When a capital product is sold, costs and revenue must be accounted for based on the product’s serial number for profits to be calculated. Incoming charges are added to the product cost at the time of purchasing the product, and outgoing charges (dynamic in nature) are added at the time of sales order booking.
Incoming charges include those related to customs, insurance, freight, transportation, and handling. Outgoing charges include transportation charges, installation charges, warranty charges, and free components. Incoming charges are always added at the time of purchase order, either in the form of landed cost or using accounting overhead rules. All charges must be added to the overall product cost, and they must be accounted for as costs of goods sold (COGS), which has a direct impact on the P/L statement.
Accounting for cost
Creating cost based on the serial number is a challenge because outgoing charges are not added to the product cost, but they are added at the time of the Sales Order (SO) line booking. Accounting for cost at the serial level solves part of the problem by identifying revenue based on the serial number and product cost based only on the incoming cost. Still, outgoing charges are not added to the serial as these charges are not on the product sold. That can be addressed by creating a detailed report.
Oracle’s standard functionality for costing methods includes the standard cost, actual cost, and average cost. However, serial-level costing does not work on standard cost, so the actual or average cost must be considered.
Finding a solution
As its name implies, the average cost method averages out the product cost during the SO shipment. When selling two products for one SO (i.e., one SO with one line for two quantities) there are always two different costs for those serials. That cost is averaged once the two products are shipped to the customer.
For example, if Product X has one $10,000 serial cost and one $12,000 serial cost, the COGS is generated as $22,000 — with two $11,000 lines in cost accounting. To avoid costs being averaged during shipment, it is mandatory to use the actual cost method. To get the complete product cost for a shipment, a report must be generated showing the cost of the product including incoming and outgoing charges. This report must have the SO number and the product number and include serial details.
In that scenario, the serial numbers need to be entered at the time of the PO (Purchase Order) receipts or work order (WO) completion. In addition, all incoming overhead must be added at the time of PO receipt or WO completion using overhead accounting rules. All outgoing charges must be added at the time of entering the SO (with each unit base) so that the P/L statement can be calculated based on each serial.
To accomplish that, a report must be developed with the following details:
- Product number
- Serial number
- SO number
- SO line number
- SO line price (which will be the revenue amount)
- Product base cost
- All incoming charges
- All outgoing charges (from the SO line EFF)
As a result, profit margins will be successfully calculated based on each serial number.
Inspirage can help
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