Product Costing

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 Topics
 SAP Overview
 Product Cost Planning
 Product Cost Execution
 Month End Closing
 Reporting

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 SAP – FICO role
 For most part, operational transactions now have automatic
accounting entries generated behind the scenes
 Focus of the accounting function will shift from “data compilation
and generation of reports” to “data monitoring and analyzing of
reports”
 Tight integration in SAP will require gaining working knowledge of
other SAP functional modules
 Timely identification of erroneous transactions by means of
periodic review of data is important to be able to fix the error
 Flexibility of fixing errors using journal entries will be very limited

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 Cost Center vs. Shop Floor responsibility

 SAP separates Cost Center responsibility from

production.
 Cost Center costs are dependent upon activity
drivers determined based on the nature of costs.
 Production efficiency is reflected in the production
variances driven by production order process.

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 Cost Center-Work Center relationship

 Cost center layout is driven by cost control and management

considerations
 Must be able to plan and book actual payroll and expenses at

the cost center level

 Cost centers should be subject to responsibility accounting

 A work center must be assigned to one cost center

 One cost center may include several work centers
 Standard labor/overhead rates are derived by taking the planned
labor/overhead dollars/euros in the cost center and dividing them
by the planned activity quantity from the work centers

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 Long Term Planning (LTP) Process

 The SAP system is designed to calculate the

manufacturing plan by part number with the quantity.
 This gives the planned labor and overhead hours by cost
center to be used when calculating standard activity
rates.
 As an alternative, planned hours and/or the activity rate
can be calculated off-line and entered in SAP manually.

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 Topics

 SAP Overview
 Product Cost Planning
 Product Cost Execution
 Month End Closing
 Reporting

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 Product Cost Planning - 1

PLANT SUPPORT PLANT MANUFACTURING SALES DEMAND

COST CENTER COST CENTER

Activity independent Activity dependent planning (budget LONG TERM

planning (budget dollars/euros by cost element by activity PLANNING
dollars/euros by cost
element)
type)
Variable
Fixed Load Demand
(Volume by Part
Activity independent planning (budget
Number)
dollars/euros by cost element)
Fixed Run LTP on BOMs
and Routings

Allocated Costs from support Cost Centers Transfer Activity

Quantity to Cost
Fixed
Centers

Total Plan Cost Plan Activity Quantity

Plan
PlanActivity
Activity
8 Price
Price
 Product Cost Planning - 2

Inputs Process Output

Material Bill of Material
Master Materials Costs

Calculate Product Cost Estimate

Release Standard Product Costs

Mark Future Standard Cost
Routing
Update
Work Center Activity
Activity Material
Cost Quantity Costs Master
Center and
Revalue
Plan
PlanActivity
Activity inventory
Price
Price

Costing Surcharge
Sheet

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Product Cost Planning - summary
Quantity Structure:
PP Master Data
BOM Routing Cost estimate for Mat ‘A’
Cost
Cost Items
Items Plan
Plan Actual
Actual

Mat 1 1,500
Mat 2 2,000
Mat 3 500
Value Structure
Material 4,000
Prices for Materials Labor 2,500
Prices for Activities
Overhead Overhead 1,500

Total 8,000

Cost estimate:
Standard costs

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 Topics

 SAP Overview
 Product Cost Planning
 Product Cost Execution
 Month End Closing
 Reporting

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 Product Cost Execution - 1
Create/Release Order Financial postings
No financial impact at this step
Production

Copy from active

Execution

Material production BOM

‘A’
Copy from active
production Routing
Controlling

Calculate Planned Order

Cost Based on current
BOM and Routing

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 Product Cost Execution - 2

Goods Issue Financial postings

Material
Production

Any discrete-issue Raw Mat Inventory Consumption

Execution

Materials and Semi-

4600 4600
Finished Goods are issued
to the Production Order Mat 1 1800
Mat 2 2200
Mat 3 600
Total 4600
Controlling

Standard cost of any

discrete-issued materials is
transferred from inventory
to the Production Order

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 Product Cost Execution - 3
Confirmation Financial postings

Raw Material
• Actual quantity RM Inventory
Production

Consumption
Execution

produced is confirmed
4600 4600
• Labor hours are
confirmed at standard

Production Cost Center

• Materials not issued Labor 2800

Controlling

directly to the order are Mfg. OH 1600

back flushed
• Labor and overhead Production Order
are applied to the order Labor 2800
at standard Mfg. OH 1600

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 Product Cost Execution - 4
Goods Receipt Financial postings
Production

Finished goods are FG Inventory Factory output

Execution

received into inventory 8000 8000

from the Production
Order
Controlling

Finished goods are

received into inventory
at standard from the
Production Order

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 Product Cost Execution - summary

Production
Production Order
Order Mat
Mat ‘A’
‘A’
Resource
Resource
Cost
Cost Items
Items Plan
Plan Actual
Actual

Allocation
Allocation
Mat 1 1,500 1,800
Mat 2 2,000 2,200
Mat 3 500 600

Material 4,000 4,600

GOODS ISSUE
Labor 2,500 2,800

Overhead 1,500 1,600 GOODS

RECEIPT
Total Costs 8,000 9,000

CONFIRMATION Delivery Value 8,000

Order Balance 1,000

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 Topics

 SAP Overview
 Product Cost Planning
 Product Cost Execution
 Month End Closing
 Reporting

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Month End Closing

Schedule Manager
Cost Allocation
Actual activity price calculation
Revaluation at Actual Prices
Overhead Surcharge

Run Analysis
Work in Process

Reports
Scrap,
Variances,
Target Costs
Settlement

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 Revaluation

 Revaluation of production orders is a method of

calculating the total variances at Month End, which
allows them to be allocated to a product line.
 During the month, upon production confirmation,
allocation of labor and overhead occurs real time at
planned activity (absorption) rate.
 At month end, when cost centers are posted with
actual cost, actual activity (absorption) rates are
calculated.
 The production orders confirmed during the month
are then revalued with actual activity rate.

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 Periodic vs. Full settlement

Lot-based Period-based
Functions
Product Costing Product Costing
Settlement Type FULL PER

WIP calculated based WIP calculated based

Work in Process on Actual Costs on Target Costs
Variances = Actual Costs - Variances = Actual Costs -
Variances Delivery Value Delivery Value - WIP
Should be done Has to be done
Settlement per period per period

Production Order Production Order

Cost Object

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 Status Relevance in lot-based Product Costing

Actual Costs Actual Costs

- -
Actual Costs
Delivery Delivery
Value Value
= = =
WIP WIP
Variances
at Actual at Actual

PREL DLV
PDLV Order
REL TECO
Finally Delivered or
Status
Pre-Released or Released Partially Delivered
Technically completed

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WIP and Variance Calculation in period-based Product Costing

Actual Costs Actual Costs Actual Costs

- - -
Delivery Delivery Delivery
Value Value Value

- - -
WIP WIP WIP
at Target at Target at Target

= = =
Variances Variances Variances

January February March Period

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 WIP Calculation

WIP calculation is needed to valuate unfinished products within a period.

WIP calculation in SAP can be done:

either based on status of the production order (DLV, TECO...)

=> WIP calculation at actual costs – FULL Settlement (Lot Based)
Result Analysis Key
or based on the valuation of confirmed quantities within the production
cycle => WIP calculation at target costs – Periodic Settlement (Period
Based)
Result Analysis Key

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 Variance Categories

Variance Categories

Input Variance Output Variance

Input Price Variance Lot size Variance

Input Quantity Variance Output Price Variance

Resource-Usage Variance Mixed Price Variance

Remaining Input Variance Remaining Variance

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Input Variances - Definitions

Input Price Variances between the planned

100 20 prices and the actual prices of
50
the resources

Input Qty. Variances between the planned

input quantities and the actual
input quantities of the resources

Resource- Variances caused by

usage a different resource being used
than was planned

Rem. Input Variance that cannot be

Input assigned to any other variance category,
such as overhead surcharges

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Output Variances - Definitions

Lot size Variances between planned costs

Setup and actual costs (independent of
lot size) as calculated in the delivery

Output Variance between the target credit

Price v (standard price) and the actual
S credit (e.g., moving average price)

Mixed Price Variance between the target credit of

the production version and the actual
credit with the mixed costed price

Remaining Variances that cannot be explained

due to missing target costs or
variances due to rounding problems

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 Scrap Definition in SAP
• Spoilage refers to unacceptable units of production that are discarded
or sold for net disposal proceeds.
• Normal spoilage arises under efficient operation conditions; it is an
inherent result of the production process. Costs of normal spoilage are
viewed as part of the costs of good units manufactured.
• Abnormal spoilage is not expected to arise under efficient operation
conditions. Most abnormal spoilage is usually regarded as avoidable
and controllable. Costs of abnormal spoilage are written off as losses
of the accounting period in which detection of the spoiled units occurs.

Cost Mgmt. Literature SAP´s approach

NORMAL SPOILAGE PLANNED SCRAP
ABNORMAL SPOILAGE SCRAP VARIANCE

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 Scrap Categories

Planned Scrap Categories

Planned Input Scrap Planned Output Scrap

Components Scrap Operations Scrap

Assembly Scrap

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 Components Scrap Definitions/Treatment

Component Scrap is planned % of input qty

Components
expected to fail to meet quality standards.
Scrap
Maintained in BOM or Material Master

Planned
Component Scrap is treated as additional
Components
consumption of the relevant component.
Scrap

Components No scrap variance is calculated. Additional

Scrap Variance consumption is shown as quantity variance!

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 Operations and Assembly Scrap Definitions/Treatment

Assembly Scrap
• Percentage of the quantity of an assembly that does not meet the required
production quality
• Example: an assembly scrap factor of 25 % means if you like to produce
100 pieces of an assembly you require 25% more - equals 25 pieces.
• Maintained in Material Master only. Can be updated via scheduling process

Operation Scrap
• Percentage of the material processed in an operation which does
not meet the required production quality
• Example: an operation scrap factor of 20 % means if you start
an operation step with 125 pieces you will loose 20% - equals 25 pieces.
• Maintained in Routings or in BOM

Operations Scrap Factors determine Assembly Scrap Factor

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 Topics

 SAP Overview
 Product Cost Planning
 Product Cost Execution
 Month End Closing
 Reporting

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 Reporting - 1

 Cost center reporting is designed to provide information of

actual vs. target costs for the purpose of expenditure
control. Target costs are flexed budget on the activity
driver.
 Production variance (CO) reporting is designed to provide
information concerning efficiency variances of actual
production cost vs. standard production cost.
 Production order variances are available in summarized form
in Profitability Analysis.

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 Reporting - 2
Daily/Weekly Variance Analysis - Example

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 Reporting - 3

Cost Reporting - PA & CO Variances - Example

( Favorable )
PROFITABILITY ANALYSIS CONTROLLING ANALYSIS
ACTIVITY RELATED VARIANCES MATERIAL OTHER
Variance Category Total Variance Category
Corporate
Direct Labor Manufacturing O/H Material Not
Charges Materials
Surcharge Assigned
DLBRHR MACHHR PRODUN

Material Variance $3,340 Material Input Price 1000 10

Material Quantity 2000 20
Material Resource Usage 300 10

Direct Labor Activity $1,000 Labor Input Price 500

Labor Quantity 300
Labor Resource Usage 200

Fixed Overhead Variance $710 Fixed Overhead Input Price 400 10

Fixed Overhead Quantity 200 0
Fixed Overhead Resource Usage 100 0

Variable Overhead $1,000 Mfg. Overhead Input Price 400

Mfg. Overhead Quantity 500
Mfg. Overhead Resource Usage 100

Operation Waste $53 Scrap 5 20 1 25 2 0

Other $100 Remaining Input 100

Output Price
Remaining Output

Production Variances $6,203 $1,005 $1,720 $11 $3,325 $42 $100

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 Reporting - 4

Production Variance Report - Example

• Primarily used for analyzing production performance based
on actual shop floor reporting.

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 Reporting - 5

Cost Center Monthly Report - Example

• Primarily used for cost center expenditure control at actual
activity (driver) output level.

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 Reporting - 6

Production Order Cost Report -

Example
Order 20000023058
Material 141093 UCN 7-15 metr. Egypt
Plant 2222
Order Quantity 600 EA
Delivered 600 EA

Target Cost Actual Cost Variance Target Qty Actual Qty

943206200 Activity Allocation Dir. Labor Product. 222568/222HLP 1,600.00 1,342.92 257.08 EUR 10 8.5
Direct labour 1,600.00 1,342.92 257.08 EUR
60102100 Material consumption of raw materials 2222/132049 4.60 4.60 - EUR 2 2
60102100 Material consumption of raw materials 2222/132738 4.22 4.22 - EUR 2 2
60102100 Material consumption of raw materials 2222/9800 333.26 299.94 33.32 EUR 20 18
60102200 Material consumption Merchandise 2222/9840 382.14 382.14 - EUR 25 25
60102200 Material consumption Merchandise 2222/111883 52.31 52.31 - EUR 100 100
Other raw material 776.53 743.21 33.32 EUR
943200300 Activity Allocation Overhead Production 222568/222HOP 3,479.97 2,609.98 869.99 EUR 20 15
Overhead cost 3,479.97 2,609.98 869.99 EUR
69612000 Change in inventory finished goods 2222/141093 (5,856.50) (5,856.50) - EUR 60 60
Unfinished goods (5,856.50) (5,856.50) - EUR
Net Balance - (1,160.39) 1,160.39 EUR
69999999 Production Settlement - 1,160.39 (1,160.39)
Balance - - -

• Variance of 1,160.39 will be available in cost component buckets.

• Variances can be summarized by Plant, Profit Center, Product Lines etc.

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