Some allocation base settled for product costing in ERP

Resource Class	Resource	Cost Component Class	Allocation Basis	Comments
Direct Labor	Labor	Direct Labor	Labor Hrs	-
Labor Overhead	Labor Overhead	Labor Overhead	Labor Hrs	-
Costing Resource	Granulation Costing Resource	Granulation Cost	Machine Hrs	The overheads related to Granulation will be captured based on the ‘Department’ segment in the COA
QAD	QAD	Quality Overhead	Machine Hrs	QAD cost can also be allocated on the basis of Quality hours.
Warehouse Overhead	Warehouse Overhead Resource	Warehouse Overhead	Machine Hrs	The allocation of Warehouse overhead to the product cost will be on the basis of the machine hours
GPO (General Plant Overhead)	GPO Resource	GPO	Machine Hrs	The allocation of Warehouse overhead to the product cost will be on the basis of the machine hours

How overheads will be calculated in ERP implemetation?

Computation of Overheads:

Direct and Indirect overheads are incurred to produce the finished goods from the Raw materials. At MIRACLE Pharma Ltd. 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.

How material cost will be computed in Oracle ERP environment?

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.

Configurations with respect to OPM Costing:

1.       Inventory Organizations: All Inventory organizations will be modeled as Process enabled organizations.

2.       Cost Types: Cost Types indicate the costing method being used. Two cost methods Actual and Standard shall be configured. The Standard Cost type shall be used to calculate Standard Cost where as Actual Cost Type will be used for cost accounting and inventory valuation.

3.       Cost Component Groups: Cost component categorize the costs for analytical purposes. The cost component groups will include Material, Direct Labor, Resource and Overheads etc.

4.       Cost Component classes: The cost component classes act as buckets to aggregate the costs. Some of the cost component Classes include Raw Material, Active Material, Direct Labor, QAD Cost etc.

5.       Resource Cost:  Resource cost (the cost of using the resource per hour) will have to be provided for each plant resource. Overheads will also be configured as resources to absorb them on the basis of machine hours or labor hours.

Computation of Product Cost:

Product cost can be segregated into the following:

1.       Material Cost

2.       Overheads