Actual Cost Adjustments in OPM Costing - R12

 Actual Cost Adjustments in OPM Costing - R12

Actual Cost Adjustment functionality gives the users an ability to change the cost of an item – Product or Raw materials.

Typically this functionality to :
• Adjust cost to include freight and other charges recorded on a separate freight/charge invoice
• To handle price difference in invoices that are received in a different period than the receipt
• To adjust cost to include vendor rebates

The adjustment types available are:
• Average Cost Adjustment
• Value Adjustment
• Unit Cost Adjustment

Average Cost Adjustment
This type of adjustment requires the user to enter an adjustment quantity and a cost. The effect of this adjustment is to simulate a transaction that has happened outside the scope of OPM actual costing engine.

For example, if a customer uses a 3rd party system which has transactions that need to be included in the cost calculations, the customer can replicate the event with Actual Cost Adjustments can be used in OPM Costing to either directly affect the cost of items or to simulate the effect of a transaction that happens outside the purview of the Actual Costing process.

This white paper talks about the effect of the various cost adjustments on the cost of the items and recommended scenarios for each of adjustment types.
Using Actual Cost Adjustments in OPM Costing  this type of adjustment. The actual costing logic would consider these transactions similar to a purchase receipt.

Value Adjustment
This type of adjustment requires the user to enter a total value of the adjustment that needs to be passed to the entire quantity. The effect of this type of adjustment is to add a specific value to the inventory account that needs to be spread to the onhand quantity.

For example, if the effect of vendor rebates need to be applied to the entire onhand quantity, this type of adjustment can be used.

Unit Cost Adjustments
This adjustment type requires the user to enter a fixed cost that they would like to apply to the existing unit cost. The effect of this adjustment is to add a specific value to the unit cost of the item.

For example, if the user wants to see the effect of changing the unit cost of the item by a fixed number for simulation purposes, this adjustment can be used.

Example
Let us take the following example to describe the types of adjustments and its effect on the cost of the item and Inventory account balances.
For an item FG100 under warehouse PR1, the following are the balances and
transactions that have taken place.

                                  Quantity                             Cost
Opening Balance             100 LB                           $7.00
Receipts                        100 LB                            $9.00

Actual Cost = (Prior Qty * Prior Cost) + Σ (Receipt Qty * PO Price)
                    __________________________________________
                                       (Prior qty + Σ Receipt Qty)

                     ((100 * 7.00) + (100 * 9.00))
                 =   __________________________
                                (100 + 100)

                 = $ 8.00


Let’s now create the following adjustments.

             Adjustment Type            Quantity                  Cost / Value
             Value Adjustment               -                          $300.00
             Average Adjustment       100.00 LB                  $11.00
             Unit Cost Adjustment          -                          $2.00

Let us look at the effect of each of these adjustments on Actual cost and Sub- Ledger entries:

Assumption: Purchase Order Receipts is booked at the PO price

Value Adjustments

Actual Costing Logic

PMAC cost =

(Prior Qty * Prior Cost) + Σ (Receipt Qty * PO Price) + Value Adjustments
_______________________________________________________________
                                  (Prior qty + Σ Receipt Qty)

                  = ((100 * 7.00) + (100 * 9.00)) + 300.00    
                       _________________________________
                                         (100 + 100)

                  = $ 9.50


Inventory Valuations Comparison

Inventory valuations and the A/C balances in the INV account in GL can be compared to verify the effect of the Sub-Ledger entries.

Inventory Valuation = Actual cost * On Hand Quantity
                            = 9.50 * 200
Inventory Valuation = $ 1900.00

INV Account balances

Balances from prior period   = $ 700.00 (100 * 7.00)
Receipt                             = $ 900.00 (100 * 9.00)
Value Adjustment               = $ 300.00
Total                                 = $ 1900.00

Average Cost Adjustments

Lets look at the effect of adding an Average Cost Adjustment of 100 LB @ $11.00 to the above scenario

Actual Costing Logic 

PMAC cost =

 (Prior Qty * Prior Cost) + Σ (Receipt Qty * PO Price) + Value Adjustments + Average Cost Adjustments ___________________________________________________________________________________

                            (Prior qty + Σ Receipt Qty + Σ Average Cost Adjustment Qty)

                    = ((100 * 7.00) + (100 * 9.00)) + 300.00 + (100 * 11.00)

                          _______________________________________________

                                        (100 + 100 + 100)

                     = $ 10.00 

Sub-Ledger Entries

Since the adjustment quantity does not affect the physical Inventory balance, the accounting entry that this adjustment creates uses only the difference between the cost specified in the adjustment and the calculated PMAC cost. 

 

Inventory Valuations Comparison 

Inventory ValuationU                = Actual cost * On Hand Quantity

                                             = 10.00 * 200

Inventory Valuation                  = $ 2000.00

INV Account balances

Balances from prior period         = $ 700.00 (100 * 7.00)

Receipt                                   = $ 900.00 (100 * 9.00)

Value Adjustment                     = $ 300.00

Average Cost Adjustment          = $ 100.00 (100 * (11.00 – 10.00)) 

Total                                      = $ 2000.00 

Unit Cost Adjustments

Let us look at the effect of applying a Unit cost Adjustment of $2.00 to this scenario.

Actual Costing Logic

The Unit Cost Adjustments are applied after the actual cost calculations are completed as before. Hence, it’s a two-stage calculation of the actual unit cost of the item. 

PMAC Cost =

(Prior Qty * Prior Cost) + Σ (Receipt Qty * PO Price) + Value Adjustments + Average Cost Adjustments __________________________________________________________________________________

                  (Prior qty + Σ Receipt Qty + Σ Average Cost Adjustment Qty)

      

                         = ((100 * 7.00) + (100 * 9.00)) + 300.00 + (100 * 11.00)  

                             __________________________________________

                                             (100 + 100 + 100)

                         = $ 10.00 (Without Unit Cost Adjustment)

Unit Cost Adjustment is considered only after the calculation of the actual cost in the Actual costing logic. So applying a Unit Cost Adjustment of $ 2.00, the new PMAC Cost will be as follows:

                           = $ 10.00 + $ 2.00 (Unit Cost Adjustment)

                           = $ 12.00 

Sub-Ledger Entries

Since the Unit Cost Adjustment is essentially an addition to the Item Cost, the sub ledger considers entire quantity considered by the Actual Cost calculation and not just the on-hand quantity for the accounting postings.

Inventory Valuations Comparison

Inventory Valuation                                  = Actual cost * On Hand Quantity

                                                                  = 12.00 * 200

Inventory Valuation                                   = $ 2400.00

INV Account balances

Balances from prior period                       = $ 700.00 (100 * 7.00)

Receipt                                                 = $ 900.00 (100 * 9.00)

Value Adjustment                                   = $ 300.00

Average Cost Adjustment                        = - $ 100.00 (100 * (11.00 – 12.00))

Unit Cost Adjustment                              = $ 600.00 (300 * 2.00)

Total                                                     = $ 2400.00

CONCLUSION

The Actual Cost Adjustments is a very versatile functionality available in OPM Costing and can be used to affect the cost of items for a variety of reasons. The white paper shows the various uses and the effect of such adjustments to the cost of the item and Inventory account balances.