COGS and Deferred COGS

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 you know 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
Dr

Inventory Valuation account $250

COGS Account
$250

In R12 when a sales order is shipped and interface trip stop is completed the following
accounting entries gets generated.

Cr
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Inventory Valuation account

Deferred COGS Account

$250
$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
Dr

Deferred account
COGS Account

$250 (Actual Revenue %)

$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.