5 Steps to Understanding Product Costing- Part 1 Cost Center Planning
Product Costing, part of the Controlling module, is used to value the internal cost of materials and production for profitability and management accounting. Product Costing is a niche skill. Due to costing’s high integration with other modules, many people avoid it due to the complexity. This 5 part blog will seek to simplify Product Costing.
The first step in understanding the basics of product costing is Cost Center Planning. The goal of cost center planning is to plan total dollars and quantities in each Cost Center in a Plant.
- Organizational Structure is configured:
- Company Codes
- Master data is created
- Profit Centers
- Cost Centers
- Primary and Secondary Cost Elements
- Activity Types
Cost Center dollars are planned by Activity Type and Cost Element in Transaction KP06. Variable and fixed dollar amounts can be entered. You can plan all costs in production cost centers where they will end up through allocations, or you can plan costs where they are incurred and use plan assessments and distributions to allocate.
Cost Center activity quantities are planned in by Activity Type in Transaction KP26. You can also manually enter an activity rate based on last year’s actual values. Note that if you enter an activity rate instead of using the system to calculate a rate, you lose the opportunity to review actual vs. plan and see dollar and unit variances. It is a best practice to plan activity quantities based on practical installed capacity which accounts for downtime. If you plan at full capacity, plan activity rates will be underestimated.
Let’s say we are using Product Costing to value our inventory in a cookie baking shop. This will help us value our cookies (finished good), frosting (semi-finished good), and baking items like eggs, milk, and sugar (raw materials).
In order to calculate costs, we need to come up with rates for each activity, such as mixing baking items, oven baking, and cookie cooling. Since a rate is a dollar per unit, we can either come up with a rate based on previous year’s actual rates, or enter our total costs and total units.
- You can customize layouts and user profiles to your needs.
- You can activate integrated Excel planning to see a spreadsheet instead of a fixed format.
- You can also configure the system to upload Excel files instead of typing in values.
In the next blog, I will explain how activity rates are calculated based on the plan Cost Center dollars and quantities. If rates are manually entered, activity rates do not need to be calculated, but there is a valuable report to review them prior to proceeding. Continue reading Part 2.
If you enjoyed this blog, you can look forward to my next book, Practical Product Costing Guide for CO-PC (Product Cost Controlling) coming out this summer. You can stay up to date by subscribing to TanyaDuncanBlog.com.