Cost accounting for Oracle

Management Accounting:

Genesis Cost Accounting

Oracle Projects module extension:

Cost accounting in Oracle ERP

Whitepaper – Informative Document, January 2013


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Table of contents

SYSTEM ARCHITECTURE WITH ORACLE eBS.....................................................................3

EXECUTIVE SUMMARY ...................................................................................................... 4

NO CUSTOMIZATIONS ...................................................................................................... 4

FIRST INSIGHTS ................................................................................................................. 5

DESCRIPTION .................................................................................................................... 6

Why the need to develop Genesis Cost Accounting .....................................................7

SPECIAL FEATURES ........................................................................................................... 8

Management reporting............................................................................................... 8

Centralization of data ................................................................................................. 8

Correlation of standard dimensions – internal orders .................................................. 8

Allocating internal orders-based expenditures............................................................ 9

Allocation of expenditures based on hierarchy and allocation keys ............................. 9

Performing costs variances calculation ....................................................................... 9

Performing cost accounting for work in process.........................................................10

Transaction phases in management accounting ........................................................10

Performing transactions for management accounting with balanced journals ...........10

HOW THE PRODUCT WAS DEVELOPED...........................................................................12


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SYSTEM ARCHITECTURE WITH ORACLE eBS


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EXECUTIVE SUMMARY

The accounting specialists focus on the financial aspect of accounting,

oriented on reporting more to state institutions and less to managers.

Concurrently, the ERP applications suppliers answer to the main

requirements of accounting, regularly offering only purely financial

solutions. In this context, the managers receive information from

accounting, which can be used for decision making only after additional

processing.

Cost accounting, also called managerial accounting, represents an

accounting tool for processing financial data in order to obtain reports

necessary for management, in a format other than financial. In several

European countries, this type of accounting is also called “Class 9

accounting” because it uses accounts in class 9.

Genesis Software Consulting has

developed a Cost Accounting product,

called Genesis Cost Accounting, perfectly

integrated in Oracle Application E-

Business Suite, in order to meet the

specific requests from customers. After

financial accounting completion, Genesis

Cost Accounting automatically operates

new transactions, configured following

internal, managerial rules, so that

economic and financial results are relevant

to managers. For the execution of finished

goods, Genesis Cost Accounting

determines the full cost of the finished

good; for service execution, Genesis Cost Accounting helps the

construction of works estimate; to analyze the outcomes of execution

processes, Genesis Cost Accounting provides management accounting

reports.

Genesis Software Consulting recommends that Genesis Cost

Accounting product be implemented simultaneously with Oracle

Projects. Using the structures and transactions from Oracle Projects, the

processing of financial and accounting data in management format is

performed.

NO CUSTOMIZATIONS

We believe customizations, changes made in the standard Oracle

Applications ERP, that are not supported by the vendor are something

we do not recommend. Why customizations are not good? Regression –

one minor customization could dramatically affect a standard set of

functionalities; Standard support cannot be offered even for standard

functionalities if were affected by customizations; Upgrade – new


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versions upgrade can become a more costly experience if

customizations are in place; Know how – for standard applications you

have vendor support and general documentation, while for

customizations the support depends on only a few developers. These

are just a few of many pitfalls of customizing the ERP software.

This is why we don’t recommend and don’t support customizations of

Oracle ERP. We developed our products as distinct tools over the

standard functionalities of Oracle without interfere with or change

these functionalities. They just channel the existing power of Oracle

ERP to more efficiently solve the business problems of your company.

The standard functionalities remain unaffected by our products and you

can still use them, if you choose, independently of our product.

FIRST INSIGHTS

A department manager wants to know the cost of the activity it

performs, divided by types of costs (direct costs, indirect costs, auxiliary

costs - servicing), detailed on cost elements (salaries, materials, energy,

services). Servicing activities (through which they provide internal

services) must collect orders costs, performed by persons or equipment,

which must be transferred to requesting cost centers. Providing services

to external customers requires costs elements necessary for building

works estimate. Execution of products with in-house or outsourced

products must allow full cost accounting of finished goods.

All these represent the problems an internal management accountant is

faced with to be able to offer the management a variety of reports,

which refer less to accounts and more to departments, equipment,

activities, orders, products, types of costs and cost elements.

Furthermore, the internal management accountant, faced with a large

volume of operations such as allocations, calculation of variances, needs

automatic mechanisms of transacting and accounting with balanced

journals, allowing the use of the trial balance sheet.

Genesis Cost Accounting is the solution to all these problems.


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Funky Business, Jonas Ridderstrale and Kjell Nordstrom

“Funky” business put the management and the leadership in center. “...This is the age of time and talent, where we are selling time and talent, exploiting time and talent, hiring time and talent,

packaging time and talent. The most critical resource wears shoes and walks out the door around five o’clock every day. As a result,

management and leadership are keys to competitive advantages. They differentiate you from the mass. How you attract, retain and

motivate your people is more important than technology … How a company is managed and how a company is led are vital

differentiators. They can create sustainable uniqueness...”

DESCRIPTION

Genesis Cost Accounting collects financial costs to determine the cost

of activities performed in the cost centers departments. If the

department provides internal services, Genesis Cost Accounting

transfers the servicing order costs to the requesting department. The

indirect costs of the unproductive activities are distributed on the

activities of the productive departments using an allocation hierarchy

and multiple allocation keys. For products and services, Genesis Cost

Accounting calculates the total cost.

Genesis Cost Accounting was designed and developed in close

connection with Oracle Projects module, including related modules

used for operating financial transactions. Genesis Cost Accounting

features do not invalidate in any way standard Oracle features and do

not affect Oracle support for standard modules. Genesis Cost

Accounting provides the reporting system with processed data in a

managerial format (departments, equipment, activities, orders,

products, types of costs and cost elements).

Fig.1. Genesis Cost Accounting – overview


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Why the need to develop Genesis Cost Accounting

Genesis Cost Accounting satisfies a requirement expressed by ERP

product customers, since 1998. It is the processing of financial data in a

specific format, before being presented to the management. The

processing does not affect the financial results and is auditable from

accounting point of view.

After years of Oracle Applications implementation, Genesis Software

Consulting was able to capitalize the experience gained into a product

suite, which also includes Cost Accounting module.

Successful use of Cost Accounting product enabled Genesis to extend

ERP implementation beyond financial transactions. Now, internal

management accountants benefit from automatic collection, allocation

and calculation mechanisms to transform financial results in a format

accessible and necessary to managers.


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SPECIAL FEATURES

Genesis Cost Accounting, used with Oracle Projects, brings a series of

features that the internal management accountant can use to transform

the financial results in a management accessible format. Genesis Cost

Accounting offers the management a set of analysis reports using the

processed data.

Management reporting

Management accounting transforms financial

information into information necessary to

management for decision-making.

Fig.2. Detailed report with cost variances

Genesis Cost Accounting allows centralized

analysis of management information in the

format of standard analysis dimensions:

departments, equipment, activities, products,

services, costs elements and types. Genesis

Cost Accounting provides a set of analysis

reports using standard analysis dimensions.

Concurrently, Genesis Cost Accounting offers

the data required for reporting to Business

Intelligence-type specialized analysis

modules.

Centralization of data

The data required by the management derive

from the financial activity. In order for this

data to be relevant, it is necessary that they

are associated with departments,

equipment, activities, orders, products,

costs types and elements – standard

dimension of management analysis. The

use of these standard dimensions enables the

centralization and correlation of some

financial information of different nature.

Genesis Cost Accounting adds to Oracle E-

Business Suite modules offering financial

information, these standard dimensions of

management analysis. Genesis Cost

Accounting adds to Oracle Projects

automatic processes for centralized

collection of financial information, relevant

and compliant to the standard analysis.

Fig.3. Revenue and expenditure collection report

Data centralized from Genesis Cost

Accounting enables the internal

management accountant to perform the

allocation and calculation operations,

necessary for management reporting.

Correlation of standard

dimensions – internal orders

Internal orders represent a way of correlating

standard dimensions following the rule:

internal services requester - executor.

Collection of costs on internal orders at an

executor enables their subsequent

allocation to requester.

Genesis Cost Accounting adds to Oracle

Order Management automatic generation


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features of “order” standard dimension when

an internal service order is registered. The

“order” standard dimension contains

information on requester and executor,

necessary for subsequent allocation.

Internal management accountant

automatically finds, for analysis in Genesis

Cost Accounting, all the internal orders

operated by the planners of internal service

activities.

Allocating internal orders-based

expenditures

The financial data related to internal orders

must be collected for centralized analysis of

internal service activities. These data have to

be transformed so that the service

beneficiary receives the total cost of activity.

Genesis Cost Accounting offer mechanisms

for service cost accounting on internal orders,

as well as automatic processes for their

transfer from executor to requester.

Internal management accountant has

available all the information necessary for

reporting the internal service activities. Using

Genesis Cost Accounting, challenging

activities in terms of cost analysis, as well as

internal repairs, internal transport, internal

training, is no longer a problem for the

internal management accountant.

Allocation of expenditures based

on hierarchy and allocation keys

Indirect costs collected in management

accounting should be allocated on direct

costs to calculate the total cost of products or

services provided. The allocation should be

made based on a hierarchy modeling the

dependence between the ones executing

direct activities and the ones executing

indirect activities. Internal management

accountants use allocation keys to distribute

indirect costs to direct costs.

Fig.4. Allocation of Expenditures

Genesis Cost Accounting provides definition

mechanisms of keys for allocating indirect

costs on direct costs. Genesis Cost

Accounting uses HR organizations

hierarchies for cost allocation.

Internal management accountant may

configure Genesis Cost Accounting so that

the hierarchical allocation mechanism of

indirect costs to direct costs reflects the

situation of organizational structure at a

given time.

Performing costs variances

calculation

In general, the execution of products or

services is performed at a standard cost,

according to a preconfigured works estimate.

This occurs because, at the time of work

completion, we do not know in detail all the

indirect costs that contribute to the

completion of the said product or service.

Management accountants must, after

allocation of indirect costs, calculate the real

cost of products or services provided and

emphasize the cost variances between the

real cost and the standard cost.

Genesis Cost Accounting, together with

Oracle Projects, provides real cost accounting

methods of products and services provided,

as well as emphasis of cost variances.


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Fig.5. Cost variances report

Internal management accountants use

Genesis Cost Accounting to perform the

post-calculus of products and services. They

provide the financial accountants with the

cost variances necessary for the accounting

corrections imposed by the use of standard

cost in evaluating the finished goods, stored

and unsold at the end of the month. For this

reason, management accounting is all the

more necessary for the companies providing

finished goods.

Performing cost accounting for

work in process

Companies perform products or services

upon internal or external customers’ request.

Internal orders, together with external ones,

represent calculation, analysis and reporting

dimensions in management accounting. Not

always work’s job associated to orders is

completed at the end of the month, the

moment for financial balance sheet and

revenue and expenditure closing balance.

With Genesis Cost Accounting, the costs of

work’s job become actual expenditures, used

in the financial accounting only in the month

when the work is completed.

Genesis Cost Accounting adds cost

accounting mechanisms for work in process

to Oracle Projects.

Internal management accountants use

Genesis Cost Accounting for cost accounting

of product and internal services work in

process incomplete at the end of the month.

They communicate these values to the

financial accountants performing financial

transactions for work in process.

Transaction phases in management

accounting

Management accounting must record the

operations in phases, in a specific sequence:

centralized collection of financial

information; hierarchical and order-based

allocation; cost accounting of work in process

incomplete at the end of the month; final

cost accounting of product and cost

variances; closing operations in management

accounting.

Genesis Cost Accounting offers the features

enabling the phases operating and

controlling of management accounting

processes.

Fig.6. Transaction phases

The internal management accountant uses

Genesis Cost Accounting to successively

launch collections, allocations, computing

and closing transactions needed for the

management accounting.

Performing transactions for

management accounting with

balanced journals

The management accounting is standardized

in many European countries as a special

accounting, different from the financial

accounting, with balanced journals using

class 9 accounts.

Genesis Cost Accounting uses Oracle Projects

to perform transactions with balanced

journals using class 9 accounts. Management

accounting transactions are: collecting

financial data for centralized analysis,

perform allocations based on internal orders


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or hierarchical allocation, cost variations

calculation and the cost of work in process

incomplete at the end of the month, as well

as management accounting closing

operations. Accounting transactions

generated by Genesis Cost Accounting from

Oracle Projects are transferred in Oracle

General Ledger module, in specific logs, in

order to run the Management Accounting

Balance Sheet report.

Fig.7. Class 9 trial balance

Internal management accountants use the

Management Accounting Balance Sheet

report to audit the operations performed and

extract necessary data for financial

corrections.


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HOW THE PRODUCT WAS DEVELOPED

Genesis Cost Accounting was developed progressively, covering the

business requirements raised by different customers in implementation

projects, since the early 2000’s. It is “encapsulated” in an easy to

customize and control product, containing all the developed objects,

being similar to any Oracle product.

Genesis Cost Accounting refers to all the technical elements

characterizing an Oracle product: it has its own schema of the database

objects, specific configuration elements and an operating form. The

operating form of management accounting transactions launch, in a

preconfigured succession, sets of processes populating the open

interface of Oracle Projects module with data, after which it imports

and accounting in special transactions. In Oracle Projects, transactions

operated from Genesis Cost Accounting are identical to the original

ones, without compromising Oracle support for standard modules.

Genesis Cost Accounting has its own set of reports in addition to those

existing in Oracle Projects and is available for R11.i and R12 versions.

White paper

(Informative document)

January 2013

Author: Dorian Balmuș

Genesis Software Consulting

Address: 65 Samuil Vulcan St., sector 5,

Bucharest, Romania

Contact person: George Faur

phone: +40 741-084-009

e-mail: [email protected]

www.genesissoftware.eu

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Cost accounting for Oracle

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