COGS vs DCOGS - Few important points

Whatare COGS & DCOGS ?

The purpose of this document is to explain how COGS Recognition works on Create Accounting engine.

There is no Deferred COGS functionality in 11i, this functionality was introduced in R12 to be compliant
with the Sarbanes-Oxley legislation, hence before R12 there is no Cogs Recognition process. In 11i a sales
order issue will be costed hitting the COGS account directly hence there is no Cogs recognition process,
the normal accounting template for Sales order issue (no intercompany) will be Debit Cogs and Credit the
Inventory valuation from where the item is being issued from.

QUESTIONS AND ANSWERS

1 - When does an RMA debit inventory and credit DCOGS account?

A. RMA has created after COGS Recognition. So RMA debits inventory and credits COGS account. If RMA
happens before COGS Recognition then RMA debits inventory and credits DCOGS account.

2 - Why there is no accounting for COGS recognition?

A. There is no accounting for COGS recognition because it has zero quantity.
Reason :- Customer has created RMA against this Sales Order Line.

3 - No COGS Recognized (COGS will never be recognized as there is no reference to the original invoice).
Why?
A. COGS recognition is designed to match with AR revenue recognition.If you don't have an invoice yet but
only a credit memo, what would be the percentage of revenue recognized from AR?
Ej:
The COGS recognition is not going to happen at the individual RMA level, it is at the order line level that
has been shipped.
Say you have debited the Deferred COGS for the original shipment at $100, then you have credited the
Deferred COGS for the RMA receipt at $40. The net Deferred COGS is $60, so far so good. After the credit
memo and invoice have gone through, what matters at this point of time is how much net percentage of
revenue is recognized from AR for this order line. Suppose a 50% revenue recognized, then a distinct
COGS recognition transaction is going to be created that will credit deferred COGS at $30 and debit COGS
at $30. The accounting of original shipment and RMA transactions would not change, but the additional
COGS recognition transaction will make the order line's recognized COGS to be matched with recognized
revenue.
4 - Why Inter company COGS account is not working after completing mandatory setup?
A. There is a difference between the internal order flow and drop shipment or global procurement flow. The
intercompany COGS account defined in the Inter-company Relations form is only used in drop shipment
and global procurement flows. For internal order flows, the account is driven by the Inventory Cost of
Goods Sold Account workflow. In default, the workflow process uses the item COGS account, but the user
can configure the process to use any other account.

Other references:
Note 747638.1- R12 Where To Define Inventory Cost Of Goods Sold Account Workflow
Transfer Price Accounting in Oracle SCM, Feb 2006 (Note 360106.1).

5 - How to diagnose missing COGS Recognition events?

A. Checking whether the COGS events are costed is easy, you just verify mmt.costed_flag. Checking
whether COGS events are created is more functional and less simple. You can use the R12 Revenue
COGS matching report to find out whether the result is expected. If the expected COGS recognition
percentage does not match Revenue percentage, there could be a potential problem.

6 - Can we close the Inventory period without running the

COGS recognition concurrent programs? If not, what prevents it? If so,
what are the entries that are created when the recognition is run the
following month and the inventory period for the current month is
closed?
A. If the customer is using perpetual Costing Method "Standard", "Average", "Layer" then the inventory
period can be closed prior COGS recognition process. If the customer is using PAC then the "Collect
Revenue" and "AR period" needs to be closed prior PAC period close.

7 - How to derive COGS Account Cost Center using Salesperson Value from Sales Order form in Order
Management thru SLA?
A. Looking at gmf_xla_extract_headers, for the OM issue from stores transaction, the transaction_id on that
row points to a row in mtl_material_transactions and the column source_line_id in that table points to the
line_id in oe_order_lines_all.

8 - Why when generating Accounting--the COGS , accounting does not follow the Revenue Accounting for
the Receivable Invoices?
A. COGS account in Oracle EBS is driven and derived from Order Management COGS account generator
workflow. If you need help for that workflow, contact Order Management team.

9 - Is there a way for Cost Management SLA (Subledger Account) to utilize the same sources as the AR
SLA?
A. Right now, there is no built-in cross reference of sources in SLA between Receivables and Cost
Management. There are two options for the customer:
a - Inside SLA, build a few custom sources for Cost Management Application that the customer is using for
Receivables.
b - Even though the deferred COGS account is a fixed organization parameter, the true COGS account is
derived from Order Management COGS Account Workflow. That is well-known in 11i and the functionality
remains in R12. The logic can be mimicked inside the workflow.

10 - Trying to generate Deferred COGS but instead the Inventory Accrual account appears on the Inter-
company AP invoice. How can they get this to be a deferred accrual account?
A. There is only deferred COGS, no such a thing called deferred accrual. To do the drop shipment right,
you need to set up the transaction flow and inter-company relations with advanced accounting, not the
shipping network setup.

When the setup is right, you would get one physical transaction out of OU2, one logical transaction for
OU2, and two logical txns for OU1. The logical sales order issue transaction of OU1 will hit deferred COGS
account. The deferred COGS will be transformed into true COGS after you run the COGS recognition
programs. As for the inter-company AP invoice, it should use the intercompany accrual account defined in
the inter-company relations form. There is no concept of deferred accrual.

Please see Inventory documentation about transaction flow setup and Cost Management User's Guide on
Revenue and COGS Matching for more details.

11 - COGS account is going 100% into the account instead of getting deferred into 5 groups. Our revenue
accounting rule splits the revenue into 5 deferred periods and we expect the COGS to do the same. I ran
the 3 programs under Cost Management (Resp.) -> COGS accounting and the Material Distributions is still
going 100% into a single account, instead of creating 5 records for 20% each in each period. Why?
A: For a given sales order shipment, it always goes to 100% deferred COGS at first. Then after you run
those programs for each period and assuming AR passes the right percentage of revenue recognition, we
will move from deferred COGS to COGS accordingly. For example, at period 1, if AR says 20% revenue
recognized, then you then programs and you will have 80% deferred COGS and 20% COGS. And at period
2, if AR says now 40% revenue recognized, you run the programs and you will have net 60% deferred
COGS and 40% COGS.

12 - After the COGS generation program is run, COGS entry can be viewed from Material Transactions
Distribution screen in Inventory. The COGS account is wrong as the workflow was not updated. How to
change the cogs account after it is generated?
A. The COGS entry is recorded in material distribution, sub-ledger accounting (SLA) and general ledger.
There is no way to go back to re-cost or re-account for old transactions. Practically speaking, the best way
is to manually adjust them inside GL and move forward with the correct accounting for new transactions.
13 - How to use COGS Account Relationship to Advanced Pricing?
A. n order to get it working, both profile options INV:Inter-company Invoice for Internal Orders and CST:
Transfer Pricing Option must be set to Yes at site level. Cost manager is at global level, there is no support
at responsibility level. Please study the following white papers:

- Transfer Price Accounting in Oracle SCM, Feb 2006 (Note 360106.1)

- Overview of Inter-company Invoicing, July 2005 (Note 336129.1)
- Inter-company Invoicing and Advance Pricing Integration, May 2002 (Note 733873.1)

14 - RMA Receipt transaction does not credit actual Cogs Account. Why?
A. This is intended behavior in R12.

For RMA receipt Transaction with reference to original Sales Order document will create below accounting
distribution:
Dr.Inv
Cr.Deferred COGS
There will be separate COGS Adjusting entries created for the COGS Adjustment based on the COGS
Recognition percentage.
Dr./Cr.COGS
Cr./Dr.DCOGS

For RMA receipt Transaction without any reference to Sales Order document will create below accounting
distribution:
Dr.Inv
Cr.COGS
This will result in balanced journal entries.

15 - Sales Orders are for a single customer, linked to a single sales rep, and can contain an item A which,
depending on the usage at sales order lines level, has to be linked to two distinct business lines.
Thus the same item used in the same order and in 2 sales order lines has to generate revenue account
and cogs accounts linked to 2 distinct business lines. How this can be achieved ? Can we use the order
line type for this ? Impacts on the AR and COGS auto-accounting ?

A. COGS and revenue accounts are not built the same way.

For revenue account, the auto-accounting allows to default your business line segment from the bill to site,
the transaction type (AR one, not the OM one), the sales rep or the product. If the product is not the single
driver for your business line segment value, does one of these other values could be used ? If not, it means
the value will have to be corrected manually in the invoice, or a custom to be built depending on customer
rules. For the COGS, it's generated by the account generator workflow, this can be customized to default
the value expected by the customer.

17 - Can we "Turn Off" DCOGS in Release 12.0.x ?

A. Deferred COGS and Revenue-COGS matching are mandatory new features in R12 to help customers
be legal-compliant. There is no standard way to support disabling this best-practice feature set.

18 - Why is COGS charged to the incorrect GL account?

A. COGS account is stamped as MMT's (MTL_MATERIAL_TRANSACTIONS table) distribution account,

and it is driven by the Order Management Cost of Goods Sold Account workflow. Customers can configure
the workflow process to achieve their business needs based on item types.

19 - In 11.5.10.x mtl_material_transactions table and locator_id field was used to get information on
inventory charged to projects. In R12 locator_id field is blank, how to find?

A. In EBS release 12.x.x COGS is a logical transaction --not a material transaction as 11.5.10.x.
COGS transactions will not have project and locator information.

20 - Can COGS Recognition transactions created in a closed inventory period?

A. Refer Oracle Cost Management User Guide ->Revenue and COGS Matching ->Period Close
Considerations Here its clearly mentioned that COGS Recognition transactions can be created in Closed
Inventory Period. If the GL period is closed then COGs Recognition events/transactions will be created in
next open GL period.

COGS PROCESSES:
------------------------------
-Record Order Management Transactions
- Collect Revenue Recognition Information
- Generate COGS Recognition Events
Related Reports:
----------
- Material Distribution Detail report
- COGS Revenue Matching report
Deferred COGS: How to use this feature of Oracle Apps
R12

Finally a relief for all the accounting users who had problems working
with oracle apps due to period mismatch of revenue and cost
recognition. Generally the orders which are shipped on the last day of
month have this issue. As most of youknow that till release 11i, the
value of good shipped is expensed to COGS when the material in ship
confirmed in shipping and revenue will get recognized after the invoices
are generated in AR and revenue recognition is done. The problem that
accountants face with this design is that on the last day of month COGS
gets recognized when we ship confirm the material but invoice gets
generated in next month and so revenue gets recognized in different
month. This does not look good from the matching principle which
requires the revenue and cost should get recognized in the same period.

The deferred COGS account is the new feature introduced in Release 12. The key fundamental
behind the feature is that the COGS is now directly matched to the Revenue. In simple terms,
this means, COGS for an order line will be recognized only if the revenue is recognized for that
line making sure that the revenue and COGS are posted in the same month. Matching
percentage is also taken care which ensures that revenue and cost are always in sync.

Setup:Only one key setup involved for this functionality is to define the Defer COGS account.
Navigation:Inventory Setup Organization Parameters Other Accounts
Business Process:
In R11i When a Sales order is shipped and interface trip stop is completed. This make a call to
COGS workflow to generate the COGS account. This then generate following accounting.

Cr Inventory Valuation account $250

Dr COGS Account $250

In R12 when a sales order is shipped and interface trip stop is completed the following
accounting entries gets generated.
Cr Inventory Valuation account $250
Dr Deferred COGS Account $250

After the AR invoice is generated and the revenue is recognised (Considering you dont have
revenue recognition policies or specific accounting rules), following program will create COGS
recognition transaction. This will reflect a change in the revenue recognition percentage for a
sales order line.

1. Collect Revenue Recognition Information program:This program will collect the

change in revenue recognition percentage based on AR events within the user specified date
range. It collects invoice information of the sale order line from RA_CUST_TRX_LINES_ALL
and RA_CUST_TRX_LINE_GL_DIST_ALL after the revenue is recognized and check the
percentage revenue recognized. It then insert information in
CST_REVENUE_RECOGNITION_LINE.
Navigation:Cost > COGS Recognition > Collect Revenue Recognition Information
2. Generate COGS Recognition Events:This program will create the COGS recognition
transaction for each sales order line where there is a mismatch between the latest revenue
recognition percentage and the current COGS recognition percentage. This is the program
which also makes the transactions costed by creating these accounting entries. So cost
manager is not used to make these transactions as costed in R12.The COGS account in this
entry is taken from the distribution_account in mtl_material_transactions table (which was
generated earlier by COGS workflow).
Cr Deferred account $250 (Actual Revenue %)
Dr COGS Account $250 (Actual Revenue %)

Navigation:Cost > COGS Recognition > Generate COGS Recognition Events

This particular COGS recognition transaction actually correspond to a revenue recognition
percentage change.

As we have seen above this new feature does help in resolving some of the key accounting
issues but we need to be aware of the following also

1.With this feature the COGS recognition now requires few extra concurrent requests to be
submitted.
2.AR revenue need to be recognized to have COGS recognized
3.This functionality is not optional as it is mandatory to be used in R12
4.To make the complete set of transactions visible in the Material Transaction screen, Include
Logical Transaction checkbox need to be checked.

This concludes our discussion about Deferred COGS. Now I am planning to pick some topic
from procurement as we have not touched that area till date.

COGS and Deferred COGS In Oracle R12

The deferred COGS account is the new feature introduced in Release 12. The key fundamental behind
the feature is that the COGS is now directly matched to the Revenue. In simple terms, this means,
COGS for an order line will be recognized only if the revenue is recognized for that line making sure
that the revenue and COGS are posted in the same month. Matching percentage is also taken care
which ensures that revenue and cost are always in sync.

SETUP > Inventory Resp > Setup > Organization > Parameters > Other Accounts

Here Enter Deferred COGS Account

STEP:
==========

1. Create Sales Order and do Pick Confirm

2. Complete Shipping Confirm Process and run interface trip stop Program.

Below two Accounts Will hit.

Cr > Inventory Valuation accoun

Dr > Deferred COGS Accoun

Go To Inventory responsibility andReview the Accounts in Material Transactions form.

3. RunWorkflow Background Process and AutoInvoice Master Program to Create Invoice in AR.

Now AR invoice Got Created, But Revenue not yet Recognized.

Go To AR Resp >Control > Accounting And Search with Sales Order Number.
Revenue Not Yet Recognized.

4.Recognize the revenue in AR.

NAV > Accounts Receivables Resp > Control > Run "Revenue Recognition" Program.

After running the program, again check for Revenue.

5. Now we have to accept the Revenue.

Click on "Manage Revenue".

6. Run Below Set Of Concurrent Programs.

Record Order Management Transactions:records new sales order transaction activity such as
shipments and RMA returns in Oracle Order Management.

Collect Revenue Recognition Information:determines the percentage of recognized or earned

revenue related to invoiced sales order shipment lines in Oracle Receivables.

Generate COGS Recognition Events:creates and costs COGS recognition events for new sales
order shipments/returns and changes in revenue recognition and credits for invoiced sales order
shipment lines.

After Running ABove Programs, Verify "Material Transaction" Form. A non-physical

transaction has been generated Transaction Type= COGS Recognition
Click on "Distributions" Button and verify Accounts.

Deffered COGS : Credit

COGS : Debit.