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 third step in understanding the basics of product costing is Quantity Structure. Quantity Structure enables you to calculate the cogs of goods manufactured and cost of goods sold for products based on the BOM and Routing (PP) or Master Recipe (PP-PI).
- Master data is created
- Material Masters (including MRP, Accounting, Costing views)
- Bill of Materials
- Work Centers (with Cost Centers and Activity Types)
- Routings (Production Planning) OR
- Master Recipes (Production Planning- Process Industries)
- Production Versions (optional)
- Product Cost Collectors (PP-REM – Repetitive Manufacturing)
Quantity Structure is an important concept in Product Costing because it is a key integration point between the Finance and Logistics modules in SAP. There are several components of Quantity Structure.
A material master is created for each product with a unique fit/form/function in a plant. The material master contains many views including Material Resource Planning (MRP) views, Accounting views, and Costing views. Two costing-relevant fields on the MRP 2 view are procurement type and special procurement key. The procurement type field indicates if a material is produced internally, purchased or both. The special procurement key further designates if a material is subcontracted, a phantom, purchased from another plant, etc. It is important that these two fields are correct when costing a material.
For each internally produced material, a bill of materials (BOM) is created. A BOM contains the component materials and quantities required to produce a finished or semi-finished good. The material cost of a product is calculated using the standard or moving average price of the BOM components depending on the price control (S for standard, V for moving average).
A work center (PP) or resource (PP-PI) identifies a machine or work area where a production process is performed. Each work center or resource utilizes a standard value key which is a unique set of activities related to a work center. I previously discussed activity types in part 1 of this blog series.
In addition to a BOM, a routing or master recipe is created to indicate the processes required to produce a material. In Production Planning (PP) manufacturing, a routing is made up of a series of operations that include work centers and activity quantities which define a production process. In Production Planning- Process Industries (PP-PI), a master recipe is used for batch-oriented process manufacturing. A master recipe contains the processes required for producing a material including the resources (instead of work centers) required for production.
Repetitive manufacturing utilizes rate routings and product cost collectors. Product cost collectors are created for each production version (see below) and capture costs per period rather than per order.
If there are multiple ways to produce a material including different material combinations or activities, production versions can be used. Production versions indicate a combination of a BOM and routing or master recipe required to produce a material. The first production version should be the most frequent or realistic
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 a list of ingredients (Bill of Material) and a recipe of steps to follow (Routing or Master Recipe). There may be several ways that we can bake the same cookie by substituting ingredients or baking in different ovens, so we can have several versions of our ingredients and recipe (Production Version). In order to accurately calculate costs of producing our cookies, we need to define the places where baking activities occur (work centers or resources).
For example, we may use a refrigerator, mixing station, oven, cooling station, and packaging station. Each would be considered a work center, and we assign different activities like labor and overhead to each work center. The work centers and amount of each activity are indicated in our recipe (Routing or Master Recipe) as operations.
Using the costs for each ingredient (Material Master) in our ingredient list (BOM) and the rates for activities in our recipe (Routing or Master Recipe), we can calculate the cost of producing a cookie.
- Material Master MRP settings are crucial in product costing with quantity structure.
- You must re-calculate and release costs to reflect changes in production data like BOMs, Routings or Master Recipes, Production Versions.
In my next blog, I connect the concepts of cost center planning, activity rate calculation and quantity structure to the costing process. This blog includes executing a costing run, costing an individual material, and marking and releasing costs.
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.
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