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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).

Prerequisites:
  • 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)

Overview:

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

Relatable Example:

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.

Further information:

  • 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.

http://scn.sap.com/community/erp/financials/controlling/blog/2013/01/02/5-steps-to-understanding-product-costing-part-4-costing-run

If you missed the previous two blogs, catch up by following these links:

5 Steps to Understanding Product Costing- Part 1 Cost Center Planninghttp://scn.sap.com/community/erp/financials/controlling/blog/2013/01/02/5-steps-to-understanding-product-costing-part-1-cost-center-planning

5 Steps to Understanding Product Costing- Part 2 Activity Rate Calculationhttp://scn.sap.com/community/erp/financials/controlling/blog/2013/01/02/5-steps-to-understanding-product-costing-part-2-activity-rate-calculation

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14 Comments

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  1. Symbat Issabayeva

    Dear Tanay,

    Thanks to your post it is really helpful, but I have problem with understanding ‘Why we need to keep information about the costs of products and materials?’ 

    thanks in advance

    Yours faithfully,

    Symbat

    (0) 
    1. Tanya Duncan Post author

      Hi Symbat, we need to value inventory for our balance sheet and income statement. We want to understand how profitable we are by product, customer, plant, etc. Understanding your variable costs also helps you determine pricing so you can lower costs but still remain profitable.

      (0) 
    1. Patricia Brainard

      Hi Baburao,

      That depends on how you are populating COPA and how you are doing reconciliation. If you are comparing COPA records that were created from FI postings, then both systems should match. But remember that it is possible to create COPA records manually that look like postings from FI. These will not have FI postings to match. You might also have custom programs that are supposed to be creating both entries — FI and COPA — but one posting or the other failed. Or a COPA posting might have been reversed when the FI posting was not reversed.

      Also, COPA postings that did not originate with FI (such as a COPA posting from  an SD invoice) will not necessarily tie to FI.

      So you have to look for how the data got into COPA.

      Best Regards,

      Patricia

      (0) 
    1. Patricia Brainard

      Hi Ram,

      Yes, you can use multiple production versions to cost. You will use “mixed costing” to do this. It first needs to be set up in configuration. The menu path is Controlling > Product Cost Controlling > Selected Functions in Material Costing > Mixed Costing. (There are two configuration steps.)

      Once you have the configuration in place, you must create a procurement alternative for each production version that you want to use in the costing. Then you create mixing ratios to determine what proportion of the cost of each production version should be used in the final costing.

      For example:

      • Production version 1 — used 20% of the time
      • Production version 2 — used 50% of the time
      • Production version 3 — used 30 % of the time

      So you create 3 procurement alternatives — one each for production version. (This is transaction CK91N.) Then you create the mixing ratios. (This is transaction CK94.)

      • Procurement alternative 1 (for production version 1) = 20%
      • Procurement alternative 2 = 50%
      • Procurement alternative 3 = 30%

      Now when you create a cost estimate, if all the master data fields have been populated correctly, your cost estimate will take 20% of the cost of production version 1, 50% of the cost of production version 2, and 30% of the cost of production version 3.

      The itemization view of the cost estimate will have three lines, one for each production version, instead of the lines that make up the BOM/Routing. Each line will have its own cost estimate. These will have status “KA” — they will never be released (only the top level cost estimate, the material level, will be released). And the quantity will represent the percentage. You can drill into the details, just as if they were sub-BOMs.

      This is just an overview of mixed costing — hope it helps!

      Patricia

      (0) 

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