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 fourth step in understanding the basics of product costing is the costing run. Costing runs are used to cost mass amounts of materials in a single company code. The costing run allows you to select certain materials, explode their quantity structure, cost, analyze, and mark and release.
- Material Masters (including MRP, Accounting, & Costing views)
- Quantity Structure (Bill of Materials, Routing or Master Recipe, Production Versions are optional)
- Purchase Info Records and Condition Types (If desired for costing)
- Configuration (Cost Component Structure, Costing Variant, Valuation Variant, Costing Sheet if required)
- CO Master Data (Primary and Secondary Cost Elements, Activity Types, Mixed Costing Ratios & Alternatives if required, Additive Costs if required)
During the annual or monthly costing process, materials are costed in a costing run. Transaction CK40N is used to execute costing runs, analyze results, and mark and release costs. The costing run must be created using a costing variant (read more in configuration section), costing version, controlling area, company code, and transfer control. Therefore, a costing run can only be created for one company code at a time. The costing run is also created for a particular date range.
The costing run contains six steps: Selection, Structure Explosion, Costing, Analysis, Marking, and Release. Each step requires you to enter parameters, save, and then execute. The selection parameters are entered which indicates which materials should be costed. In the structure explosion step, the selected materials are exploded to pick up component materials from BOM’s.
As discussed in the previous blog on Quantity Structure, a bill of materials (BOM) is created for each internally produced material. In the costing step, finished good materials selected from the previous step are costed based on their BOM and routing or master recipe. A routing or master recipe is also created to indicate the processes required for a material. Component materials are also costed based on costing configuration.
You can analyze the costing results using the available reports in the analysis parameters. In the marking step, you open the lock to authorize marking for a company code, costing variant, and period. Once marked, costs appear as planned standard cost estimates in the material master. After executing marking, you release the costing results. Once released, costs are valid for the given date range and appear as current standard cost estimates in the material master.
After executing each step, it is important to review the error log and resolve errors. Once resolving errors in a given step, you must re-execute each step from the beginning to see the effect. If results do not update after executing, you can press the refresh button. You have the option to execute any step in background when processing a large number of materials or if you prefer to execute a step at a given date and time.
Configuration of costing and valuation variants and cost component structure are required to set the strategy for costing materials. The costing variant holds the criteria for costing. Costing variants contain a costing type, which determines the object to be created, and valuation variant. Valuation variants contain parameters for valuation of a cost estimate. In a valuation variant, you can specify the strategy sequence for how costs are selected. For produced materials, the component’s standard cost, moving average price, purchase info record price, or planned prices may be selected. You can also choose a particular plan/actual version and average the plan activity rates for the year or take the current activity rates. The cost component structure is used to indicate which costs should be included, whether to include the variable or total costs, and group costs in logical groupings called cost components.
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).
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. In costing our cookies, we will cost the ingredients. Once we are satisfied with our standard cost, we can choose to value our inventory at that cost (release).
- Product Cost Collectors, used in repetitive manufacturing, must be costed in a separate transaction (Individual- KKF6N or Mass- KKF6M).
- You must re-calculate and release costs to reflect changes in production data like BOMs, Routings or Master Recipes, Production Versions.
- Note that only the first production version will be used in costing.
In the final blog of this series, I will explain how actual costs are calculated and plan to actual variance analysis.
If you missed the previous three blogs, catch up by following these links: