Management Accounting: Genesis Cost Accounting Oracle Projects module extension: Cost accounting in Oracle ERP Whitepaper Informative Document, January 2013
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 Whitepaper Informative Document, January 2013 2
SYSTEM ARCHITECTURE WITH ORACLE ebs Whitepaper Informative Document, January 2013 3
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 Whitepaper Informative Document, January 2013 4
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. Whitepaper Informative Document, January 2013 5
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 Whitepaper Informative Document, January 2013 6
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. Whitepaper Informative Document, January 2013 7
Management reporting Management accounting transforms financial information into information necessary to management for decision-making. 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. 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.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 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 Whitepaper Informative Document, January 2013 8
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. Whitepaper Informative Document, January 2013 9
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 Whitepaper Informative Document, January 2013 10
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. Whitepaper Informative Document, January 2013 11
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. Software and consulting you need 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: george.faur@genesissoftware.ro www.genesissoftware.eu Copyright 2013, Genesis Software Consulting. All rights reserved. This document is provided for information purposes only and the contents hereof are subject to change without notice. This document is not warranted to be error-free, nor subject to any other warranties, including implied warranties and conditions of merchantability or fitness for a particular purpose. This document is provided for marketing and information purposes, and does not entail any contractual liability. The content hereof is protected by the Copyright Law L8/1996 and allied rights, as subsequently amended and supplemented. All Genesis trademarks are used under license and are trademarks or registered trademarks of Genesis Software Consulting. Whitepaper Informative Document, January 2013 12