When reconciling Inventory to the General Ledger, we need to know how Inventory is integrated with the General Ledger and how Inventory calculates inventory value.  Inventory integrates with GL using cost elements and material distributions.  WIP integrates with GL using cost elements and WIP distributions.  Cost elements define the elemental level that Oracle tracks and accounts for inventory and manufacturing cost.  After we review these concepts, I will discuss how Oracle calculates inventory value and how you can reconcile this balance to the General Ledger.

Oracle uses Cost Elements to track and account for Inventory Cost

Oracle uses 5 cost elements to track inventory value.  When you setup an Inventory organization, you’ll be asked for default accounts for material, material overhead, outside processing, overhead, and resources.  The first two (material and material overhead) are associated with material transactions (from the Inventory module) and the last three (outside processing, overhead, and resources) are associated with WIP transactions (from the WIP module).

The Relationship between Inventory, WIP, and Receiving Transactions and Inventory Value Reports

It is important to note that only material and WIP transactions affect inventory value.  Material transactions occur in the Inventory module, WIP Transactions occur in the WIP module, and receiving transactions occur in the Purchasing module.  Receiving transactions do not affect inventory value reports.  These transactions are recorded to the receiving sub-ledger and affect the receiving value reports.

How Material Receipts flow from Receiving to Inventory

When you look at a receiving transaction (with a routing of Direct Delivery) you will see two transactions.   The first transaction is the “Receive” transaction.  This records the receipt in the receiving module and creates the accrual.  The second transaction is the “Deliver transaction”.  This records the movement of inventory from receiving into inventory.  It records the credit to the receiving module and the debit to the inventory module. The way receiving affects inventory value is when the “deliver” material transaction is created.  This transaction is not recorded in the receiving module it is recorded in the Inventory module.

How Oracle Calculates Inventory Value

When a material or WIP transaction is processed in Oracle, the on-hand quantity is updated.  If you are using the Average Cost costing method, the average cost is also updated.  Oracle uses the on-hand quantity multiplied by the item cost to calculate Inventory value.  If you run period-end inventory value reports, Oracle will rollback the quantity and cost to the period end values.  Otherwise, the inventory value is calculated (real time) with the current on-hand and item cost.

The Relationship between Material and WIP Distributions and Inventory Value

After a material or WIP transaction has been recorded, the Cost Manager will create the distributions for that transaction.  Each transaction has two distributions per cost element.  Each cost element will have a debit and credit distribution associated with specific accounting line types.  The accounting line type tells us if this distribution affects inventory value.  If the accounting line type is “Inv Valuation” then inventory value is affected.
Because “Inv Valuation” is the only accounting line type that affects inventory value, we can say that the inventory value should equal the sum of the “Inv Valuation” accounting line types.  This gives us the first step in our reconciliation.   Does the sum of the “Inv Valuation” accounting line types equal the Inventory Value report?  If not, then you have a problem with the on-hand or item cost being out of sync with the material distributions.   To verify this for a specific period, you need to subtract the inventory value from last period from the inventory value for this period.

Reconciling Inventory Activity to GL Activity

After you have verified that the difference between last period’s inventory value report and this period’s inventory value report equals the “Inv Valuation” material distributions, you can verify the sum of all material distributions for each inventory valuation GL account equals the difference the same amount.  If there’s between the two amounts you know that there are some material distributions that do not have an accounting line type of “Inv Valuation”.    The main culprit for these distributions is miscellaneous issues, miscellaneous receipts, and cost updates coded to an inventory valuation GL account.  The other possible reason is if your receiving account is the same as your inventory valuation GL account.  This will cause you to debit and credit the same account when the “deliver transaction” is recorded.  You can verify this by entering the material valuation GL account with the accounting line type of “Receiving Inspection” into the material distribution form.  When you have the adjustments to your material distributions, you can now compare the material distributions amount to the difference between last period’s GL balance and this period’s GL balance.  If you are using different accounts for each cost element, you’ll need to add them together before comparing.   If you have a problem here, then look for journal entries that do not have a source of Cost Management.   If you exclude these journal entries and you still do not balance, then make sure all accounting has be created, interface, and posted to the GL.