ups – Shipping Network

Slide 29 Time Sensitive Set-Ups – Inter-Co Relationships

Slide 30 Thanks for allowing us to discuss these topics with you!