How Does the Landed Cost Management Impacts the Accounting Flow in a Procure To Pay Cycle

What are the accounting entries in a Procure to Pay cycle when the PO shipment is enabled for Landed Cost Management?

1. Receive the PO with estimated landed cost calculated
– Receiving Inspection a/c DR @ Estimated Landed Cost
– AP Accrual a/c CR @ PO Price inclusive of Non-Recoverable tax
– Landed Cost Absorption a/c CR @ (Estimated Landed cost – PO Price inclusive of Non-Recoverable tax) (This a/c is defined in Receiving options)

• These accounting entries can be viewed from Receiving Transaction summary > Transactions > Tools > View Accounting
• These entries get created in rcv_receiving_sub_ledger

2. Deliver the PO to Inventory destination

For Standard Costing organization
– Material Valuation a/c DR @ Std Cost
– Receiving Inspection a/c CR @ Estimated Landed Cost
– Purchase Price Variance a/c DR @ difference between Std Cost and Estimated Landed Cost

For Average Costing organization
– Material Valuation a/c DR @ Estimated Landed Cost
– Receiving Inspection a/c CR @ Estimated Landed Cost

• These entries can be viewed from Inventory > Material Transactions > Distributions
• These entries get created in mtl_transaction_accounts

3. Invoice validated and actual landed cost calculated

Once the Actual Landed Cost is calculated, LCM will populate this information in cst_lc_adj_interface with rcv_transaction_id corresponding to the receipt to which the invoice is matched. Then the adjustment entries would get created as given below on running the Landed Cost Adjustment Processor

Landed cost Adjustment – Receiving
– Receiving Inspection a/c DR @ difference between Actual LC and Estimated LC
– Landed Cost Absorption a/c CR @ difference between Actual LC and Estimated LC

Landed cost Adjustment – Delivery (Standard Costing)
– Receiving Inspection a/c CR @  difference between Actual LC and Estimated LC
– Purchase Price Variance a/c DR @ difference between Actual LC and Estimated LC

• These accounting entries can be viewed from Receiving Transaction summary > Transactions > Tools > View Accounting
• These entries get created in rcv_receiving_sub_ledger

Landed cost Adjustment – Delivery (Average Costing)
– Receiving Inspection a/c CR @ difference between Actual LC and Estimated LC
– Landed Cost Absorption a/c DR @ difference between Actual LC and Estimated LC

Average Cost Update (Average Costing)
– Material Valuation a/c DR @ difference between Actual LC and Estimated LC
– Landed Cost Absorption a/c CR @ difference between Actual LC and Estimated LC

If this Average cost update happens for updating the item cost with the difference between Actual and Estimated landed cost for an item which has 0 or negative on-hand quantity, then the accounting entries would be as follows:

– Material Valuation a/c DR @ 0
– Landed Cost Absorption a/c CR @ difference between Actual LC and Estimated LC
– Landed Cost Variance a/c DR @ difference between Actual LC and Estimated LC (This a/c is defined inventory > Set up > Organization > Parameters)

• These entries can be viewed from Inventory > Material Transactions > Distributions
• These entries get created in mtl_transaction_accounts
• The link between the Receiving transaction and Average Cost update is done through txn_source_line_id. Rcv_transaction_id of deliver transaction is stamped as txn_source_line_id in mtl_material_transactions for the LCM adjustment transaction which has the transaction type as Average Cost Update.

4. Create accounting for item invoice

– AP Accrual a/c DR @ PO Price
– Tax a/c DR @ tax rate
– Liability a/c CR @ Invoice Price including tax
– LCM:Invoice Price Variance a/c DR @ difference between PO Price and Invoice Price (This IPV a/c is defined in Receiving options)
– LCM:Exchange Rate Variance a/c DR @ difference between receipt exchange rate and Invoice exchange rate (This ERV a/c is defined in Receiving options)

5. Create accounting for charge invoice

– Default Charge a/c DR @ invoice price (This charge a/c is defined in Receiving options)
– Liability a/c CR @ invoice price

6. Perform Return transaction or negative correction after invoice is accounted and actual landed cost is calculated

Return to Vendor /Negative Correction
– Receiving Inspection a/c CR @ Actual Landed Cost
– AP Accrual a/c DR @ PO Price + Non-Recoverable Tax
– Landed Cost Absorption a/c DR (Actual Landed Cost – {PO Price+Non-Recoverable Tax})

• These accounting entries can be viewed from Receiving Transaction summary > Transactions > Tools > View Accounting
• These entries get created in rcv_receiving_sub_ledger

Return to Receiving/Negative Correction (Standard Costing)
– Material Valuation a/c CR @ Std Cost
– Receiving Inspection a/c DR @ Actual Landed Cost
– Purchase Price Variance a/c CR @ difference between Std cost and Actual Landed Cost

Return to Receiving/Negative Correction (Average Costing)
– Material Valuation a/c CR @ Actual Landed Cost
– Receiving Inspection a/c DR @ Actual Landed Cost

• These entries can be viewed from Inventory > Material Transactions > Distributions
• These entries get created in mtl_transaction_accounts

7. Raise a Debit Note

– AP Accrual a/c CR @ PO Price
– Tax CR @ tax rate
– Liability a/c DR @ Invoice Price including tax
– Invoice Price Variance a/c CR @ difference between PO price and Invoice Price

Note:

1. Estimated and Actual Landed Cost are always inclusive of PO price and Non-Recoverable tax.
2. Landed Cost Absorption account need not be having zero balance at the end of this procure to pay cycle in LCM enabled organization. It will be zero only if default charge a/c defined in Receiving options is same as the landed cost absorption a/c and Actual landed cost is same as the Estimated landed cost.
3. Accounting entries for Expense POs and Shopfloor destination POs has no impact as Landed Cost Management is not applicable for Purchase Orders with Expense and Shopfloor destination.
4. Landed Cost Management has no impact on the Encumbrance Accounting as the PO gets reserved at PO price and it gets reversed at PO price only even though the actual charge account get hit at landed cost.
5. Retroactive Pricing is not supported in LCM enabled organization and hence retroactive price update program will not create the retroactive price adjustment entries in Receiving subledger for the receiving transactions created.

Release 12.1.1 New Features in Oracle Landed Cost Management

Overview

Oracle’s Landed Cost Management application is a new product released on EBS r.12.1.
Landed Cost Management enables organizations to gain insight into all of the “real”costs associated with acquiring products including broker, terminal, insurance, and transportation fees as well as duties and taxes. These costs are initially estimated and updated with actual amounts as they become known allocating them to shipments, orders, and products. Cost methods and inventory valuations are accurately maintained providing better visibility into an individual product’s profitability and an organization’s outstanding exposure. This data provides better insight for product forecasting and budgeting and provides clear evidence of the detailed accumulation of expenses for regulatory requirements and reporting.

Features

1. Charge Management
Many of the charges that apply to landed costs can be complicated in their application, maintenance, and ongoing tracking. These charges are received in a variety of formats at different points during a fulfillment process. These points include product creation, sourcing, order creation, shipping, receiving, and invoicing. Organizing and tracking these charges as soon as they are incurred is key to a company fully understanding their outstanding liabilities.

Oracle Landed Cost Management collects an unlimited number of estimated charges and allows users to configure how charges should be applied to a shipment line, a group of lines within a shipment, or an entire shipment. It applies these charges based on weight, volume, quantity, or the value of the items being traded. These charges can be categorized by different cost factors, which will ultimately govern the behavior in how they are included in a total landed cost calculation. Once actual amounts are received, Charge Management records the new value for comparison with the earlier estimates and sends adjustments to backoffice applications.

2. Advanced Pricing for Charge Templates
When organizations try to obtain estimates for a particular charge, they can typically identify standard business rules for when these charges should apply. Oracle’s Landed Cost Management application allows users to enter lists of estimated charges and conditions as to when these charges should apply by using Advanced Pricing. This enables a template of charges to automatically be applied to a receipt. It removes the need for a charge reference spreadsheet or document often found in organizations dealing with complex supply chains and minimizes error prone steps of manually entering charges during a transaction. Once these estimated costs are applied by Advanced Pricing, users have the ability to verify and update them via Oracle Landed
Cost Management’s Charge Management functionality. Ultimately, Oracle Landed Cost Management uses these components to calculate the estimated landed cost.

3. Landed Cost Calculation
Most organizations struggle to find the “real” costs required to take a product to market, to source a product overseas, or to do business with a particular vendor or customer.
Knowing the total actual landed cost of goods provides powerful insight in today’s competitive global markets. When companies use this landed cost information strategically, they can control overall product margin and optimize profitability. Some companies can only estimate this landed cost at best, while others can calculate estimated or actual costs. Often times, this is done in a semi-automated fashion in different places, making it difficult to compare estimates with actuals.
The Oracle Landed Cost Management engine provides the ability to calculate the estimated landed cost based on charges manually assigned and automatically allocated based on the configuration in the charge management repository. It recalculates applicable taxes and can be configured to exclude recoverable tax amounts. It also calculates the actual landed costs by prorating the actual invoices and proportional taxes to obtain the variances between what was estimated and what was charged. Cost components summed in the calculation remain stored at the most granular level for detailed tracking of charge amounts while variances are updated to the appropriate accounts.

4. Product Cost Dashboard
Financial flows do not mirror physical supply chain transactional flows. Landed cost management helps to link these two flows together and provides visibility and traceability from one to the other. With Landed Cost Management’s dashboard pages, companies can see the real time accrual updates for a particular receipt or shipment.
They can validate the accuracy of a supplier’s estimate by comparing estimated and actual costs and can see the percentage of a particular cost component for a particular item. Additionally, users can make use of all the flexible Oracle and E-Business Suite tools in order to meet their own customized reporting requirements.

5. Tax Recovery
Many countries impose high tariffs on items as they pass through the supply chain. This can sometimes reach into the double digits. As a result, tax recoverability becomes extremely important when organizations are making sourcing decisions and automating inbound flows. Oracle Landed Cost Management factors in tax recoverable amounts in the landed cost calculation, so that estimated and actual landed cost calculations do not overstate the true tax costs.

6. Integration to EBS Supply Chain and Backoffice
Almost all organizations struggle to provide their backoffice systems visibility into estimates of accrued liabilities that are then updated with actual amounts when they become known. This is particularly the case when organizations have a large portion of their trade done across borders or have a complex supply chain. Oracle’s Landed Cost Management is integrated with Oracle E-Business Suite’s financial and supply chain applications to provide this visibility and make implementation straightforward. Oracle Landed Cost Management provides the estimated landed cost to E-Business Suite Inventory Receiving, which then automatically forwards it on to E-Business Suite Cost Management module. Once actual costs are obtained and shared with Accounts Payable, variances are effectively communicated to E-Business Suite Cost Management module.

6.1. Procurement Integration
Procurement Information is often the baseline information used to itemize expected shipment or receiving lines on which extended supply chain charges will be applied. Landed Cost Management provides visibility into E-Business Suite Procurement data in order to build expected shipments for charge application and subsequent landed cost estimation calculations. When manually entering expected shipments the reference information provided by Procurement saves time and decreases errors that might occur without automated access to this information. Once available in Landed Cost Management, expected values received from procurement such as quantity and price can be edited for estimated cost calculation purposes. Furthermore, all the necessary data is provided to help arrive at an accurate three way match once an
invoice for a PO line or charge is entered into Accounts Payable.

6.2. Receiving Integration
It is difficult to gain insight into charges associated with the acquisition of items through an extended supply chain. Often, organizations are not aware of them until an invoice is received. Companies need better visibility into these charges. Additionally, many regions require that all expenses be accounted for at an
item/product level upon receipt. In order to comply with these requirements and provide an accurate calculation of product related expenses, these extended costs need to be estimated and applied to an item at the time of receipt.
Oracle’s Landed Cost Management’s integration with EBS Inventory’s Receiving module enables Receiving to view LCM’s estimated shipments and receive against them. It further calls LCM for a total cost estimation calculation for all receipts whether they originate in LCM or in Receiving itself. These estimations are then forwarded to E-Business Suite Cost Management module in order to update inventory valuations and accounting.

6.3. Cost Management Integration
When organizations are able to estimate landed costs, they often do not communicate those estimates to their backoffice system. This is because they lack an automated method to update these estimates with actual values once they are received. This prevents them from fully utilizing the estimated information in their reporting and decision making processes.
After actual values are received and the true landed cost is calculated in Landed Cost Management, any variances between the actual and the estimate are determined.
Those variances are updated to E-Business Suite Cost Management module which in turn updates the proper accounts and valuation.

6.4. Accounts Payable Integration
Few Accounts Payable applications provide a mechanism to apply and match an unlimited number of charges to a particular procured item line or group of lines.
This means that accurate actual landed cost calculations might be difficult to automatically calculate. Additionally, this prevents tying an actual charge back to any record of an earlier estimated landed cost calculation.
Oracle Accounts Payable allows for unlimited numbers of charges to be entered and applied to procured line items and allows line items to be applied and associate to recovered line items. This information is forwarded to Landed Cost Management which in turn calculates the Actual Landed Cost. These values are compared with earlier estimates to determine if a variance should be communicated to Costing and ultimately to the General Ledger.

Oracle Landed Cost Management

• Oracle’s Landed Cost Management application is a new product released on E-Business Suite R.12.1

• Oracle Landed Cost Management captures extended supply chain costs (freight, insurance, duties, taxes, etc.) and attributes them back to the products which incurred them

– Costs can be estimated during receiving

– Actual costs calculated when invoices arrive to identify variances

– Receiving estimates and any variances automatically update inventory valuation and accounting

So what are we talking about when we talk about “landed costs”.   Let’s use a quick example to baseline our

discussion of the topic.

For many companies the first challenge is gaining internal information visibility. Companies with a high number of purchases and sales involving great distances and cross-border transactions involving many hand-offs, Experience challenges trying to obtain accurate, timely and complete information. The total landed cost of merchandise is more than what is typically displayed on a trade document, like an invoice, and it can surprise a company to realize what exactly constitutes a “total landed cost.” The major cost elements include items such as:

the price of merchandise, shipping and handling fees, duties, taxes and other government charges.

In this example, the PO Item cost was $100.  The real cost of the item was $140.  An additional 40% is added to the cost of the item due to extended supply chain costs.  In many cases, organizations report and make decisions on the base item cost without visibility to the real costs of product acquisition.

Organizations make decisions from

Inventory valuations

Profitability reports

Are now making them based on total landed cost rather than PO item cost

You can find more about Oracle Application Landed Cost R12