ERP Post Implementation Challanges – Part 1 Understanding COGM, COGS, Price Difference & Closing Stock Calculation
ERP Post Implementation Challanges – Part 1 Understanding COGM, COGS, Price Difference & Closing Stock Calculation
Author: Ranjit Simon John
After our Go-Live we had gone through various tough stages while trying to stabilise the system.
Major challenge we faced was resistance from end users, lack of confidence on the new system by the external and internal stake holders. Finally after working so hard on the various points raised by the internal as well as external team, we succeeded.
In this blog I would like to highlight the most important challenge we faced. Mainly they are two in number;
1) Clarity on COGM, COGS & Production Order Price Difference general ledger accounts.
2) Trying to equate the formula
Opening Stock + Receipt – Issue = Closing Stock
1) COGM, COGS & Production Order Price Difference general ledger accounts.
Let us start with COGM;
There will be mainly two entries posted in Cost of Goods Manufactured;
1) During Production Order Confirmation
2) During Production Order Settlement
First let me try to explain the GL entries posted during various stages starting from Raw Material receipt to Finished Good sales.
The postings can be divided into various Parts;
Part 1: Raw Material Receipt
Step 1: Raw Materials are received. (Goods Receipt – MIGO_GR)
Part 2: Vendor Payment
Step 2: Invoice Receipt
Step 3: Vendor Payment
Part 3: Raw Material Issue to Production
Step 4: Raw Material used for the production of Semi Finished Good 1
Step 5: Semi Finished Good 1 used as raw material for the production of Semi Finished Good 2
Step 6: Semi Finished Good 2 used for the production of Finished Good
Part 4: Finished Good received in Inventory
Part 4: Step 7: Finished Good Receipt
Part 5: Sales
Step 8: Sales Delivery
Step 9: Billing released from Accounts
Step 10: Customer Payment
Part 1: Raw Material Receipt
GL Entries during Step 1: Raw Materials are received at Inventory
Debit | Credit | |
---|---|---|
Stock of Raw Material | XXX | |
Raw Material GR/IR | XXX |
Table 1.0
Part 2: Vendor Payment
GL Entries during Step 2: Invoice Receipt
Debit | Credit | |
---|---|---|
Raw Material GR/IR | XXX | |
Vendor Account | XXX |
Table 2.0
GL Entries during Step 3: Vendor Payment
Debit | Credit | |
---|---|---|
Vendor Account | XXX | |
Bank Account | XXX |
Table 3.0
Part 3: Raw Material Issued to Production
GL Entries during Step 4: Raw Material used for the production of Semi Finished Good 1
Debit | Credit | |
---|---|---|
Raw Material Consumption | XXX | |
Stock of Raw Material | XXX | |
Stock of Semi Finished Good 1 | XXX | |
COGM of Semi Finished Good 1 | XXX |
Table 4.0
GL Entries during Step 5: Semi Finished Good 1 used as raw material for the production of Semi Finished Good 2
Debit | Credit | |
---|---|---|
Stock of Semi Finished Good 2 | XXX | |
COGM of Semi Finished Good 2 | XXX | |
COGM of Semi Finished Good 1 | XXX | |
Stock of Semi Finished Good 1 | XXX |
Table 5.0
GL Entries during Step 6: Semi Finished Good 2 used for the production of Finished Good
Debit | Credit | |
---|---|---|
Stock of Finished Good | XXX | |
COGM of Finished Good | XXX | |
COGM of Semi Finished Good 2 | XXX | |
Stock of Semi FInished Good 2 | XXX |
Table 6.0
Part 4: Finished Good Received in Inventory
GL Entries during Step 7: Finished Good Receipt
Debit | Credit | |
---|---|---|
Stock of Finished Good | XXX | |
COGM of Finished Good | XXX | |
COGM of Semi Finished Good 2 | XXX | |
Stock of Semi FInished Good 2 | XXX |
Table 7.0
Part 5: Finished Good Sales
GL Entries during Step 8: Sales Delivery
Debit | Credit | |
---|---|---|
COGS | XXX | |
Stock of Finished Good | XXX |
Table 8.0
Live posting example during sales delivery. VL01N/VL02N.
GL Entries during Step 9: Billing released from Accounts
Debit | Credit | |
---|---|---|
Customer Account | XXX | |
Finished Good Sales | XXX |
Table 9.0
Live posting example during sales invoice release from accounts using VFX3.
GL Entries during Step 10: Customer Payment
Debit | Credit | |
---|---|---|
Bank Account | XXX | |
Customer Account | XXX |
Table 10.0
Now let us try to understand COGM, COGS and Production Order Price Difference Accounts;
Finished and Semi Finished Material will be valuated at “Standard Price” for all COGM, COGS and Closing Stock calculation.
1.1) COGM: Cost of Goods Manufactured
Transactions hitting COGM account are;
a) Goods Produced
b) Goods Issued to Production Order
c) Reversal of Goods Produced
d) Entries posted during settlement of Production Orders ( Variance)
I have broken down the COGM entries for clear understanding. Please find the below screen shots.
The above figure is divided into three sections;
Section 1: Materials Produced
Section 2: Materials Issued
Section 3: Production Order Settlement
The below attached image shows how the Production Order Settlement amount of 1,403,463.52 has been arrived.
If ML is not activated we will not be able to apportion the total variance between stock, COGM and COGS. We follow the below mentioned procedure to split the variance.
In the first column the total variance for each product has been entered. Second column we enter the total quantity produced for the material. So Total Variance / Production Quantity = Variance Per Ton.
You have the quantity for Closing Stcok, COGM and COGS of the material. Multiply it with Variance per ton.
Closing Stock Quantity * Variance Per Ton
COGM * variance Per Ton
COGS * Variance Per Ton
1.1.a) Goods Produced:
When a finished or semi finished good is produced i.e after confirmation stock of the finished or semi finished good will be Debited and cost of manufacturing the finished or semi finished good will be Credited with document type “WA“. (Refer Table 6.0)
Entires will be posted against the particular material i.e with material number.
1.1.b) Goods Issued to Production Order:
When a Semi finished good is issued against a production order Stock of the semi finished good is credited and cost of manufacturing the semi finished good is debited with document type “WA“. (Refer Table 6.0)
Entires will be posted against the particular material i.e with material number.
1.1.c) Reversal of Goods Produced:
When a finished / semi finished good “A” Quantity is produced at “X” rate and reversed “B” Quantity at “Y” rate, the quantity will be reversed at “Y” rate and the difference in price “X – Y” will be posted in Price Difference and COGM account.
GL entries posted will be;
(For GL entries posted when Raw Material is Issued to Production of Semi Finished Good refer Table 4.0)
Debit | Credit | |
---|---|---|
COGM of Semi Finished Good | XXX | |
Stock of Semi Finished Good | XXX | |
Stock of Raw Material | XXX | |
Raw Material Consumption | XXX | |
Production Order Price Diff Account | XXX |
Table 11.0
1.1.d) Entries posted during settlement of Production Orders ( Variance)
During settlement of production order variance will be posted to Production Order Price Diff Account and COGM
KIndly chek my blog “Understanding Production Order Variance Part – 1 ” (http://scn.sap.com/community/erp/manufacturing-pp/blog/2012/03/13/understanding-production-order-variance–part-1).
Note: There is no hard and fast rule for analysing COGM. Analyse COGM based on the analysis I have given above, if any other entries are posted we have to analyse those entries one by one.
Let me try to explain COGM entry for one material.
COGM entry posted for material “FG1” is 27,134.90 AED.
Let me explain the entries. “FG1” produced is (Execute Transaction Code MB5B for movement type 101 + 102 ) 28,507,148.10 AED.
“FG1” issued to production order is (Execute Transaction Code MB5B for movement type 261 + 262 ) 28,480,013.2 AED.
COGM -> 28,507,148.10 – 28,480,013.2 = 27,134.90
1.2) COGS: Cost of Goods Sold
For calculating Cost of Goods Sold materials will be va;luated at standard price maintained in the material master.
Execute Transaction Code MB51 for movement type 601 + 602. Also consider price difference during sales reversal.
Both the 601 & 602 values should match with COGS general ledger (If no price diference for sales reversal is there).
MB5B 601 + 602 Report
Figure 4.0
FBL3N COGS Report
Figure 5.0
1.3) Production Order Price Difference Account
KIndly chek my blog “Understanding Production Order Variance Part – 1 ” (http://scn.sap.com/community/erp/manufacturing-pp/blog/2012/03/13/understanding-production-order-variance–part-1).
2.0) Closing Stock:
Formual for closing stock;
( Opening Stock + Receipt ) – Issues = Closing Stock
i.e Opening Stock + COGM = Closing Stock
But in most of the cases if we apply the formula the closing stock will not match. All material movement has to be considered while calculating closing stock of material.
Let us try to analys few Scenarios:
Scenario 1: Material Stock Transfer
Let us consider two materials RMOPCK2 and RMSRCK1
Material | Opening | Receipt | Issue | Closing |
---|---|---|---|---|
FG1 | 276,120.06 | 116,157,464.09 | 115,882,172.88 | 814,101.12 |
FG2 | 0.00 | 7,868,063.25 | 7,616,416.50 | 0.00 |
Table 12.0
If we substitute the values in the formula the closing stock will not match. We need to consider all material movements.
Material | Opening | Receipt | Issue | Price Diff. (0 Qty) | Material Transfer | Closing |
---|---|---|---|---|---|---|
FG1 | 276,120.06 | 116,157,464.09 | 115,882,172.88 | 37,161.73 | 225,528.12 | 814,101.12 |
FG2 | 0.00 | 7,868,063.25 | 7,616,416.50 | (251,646.75) | 0.00 |
Table 13.0
Formula modified as below;
( Opening + Receipt + Price Diff. + Material Transfer ) – Issue = Closing Stock
Sustituting the Valyues
FG1 -> (276,120.06 + 116,157,464.09 + 37,161.73 + 225,528.12) – 115,882,172.88 = 814,101.12
FG2 -> (0.00 + 7,868,063.25 + 0.00 + (251,646.75)) – 7,616,416.50 = 0
Useful Transaction Codes:
MB5B – Material Movement Report
MB51 – Material Movement Report
FBL3N – General Ledger Report
Also Refer: http://help.sap.com/erp2005_ehp_06/helpdata/EN/7e/cb7ead43a311d189ee0000e81ddfac/frameset.htm
“ERP Post Implementation Challanges – Part – 2 Reconciling GL, Raw Material Consumption, Finished/Semi Finished Material Production, Vendor Invoice“
Dear Ranjith,
All your efforts and analysis will be useful for lot of users.
I appreciate your kind heart to share it in public folder.
We look forward to see same kind of participation in forum.
Thanks a lot
Narasimhulu
Thank You Narasimhulu
Hi Ranjit
Good documentation, this will help to every body.
Thanks once again for your great efforts....
Regards
Rao
Thank you.Kindly rate the article
Hi Ranjit,
I really appreciate your effort, this will help a lot for Consultants. I hope i am expecting a lot from you like this... and all the best for your Certification.
Regards
Sridhar
Thank you Sridhar. Kindly rate the article
Well done Ranjit. Nice Article. * * * * *
thank u ravi.great to know that the article helped.kindly rate the article
Hi Ranjit, I am struggling to find that rate buttong 🙁
I click on like button, I do not know whether it is for rating or not.
Can you please guide me how to rate an article 🙂
hi ravi rating stars are at the bttom of all the blogs,articles.went through your bio,really great, i need your guidance for completing certification
Hi Ranjit, I got it now 🙂
Will reach you on your rediff.
thanku u ravi 🙂
Dear Ranjith,
A very nice artice, thanks for sharing.
Thank You
Please do let me know if you make any additions to these blogs.
A blog full of knowledge starting from the procurement in MM, Production in PP, Variances and settlement in CO, Posting impacts in FI and ultimately sales in SD. Great effort....
Thank You Atif.
You are Welcome...
Dear Ranjit,
This analyses is quit useful specially to remove scepticism from finance staff heads.
thank you dheyaa
Hi Ranjith,
I really appreciate your efforts and willingness to share knowledge. Fortunately, I have also implemented the same stuff for a cement grinding machine manufacturing company back in USA and I felt good to have a refresher by going through this document. I have also rated it.
The only place where I would like to comment on is the SD integration with Finance. I trust the entries that flow during PGI (post goods issue) and Billing are as below.
PGI (GLs flow from OBYC settings):
Debit: COGS Account
Credit: FG Inventory
Billing (GLs flow from VKOA settings):
Debit: Customer
Credit: Sales Revenue
In your set of accounting entries I did not find mention of Sales revenue being accounted any where.
Just to add further the difference between the COGS and COGM accounts is tagged to change in inventory in the Profit and Loss account in the Financial statement version.
Kindly let me know your views on above.
Regards,
Prasad
SAP certified FICO Solution Consultant
Dear Prasad,
Thanks for the remark.
Regarding the PGI the entries I Have mentioned in Part 5: Step 8
and regarding the sales revenue I have mentioned in Step 10.
Thanks once agains for the support.
Dear Ranjith,
I take you point, but have to discuss the below.
In step 8 (PGI) you get debit balance in COGS account. Later in step 9 (billing), you have nullified COGS account crediting it and took that balance to Finished goods sale account.
In step 10 you have nullified Finished goods sale account and taken it to the customer account.
So Finally if you verify you SD - FI interface accounting entries then it would be as under, which to my understanding is not correct:
Debit: Customer (this is a balance sheet item)
Credit Inventory: (this is also a balance sheet item).
So where is your sales revenue accounted for in this set of entires? That is my question. The GL account determination happens from VKOA while doing billing, I don't see it in the set of accounting entries provided in your document. Also the COGS account is nullified so it would not impact the change in inventory node in the profit and loss account in the Financial Statement version.
I would like to clarify the above.
Regards,
Prasad
Hi Prasad,
Thanks for identifying the corrections.
Could you please download this document and do the necessary corrections and re-load it into forum? Sorry to ask you, as so many users are suffering with this process.
I hope you understand what i am saying
Thanks
Hi,
I think it would better if Ranjith does it after he reviews it.
Regards,
Prasad
Dear Prasad,
Can you pleace check now, Table 9.0 I have given was wrong. Could you please check
Regards
Dear Ranjit,
The document seems correct now. Further to make the document more useful and a bit technical, can you also add the OBYC & VKOA KEYS through which those GL in the entries are determined.
I know all those, but it would be helpful to others as well.
Thanks!
Prasad
Dear Prasad,
Thank you. I am not that strong on the technical side. Can you give me the inputs. Kindly rate the article.
Regards
Yaa surely I would try, but it may take some time. I am currently placed at Singapore for some assignment and my database (hard drive) where I have documented all these things I unfortunately left it back in India.
Once I return back I would do the needful.
Thank you Prasad, All the best.
HI Prasad,
I have a doubt In the table entry 7 & 8.
7th Table :
8th Table :
My doubt is the COGM is picked up form the GBB-AUA & the COGS picks up from the GBB-VAY.
Question : Is there any amount difference between the COGM & COGS of the above tables or the same amount.?
If it is the same amount, then why should we use COGM & COGS for the same amount..!
PS : we can use the the Change in Stock Account insted of COGM & COGS.
Regards
Raj
Hello Ranjit Nice job
I have some question about Table 6 and Table 7 entries. both are same
Also can you please clear me about Table 9 and table 10 entries
Thanks and Regards
Manoj J
Dear Manoj,
Yes Table 6 & 7 are the same, since I have divided the entries into parts I replicated the same.
Table 9 has been corrected.
Thanks
very usefull
Thanks a lot
Again Nice Job, Thanks for Real Scenario. 🙂
Thanks for a sharing a good practical scenario 🙂
Hello Ranjit,
Keep up the good work.
Regards,
Hari
Hi RJ,
Very good article and helpful. Is there any report where i can get POwise payment details made to vendors?
Please share.
By Standard Report fbl1n also you can get PO Wise Payment details but Payment must be made against PO No. and their item.
In the fbl1n, click on change Layout and Drag Purchase Document.
Dear Ranjit,
Its a great help for us.
Thank u so much!
Dear Ranjit
Simply.....superb effort dear......keep posting
Thank you. Great to know that the document has helped.
Thank you Padma, Glad to know that my effort helped.
Regards
Ranjit Simon
Dear Ranjit,
Thank you for taking time and postings such a wonderful document. It will help product costing professionals like me.
Thanks,
Padmaja
HI Ranjit,
Gud Article..! Keep it up for guys who are looking for you Guidence.
I want so say the eight (8) Table the entry. It should be
COGM A/C....................Dr
to Fineshed Goods A/C
But you have stated that COGS. I am just throwing my view on this.
At the time of PGI (Post Goods Issue), the entry would be :
Finished Goods A/C .............. Dr
to COGM A/C
At the time of Delivery (VL01N)
COGM A/C .......................... Dr
to Finished Goods A/C
At the time of Invoice VF01:
Customer A/C ...................... Dr
to Sales Revenue or COGS A/C
PS : At the time of Invoice only you ll get the Cost of Goods Sold before that you ll have the Cost of Goods Manufacturing. Some of the Clients ll have different naming sequence instead of COGS they ll have sales revenue or sales account etc.,
Finally gr8 job done by you..!
Regards
Raj
Hi Raj,
Thanks for the update. The entries provided in Table 8& 9 are correct. Kindly run one test scenario in your Quality system so that the entries will be clear.
Kindly find the attachments added below Table 8 & 9.
Regards
Ranjit Simon
Hi Ranjith,
Your presentation is very nice and requesting you to kindly post more articles.
Regards
Singh
Thank you singh,
PLease check the artciles
http://scn.sap.com/people/ranjit.john/content#filterID=contentstatus%5Bpublished%5D~objecttype~objecttype%5Bblogpost%5D
Hi Ranjit,
Really you did a great job to share such useful to our friends. well done and keep it up 🙂
Best regards,
ARK*
Dear Ranjith
Good one and helping a lot for understanding the concepts....
Thank you..Check the other documents also
http://scn.sap.com/people/ranjit.john/content#filterID=contentstatus%5Bpublished%5D~objecttype~objecttype%5Bblogpost%5D
Thank you for the detailed explanation.
Thank you krishna
A great effort and pain is required to produce the article like this which is Presented in great way , it will be very helpful to lot of people,
Thanks a lot Mr. Ranjit, please keep up the good work.
Very nice article Ranjit!
Thank You
Thank you vignesh
Thanks for sharing valuable knowledge....
Mariks...
Good one Ranjit...
Thanks,
Jay
Great!!!
Thank You
Hello Ranjit,
Thanks for sharing valuable document. Your efforts are really appreciatable 🙂 and keep sharing
Regards,
Lakshmi S
Thank you Lakshmi