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Costing Standard Rates vs Actual Rates in Oracle Fusion™

Oracle Fusion Projects Portfolio Management (PPM) will cost labor transactions at a standard rate setup in the rate schedules. The rate could be at the person, job, or resource class level.

Oracle Fusion Payroll will cost labor transactions at an actual rate setup for the employee.

Assumptions that detail the example:

  • Actual salary $100 / pay period + $30 for Benefits
  • Employee charges 50/50 of time to direct/indirect
  • Standard Costing rate 120 & 30% for benefits applied as burden

The Payroll Transactions (Actual Costs)

The payroll transaction will be processed directly into the GL and will not pass through PPM.  There is no way to easily split the transactions across natural accounts for Direct & Indirect charges.  It will only transfer the salary and benefits transactions into separate natural accounts and look like the following:

The Project Portfolio Management Transactions (Standard Rate Costs)

The PPM transactions will also process directly into the GL and will not pass into Payroll.  PPM will split the transactions into Direct & Indirect costs.  If burden schedules are setup correctly, they will also separate the benefits & other overhead costs.

Balance Review When Closing the Period

Based on the above transactions, there are a few balances that need to be reviewed and reconciled at the end of the period.

An entry is needed at the end of the period to adjust the payroll variance and report accurately.  The labor variance measures the difference between the actual and expected cost of labor.

Financial Reporting

Finally, the financial report balances should include the variance account.  The table below shows the balances and will net to the $130 dollars from Payroll in our example:

If the rates are maintained accurately and regularly, the variances should remain small.

If the Labor Variance is favorable, the company paid less than its standard cost for the direct labor it used.

If the Labor Variance is unfavorable, the company paid more than its standard cost for the direct labor it used.

If there is a significant difference in either case, the standard labor rates or the burden rates need to be reviewed and updated.

The Labor Variance accounts along with the indirect labor cost accounts roll up to a summary indirect cost account, which is reported below the line in the P&L to derive net margins.

 

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By Neeraj Garg

Introduction

Oracle E-Business Suite Projects applications have provided Standard Costing for labor transactions for some time. However, other important approaches to costing have not been supported out of the box, such as costing using effective rates, HR rates or payroll actuals. To address these approaches, Oracle Projects provided three client extensions that could be used to replace Oracle’s standard capabilities.

Now, in Oracle Projects Release 12.2, Oracle has provided a number of enhancements that go beyond Standard Costing. These enhancements, which provide more options and greater flexibility, give companies new tools to help ensure that their costing approach fits their business, and gives them a clear view of the labor component of project costs.

The Traditional Approach

The Oracle Projects Standard Costing for labor transactions uses job or employee-based rates defined in Oracle Projects tables. However, this does not meet the specific needs of some companies and situations. For example, it does not support the following.

  • Costing using effective rates: This is typically used to address costing of labor transactions for exempt employees. Under the Standard Costing approach, all hours (including overtime hours) are costed at the standard rate. This may result in the overstatement of project costs, because exempt employees do not get paid extra for overtime work.
  • Costing using HR rates: Standard Costing in Oracle Projects requires users to set up rates by job or by employee with Oracle Projects Rate schedules. If a company is already using Oracle HR and holding employee rate information there, that information cannot be reused in Standard Costing. That is, companies cannot use HR rates directly to cost labor charges to a project.
  • Costing using actual payroll information: The distribution of actual payroll costs to project labor transactions is an industry standard in a variety of industries, such as construction, where companies typically work with small margins. Without this ability, variations between Standard Costing calculations and actual costs may be greater than the profits on projects.

Because such costing requirements could not be met with Standard Costing, Oracle Projects has traditionally provided three Client Extensions that companies could use to address a wider range of needs: These extensions are:

  1. Labor Costing Extension, which can be used to override or replace the costing algorithm provided by Oracle. It essentially allows users to implement any business logic they choose to cost labor transactions.
  2. Labor Overtime Extension, which can be used to determine overtime transactions, and then classify and cost them based on the appropriate overtime rules.
  3. Related Item Extension, which allows users to create separate “related” transactions for different labor-cost components in order to gain visibility for reporting or billing purposes.

Understanding the Enhancements

The new enhancements in Oracle Projects Release 12.2 allow companies to address various costing requirements without the use of these extensions. There are three key enhancements:

  1. Total Time Costing
  2. Costing Using HR Rates, and
  3. Costing Using Payroll Actuals.

These elements are discussed in subsequent blog articles.