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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.

VL02N.jpg

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.

VFX3.jpg

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.

COGM1.JPG

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.

vARIANCE 1.JPG

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.

Variance Calculation.JPG

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.

F1.jpg                                                                       Figure 1.0

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.

F2.jpg                                                                        Figure 2.0

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

MB51 601.JPG

                                                                                  Figure 4.0

                                                                           FBL3N COGS Report

FBL3N.JPG

                                                                               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

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62 Comments

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  1. Narasimhulu Konnipati

    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

    (0) 
      1. Sridhar S

        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

        (0) 
      1. Ravi Sankar Venna

        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 🙂

        (0) 
        1. Ranjit Simon John Post author

          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

          (0) 
  2. Atif Farooq

    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….

    (0) 
  3. Prasad Garud

    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

    (0) 
  4. Ranjit Simon John Post author

    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.

    (0) 
    1. Prasad Garud

      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

      (0) 
      1. Narasimhulu Konnipati

        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

        (0) 
            1. Prasad Garud

              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

              (0) 
                1. Prasad Garud

                  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.

                  (0) 
                  1. raja sekhar

                    HI Prasad,

                    I have a doubt In the table entry 7 & 8.

                    7th Table :

                    Stock of Finished Good XXX
                    COGM of Finished Good XXX (GBB-AUA)

                    8th Table :

                    COGS XXX (GBB-VAY)
                    Stock of Finished Good XXX

                    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

                    (0) 
  5. Manoj Jamkhedkar

    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

    (0) 
    1. Ranjit Simon John Post author

      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

      (0) 
    1. Vikram raj

      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.

      (0) 
  6. padmaja gan

    Dear Ranjit,

    Thank you for taking time and postings such a wonderful document. It will help product costing professionals like me.

    Thanks,

    Padmaja

    (0) 
  7. raja sekhar

    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

    (0) 
    1. Ranjit Simon John Post author

      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

      (0) 
  8. Ikram hazari

    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.

    (0) 

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