Defining Overhead

You can use material overhead and overhead cost sub-elements to add indirect costs to item costs on either a percentage basis or as a fixed amount in both standard and average costing organizations.

Each overhead sub-element has a default basis, a default activity, and an absorption account. The overhead absorption account offsets the corresponding overhead cost pool in the general ledger.

You can base the overhead charge on the number of resource units or percentage of resource value earned in the routing operation. Or, you can set up move-based overheads where the rate or amount is charged for each item moved in an operation. To do this, use the Item or Lot basis types.

You can base the material overhead charge on a percentage of the total value, which is earned when you receive purchase orders or perform WIP completion transactions. Or, you can use the Item or Lot basis types.

You can apply each of these sub-elements using different basis types for increased flexibility. Material overhead is earned when an item is received into inventory or completed from work in process. Overhead, based upon resources, is earned as the assembly moves through operations in work in process.

Note: If you use Oracle Bills of Materials, you must first define the bill of material parameters to use the overhead cost element in the Overhead window. If the bills of material parameters are not set up, you only have access to material overhead cost element. 

Prerequisite:

 

To define, update, or delete cost information, the Overheads: Maintain security function must be included as part of the responsibility. 

Defining overhead:

1. Navigate to the Overheads window.

2. Enter an overhead name.

3. Select a cost element: Material Overhead: Define material overhead. Overhead: Define resource and move-based overhead. This is only available if Bills of Material is installed.

4. Select an overhead absorption account. This is the offset account for any cost earned to the inventory or work in process value.

5. Select a default basis type to be used as a default for the overhead being defined. This basis type is used to determine how the overhead cost is earned and how it is applied to product costs. 

6. Select a default activity to use for this overhead. Activities are processes or procedures that consume costs and time. Your activities may be directly related to building your items, such as runtime or setup time; or they may be indirect, such as purchase order generation, payroll, and engineering activities. The goal of activity based cost accounting is to accurately identify your product costs, especially overhead costs. 

7. Select an expenditure type.If the Project Cost Collection Enabled parameter in the Organization Parameters window is set, you must associate an expenditure type with each sub-element. 

You can only select expenditure types that belong to the Burden Transactions expenditure class. Expenditure types are defined in Oracle Projects. 

8. Optionally, select a date on which to inactivate a material overhead or overhead. An inactive overhead sub-element cannot be used to define an overhead cost (when defining item costs) or associated with a resource (when defining a resource).You can continue to use item costs previously defined for and resources previously associated with the inactive overhead sub-element. The cost rollup will continue to roll up previously defined inactive overhead sub-elements.

9. Do one of the following:
To earn overheads and material overheads based on resource units or value, you must associate resources to overhead and material overhead for a specific cost type. Choose the Resources button to open the Resource Overhead Associations window.
To associate department and overhead combinations with a cost type, choose the Rates button to open the Overhead Rates window. This option is available for overheads only.

10. Save your work.

To associate resources to overhead for a cost type:

1. Navigate to the Resource Overhead Associations window.

2. Select a cost type for which to associate resources to overhead. This is only necessary for material overhead and overhead sub-elements with a basis type of Resource Value or Resource Units.

Attention: You only apply these overheads when they are associated with a resource.

3. Select the resource.

4. Save your work.

To associate department and overhead combinations with a cost type:

1. Navigate to the Overhead Rates window.

2. Select a cost type for which to associate departments with and assign rates or amounts to overhead. This is required for both resource and move (item or lot basis type) overheads.

3. Select a department.

4. Optionally, select an activity. The default is the activity selected as the default in the Overheads window. 

5. Select the basis. The default is the basis selected as the default in the Overheads window. 

6. Enter the percentage rate or the fixed amount, as appropriate for the basis. If the basis is resource value, enter a rate in this field. If the basis is resource units, item, or lot, enter an amount in this field.

7. Save your work.