Periodic Average Costing (PAC) Demystified
Last week when I was talking to some people, there was a major hue and cry about the need for changing the costing method. They went to the extent of trying to compare Periodic Average Costing and Average Costing. But what they failed to realize was that they were comparing apples with oranges.
Periodic Average Costing is required by law in some countries like Brazil and is applicable for fiscal inventory reporting requirement. It is invoice based and allows including additional invoiced charges in the cost of the item and hence helps report actual cost or total acquisition cost of an item at end of fiscal period.
Typically, Periodic Costing is shared across Inventory Orgs each of which having its own perpetual costing methods like Standard Costing, Average Costing, LIFO and FIFO. PAC operates at a Cost Group Level and not at Inventory Org Level.
Companies will continue to use Standard Cost at Inventory Org Level for say, Brazil while the Periodic average Cost Group will be defined to include only the Brazil Inventory Org.
For illustration purpose,
Suppose we have an Item ‘A’ in Inventory Org ‘Sao Paolo, Brazil’
Standard Frozen Cost for Item ‘A’ = USD 200
Purchase Order of 200 Units @ USD 250 received on Day 1
Purchase Order of 300 Units @ USD 300 received on Day 2
Freight = USD 400
Acquisition Cost (Cost incurred in acquiring the item) without using Periodic
Average Cost = USD 200 (Standard Cost)
Acquisition Cost using Periodic Average Cost
= USD 280.8 (200*250 + 300*300 + 400)/ (200 + 300)
So we are still using Standard Costing (and not changing the Costing Method) but for Fiscal Reporting, we are using the correct acquisition cost.
Oracle has a full-fledged PAC module with add-on BR-PAC for Brazil. BR-PAC is integrated with Integrated Receiving (RI) which was covered in one of my earlier blogs.
Comments
Just want to add about the costing in Process ERP solution (OPM) from Oracle. Three cost methods are supported in OPM - Standard, Actual & Lot Costing. Standard is pretty much same as in Discrete Cost Management. There is no real average costing (i.e. cost recalculated after each transaction) supported by OPM. We have what we call 'Period Moving Average Cost (PMAC), which is similar to PAC of Discrete Cost Management. PMAC is one of the variations of actual costing; others are ‘Period Weighted Average Cost (PWAC)’ and ‘Periodic Perpetual Actual Cost (PPAC). All three variations PMAC, PWAC & PPAC are period costing; only difference is of consideration of Opening Balance & Range of period which will be considered for calculating the cost. In Lot Costing, cost is calculated of each lot. Instead of LIFO & FIFO, Lot Costing is used in OPM, which is a more accurate reflection of Cost.
Posted by: Ashish Namdeo | April 20, 2009 10:32 AM
Hello,
What is the difference between WAC (Weighted Average Cost) and PAC?
Posted by: Sundar Yegnesan | April 21, 2009 4:56 PM
Is there India localisation support or customization done by any one? We cannot use it without that? Also IR ISO does not support base apps taxrx. Is there any solution?
Posted by: amondikar | June 20, 2009 8:21 AM
Hi Amondikar,
Oracle Standard PAC will work fine under India conditions unlike Brazil where there are some legal compliance issues. Can you please explain a bit more on the IR-ISO issue before I suggest a solution? You can contact me at sandeep_chatterjee@infosys.com
Posted by: Sandeep Chatterjee | June 22, 2009 3:57 AM
Hi, I mean India localisation non recoverable taxes in purchase order receipts are not considered as acquistions costs in PAC and hence we cannot use this, Oracle Localistion has declared that ER, I think.
For across operating units/legal entity in same innstance when we move materials and charge excise/VaT/CST in shipping entity, the receiving entity cost group needs to take that as a cost if they are non recoverable. We use internal requistion and internal sales order and use localisation tax. But when we tested with base apps tax in requisition they don't flow to internal order, if we manually apply the tax on internal orders then receiving time the receipts does not have that tax and no accounting entry is generated for taxes as well so we can not use base apps for IR ISO flow.
SO cannot use PAC for india
let me know your view
thanks
Posted by: amondikar | August 22, 2009 2:04 PM
Hi,
In case of Brazil localization, they have a module called Integrated Receiving (RI) where you need to enter all tax details. This module is hooked to BR-PAC which calculates the acquisition cost with PO price and freight in the Purchase Order and other taxes included in a document called Nota Fiscal Entrada.
For Indian conditions, unless you input the taxes as a separate line item in the Purchase Order itself, it will not get captured in PAC.
Posted by: Sandeep Chatterjee | August 24, 2009 5:31 AM