The deferred COGS of goods account is the new feature introduced in Release 12.

The basic fundamental behind the enhancement is that the COGS is now directly
matched to the Revenue. The same was not possible till now.

Prior to this enhancement, the value of goods shipped from inventory were
expensed to COGS upon ship confirm, despite the fact that revenue may not yet
have been earned on that shipment. With this enhancement, the value of goods
shipped from inventory will be put in a Deferred COGS account. As percentages of
Revenue are recognized, a matching percentage of the value of goods shipped from
inventory will be moved from the Deferred COGS account to the COGS account,
thus synchronizing
the recognition of revenue and COGS in accordance with the recommendations of
generally accepted accounting principles.

The Matching Principle is a fundamental accounting directive that mandates that

revenue and its associated cost of goods sold must be recognized in the same
accounting period. This enhancement will automate the matching of Cost of Goods
Sold (COGS) for a sales order line to the revenue that is billed for that sales order
line.

The deferral of COGS applies to sales orders of both non-configurable and

configurable items (Pick-To-Order and Assemble-To-Order). It applies to sales orders
from the customer facing operating units in the case of drop shipments when the
new accounting flow introduced in 11.5.10 is used. And finally, it also applies to
RMAs that references a sales order whose COGS was deferred. Such RMAs will be
accounted using the original sales order cost in such a way that it will maintain the
latest known COGS recognition percentage.

To set the deferrred COGS account.

Inventory -- Setup -- Organization -- Parameters -- Other Accounts

A new account is added which is referred as the Deffered COGS accounts.

NEW ACCOUNTING :

Release 12 :

When a Sales order is shipped the following accounting takes place:

Inventory Valuation Account : Credit.

Deferred COGS account : Debit

Once the revenue is recognised, you would need to decide the percentage you wish
to recognize the Revenue. A COGS recognition transaction will be created to reflect
a change in the revenue recognition percentage for a sales order line.

The steps to generate such transactions are as follows:

1. Run the 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.
2. Run the 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.

Note that users can choose how often they want to create the COGS Recognition
Events.

Navigation to run the COGS recognition request :

- Cost > COGS Recognition > Collect Revenue Recognition Information
- Cost > COGS Recognition > Generate COGS Recognition Events
- Cost > View Transactions > Material Transactions

The distribution for the COGS Recognition transaction associated with the Sales
Order transaction now would be as follows:

Deffered COGS : Debit y revenue percentage

COGS : Credit (Actual revenue percentage )

Thus, essentially the recognized COGS balance is to move the value from Deferred
COGS to COGS.

This particular COGS recognition transaction actually correspond to a revenue

recognition percentage change.

You can view the transactions as :

Navigation:
- Cost > View Transactions > Material Transactions > Distributions

A new COGS Revenue Matching Report shows the revenue and COGS information of
sales order that fall within the user specified date range by sales order line

SIMPLER TERMS ( Table level details ) :

Once the whole cycle is complete we will have 2 transactions lines in

mtl_material_transactions.

1. Sales Order
2. COGS Recognition transaction

Accounting will be in mtl_transaction_accounts and the Subledger accounting tables

as follows:

Transaction 1:
Inventory Valuation Account : Credit. (item_cost)
Deferred COGS account : Debit (item_cost)

Transaction 2:
Deffered COGS : Credit (Actual revenue percentage)
COGS : Debit (Actual revenue percentage )

DCOGS AND COGS RECOGNITION ACCOUNTING USEFUL TIPS [ID 1060202.1]

Modified 18-MAR-2011 Type FAQ Status

PUBLISHED
In this Document
Purpose
Questions and Answers

Applies to:
Oracle Cost Management - Version: 12.0.0 to 12.1.3 - Release: 12 to 12.1
Information in this document applies to any platform.
Cost Managemenft > SLA > Create Accounting
Sales Order Issue -> COGS Recognition
Purpose
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 (Metalink 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
https://metalink.oracle.com/cgi-bin/cr/getfile.cgi?p_attid=72450.1:284025.

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.

Related

Products

• Oracle E-Business Suite > Manufacturing > Discrete Manufacturing > Oracle Cost
Management
Keywords

SETUP; RMA; DEFERRED COGS; R12; INVOICE; DEFERRED; REVENUE; COGS

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