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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 fifth and final step in understanding the basics of product costing is actual costs. Actual costs are determined through purchase prices, actual expenses, and confirmed production quantities. Actual costs are compared to standard costs through variance analysis to make management decisions and determine profitability.


Prerequisites:

  • Material Masters (including MRP, Accounting, & Costing views)
  • Quantity Structure (Bill of Materials, Routing or Master Recipe, Production Versions are optional)
  • Configuration (WIP, Variance, and Settlement)
  • CO Master Data (Primary and Secondary Cost Elements, Activity Types, Actual Assessment/Distribution Cycles, Actual Statistical Key Figures if required)

Overview:

Throughout a given period, actual expenses are recorded in SAP as purchases are made, payroll is processed, bills are paid, and production occurs. At month-end, Work in Process, Variance, and Settlement are calculated. The variance between actual costs and standard costs can result in changes to product costing for the next period or year. Costs are settled and the posting period is closed at the end of the month end process to avoid material movement or accounting postings in the previous period.

In product cost by order, actual production yield, scrap, and activity quantities are entered in a production confirmation. The production costs are collected on the production orders for review and settlement. In product cost by period, product cost collectors are used to calculate WIP, variances, and settlement instead of the planned orders.

Prior to calculating variances and settling orders, orders must run through WIP calculation to determine what part (if any) of an order is not complete. You can calculate work in process at target costs for Product cost collectors, Production orders, and Process orders. Only orders that have a valid results analysis key and are not in status DLFL (Deletion flag) or DLT (Deleted) are included in WIP calculation.

In Product Cost by Period (repetitive manufacturing), the quantities confirmed (other than scrap) for manufacturing orders or production versions are valued at target cost based on the valuation variant for WIP and scrap. In Product Cost by Order (discrete manufacturing), WIP is the difference between the debit and credit of an order that has not been fully delivered. SAP offers variance analysis on the input (consumption, overhead allocation, actual expenses) side and output (production quantity or valuation) side.


Input Variances Output Variances
Input Price Variance:Caused by differences between plan and actual material and activity prices. Only calculated if material origin is selected on material master. Mixed Price Variance:Caused when the system determines a different mixed cost than the released cost estimate. Must be selected in the variance variant to see.
Resource-Usage Variance:Caused by the use of different materials and activities than were planned in BOMs and Routings/Master Recipes. Output Price Variance:

  • If standard price changed between delivery to stock and when variances are calculated
  • If price control V materials are not delivered to stock at standard price
  • If price used to valuate inventory is not a mixed price

Material Quantity Variance:

Caused by different material and quantities than were planned in BOMs.

Lot Size Variance:

Differences between the planned and actual costs that don’t vary with lot size.

Remaining Input Variance:

This occurs when costs are entered without a quantity or when OH rates are changed.

Remaining Variance:

Differences between target and allocated actual costs that cannot be assigned to any other category. Also used when no variance categories defined in variance variant.

Scrap Variance:

Caused by differences between operation scrap in routing and actual scrap confirmed.

Finally, we must settle our orders or product cost collectors. Product Cost Collectors and orders are debited with actual costs during production. The actual costs posted to an order can be more or less than the value with which an order was credited when the goods receipt was posted. When you settle, the difference between the debit and credit of the order is transferred to Financial Accounting (FI).

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).


At month-end, we determine what batches of cookies are still in progress (WIP), review our actual expenses and compare to our planned expenses (variances), and close our books for the month (settlement). The cookies still in the oven are considered WIP (order status not complete). We notice several types of cost variances due to higher milk costs (unfavorable input price variance), less frosting waste (favorable scrap variance), and a cost difference because we planned to purchase a higher percent of eggs from a lower cost farmer (unfavorable mixed price variance). After analyzing these variances, we make a few changes to our inventory costs of eggs and look for ways to save on milk costs. We close our books for the month and record our profit and loss to the Income Statement.

Thank you for reading this blog series on Product Costing. 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.

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

http://scn.sap.com/people/tanya.duncan/blog/2012/11/05/5-steps-to-understanding-product-costing-part-1-cost-center-planning

http://scn.sap.com/people/tanya.duncan/blog/2012/11/05/5-steps-to-understanding-product-costing-part-2-activity-rate-calculation

http://scn.sap.com/people/tanya.duncan/blog/2012/11/11/5-steps-to-understanding-product-costing-part-3-quantity-structure

http://scn.sap.com/people/tanya.duncan/blog/2012/12/27/5-steps-to-understanding-product-costing-part-4-costing-run

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6 Comments

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  1. vinod siricilla

    Hi Tanya,

    Your 5 steps to understand the concept of Product costing is really very interesting. I had gone thru with all the 5 steps and really appreciable for your efforts.

    Requesting you to keep posting like these kind of blogs.

    Regards,

    Vinod

    (0) 
    1. Tanya Duncan Post author

      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.

      (0) 
    1. Tanya Duncan Post author

      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.

      (0) 

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