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Cost of Goods Sold Split in Make to Order Scenario (MTO) with SAP S/4HANA

Objective

Cost of Goods sold (hereinafter will be known as COGS) also known as “Cost of Sales” and refers to the cost of goods that are either manufactured or purchased and then sold. COGS is part of income statement and accounted as part of sales process.

COGS Split is breakdown of single value of cost of a sale-able product into cost components which are relevant to business for analysis and management reporting. The items that make up costs of goods sold include:

  • Cost of items intended for resale
  • Cost of raw materials
  • Cost of parts used to make a product
  • Direct labor costs
  • Overhead costs, like utilities for the manufacturing site
    Etc.

This blog explains the various options that are available in SAP S/4HANA to report COGS split information in account-based COPA environment when Sale Order/item is a cost object in Make to Order (hereinafter will be known as MTO) production process.

What will you learn from this Blog

Overview of COGS split accounting during Post Goods Issue and later during its periodic revaluation in case of MTO.

Details of possible options which can be leveraged in SAP S/4HANA system to report Actual COGS split in Account based COPA

Know more about system setup in Account based COPA in SAP S/4HANA environment.

COGS Split Accounting in case of MTO

Make to Order (MTO) is a production process where product is manufactured to meet customer specific demand. To meet the process requirement in SAP, customer order (sale order/item) is treated as primary cost object to book cost of sales & revenue and it triggers the production/logistic requirements.

In case of MTO, initially when produced product is delivered to customer, accounting of COGS is done which is at standard price. Later at month end, relevant variances are loaded on COGS to achieve actual COGS information.

In costing-based COPA, COGS split information is used to update value fields depending on “Valuation Strategy” concept. While now, in case of Account Based COPA in S/4HANA, instead of value fields, COGS split information is posted to different GL Accounts depending on “Define Accounts for Splitting the Cost of Goods Sold” concept.

Below are the events when & how COGS split is accounted in account-based COPA in S/4HANA:

Goods delivery to customer (Post Goods Issue – PGI):

Along with conventional PGI accounting document, additional accounting document generated, at standard price | COGS Split GL Accounts are Cost Elements (hereinafter will be known as CE) and COGS split is booked to Sale Order/item

COGS Revaluation during Periodic Actual Costing (CKMLCP):

Actual Costing is one of the functionalities of Material Ledger which revalues the standard cost of a material based on the cumulative variances that exist in a period. This revalued cost applied to achieve COGS / Inventory at Actual price.

Thus, as part of periodic actual costing process, variances such as Production variances, Purchase Price variances, Activity Price variance etc. which are associated to Customer order are reclassified to revalue Customer order COGS and true up its standard price into actual price |General Ledger Accounts (hereinafter will be known as GL a/c) determined for Actual Costing task are cost element and COGS revaluation is booked to Sale Order/item

In the given example, total variance is 217.68 made up of 143.68 (Production variance) + 74.00 (Purchase Price variance) and assumed no produced stock is in hand.

Thus complete 217.68 is considered to revalue the COGS and generated a Closing Document to reclassify the variances and transfer total variance to COGS Revaluation GL a/c (GBB-COC)

Additional accounting document generated to split variances considered for COGS revaluation | GL a/c determined for actual cost component split are same which are setup for COGS split posting during PGI. They are cost elements (CE) and COGS revaluation split is booked to Sale Order/item

Configuration setup for COGS Split

In SAP S/4HANA, limitation of account-based COPA of not being able to split COGS as per cost components is addressed.

With the functionality of “Define Accounts for Splitting the Cost of Goods Sold”, COGS split is populated to different GL Accounts which are mapped to Cost Components for every Source Account (COGS a/c).

For each Source GL a/c (COGS a/c), different valuation can be assigned which helps in determining cogs split details as per valuations (Legal/Profit Center/Group)

With Strategy key for each Source GL a/c, a rule can be built to determine cost estimates: Released or Upcoming Released.

Reporting options for Actual COGS split in Account Based COPA

COGS split of MTO, can be reported in account-based COPA either by settling Sale Order/item cost object to COPA or by using Attributed COPA functionality. These options are explained below along with possible use cases.

Cost Object Settlement:

The settlement process allocates the actual costs/revenue incurred for a general cost object to another receiving objects (such as a profitability segment) using either GL Account with cost element (CE) category 21 or using original GL Account itself. In addition to Financial Accounting document having Balance Sheet or Profit/Loss GL a/c, you will find additional accounting document for Integration of Controlling with Financial Accounting which are posted due to change in Cost Objects. They are either posted with same Primary GL Accounts or GL Accounts with CE Category 21.

Use Case 1: Both Result Analysis (RA) & Settlement are required to report cost /revenue in COPA

If business case requires cost/revenue recognition as per Result Analysis (hereinafter will be known as RA) task then, RA setup and Allocation Structure need to be maintained as per cost component split.

Key configuration notes:

  • RA Line IDs & RA GL a/c (CE Category: 31) are to be maintained as per different cost components needed for COGS split explained above.

In this example:

Separate Line IDs & RA GL Accounts are created for each COGS Split GL a/c. For instance: GL a/c 40000028 is for Material Cost thus mapped to LID “MAT”.

  • Maintain Assignment Lines in Allocation Structure as per COGS split need and assign Settlement GL a/c (CE Category :21) by cost components

In this example:

Separate assignments are created for each cost component, for instance: Assignment 20 which is for Material cost, Material related COGS split GL a/c is assigned as source and separate settlement GL a/c is assigned. Showing below a setup of one of the assignments

Accounting & Reporting: 

  • Perform RA after Actual Costing task completed

As part of Actual costing task, variances are reclassified to COGS split GL a/c and booked to sale order/item.

In this example, it is shown in Sale order/item account assignment, that both COGS split at standard price and with variances are clubbed to COGS split GL a/c.

When RA task is performed, all COGS split relevant GL a/c as well as other cost GL a/c which are relevant for capitalization are considered for Cost/Revenue recognition.

In this example, Revenue recognition is Cost Based thus Revenue in Excess of Billing is getting computed

  • Perform Sale Order settlement

Each COGS split line, settled from separate RA GL a/c (CE Category :31) to its respective Settlement GL a/c (CE Category :21) as mentioned in configuration notes above.

1st Accounting Document generated to recognize revenue which is based on RA results.

2nd Accounting Document generated is for FICO integration with Settlement GL Accounts (CE Category :21), as values transferred from sale order/item account assignment category to PSG account assignment category

GL Account Line item browser report (FAGLL03H) in SAP S/4HANA shows both Primary & Secondary cost elements. Thus, for this example, COGS split can be seen with COPA characteristics using settlement GL a/c.

When checked in COPA Actual line item Report (KE24), it would show COGS breakdown information which is aligned to GL a/c line item report

 

Use Case 2: Result Analysis not required to record to cost/revenue. Direct Settlement to COPA.

If business case doesn’t require cost/revenue recognition as per Result Analysis (RA) task, then only Allocation Structure needs to be maintained as per cost component split.

Key configuration notes:

  • Maintain Assignment Lines in Allocation Structure as per cost components needed for COGS split
  • Maintain “By Cost Element” instead of assigning Settlement Cost Element (CE Category :21) for cost components assignment lines.

In this example:

Separate assignments are created for each cost component relevant to COGS split. Showing below a setup of one of the assignments

Accounting & Reporting:

  • Perform Sale Order settlement

As part of Actual costing task, variances are reclassified to COGS split GL accounts and booked to sale order/item. When Sale order settlement is performed with feature “By Cost Element”, COGS split information will be available with same set of COGS split GL accounts along with COPA characteristics

In this example, it is shown in Sale order/item account assignment, that both COGS split at standard price and with variances are clubbed to COGS split GL a/c.

When the Settlement is performed, all cost line items are transferred from Sale order/item to COPA with same GL Accounts as sender and receiver

Accounting Document generated for FICO integration with Primary GL Accounts, as values transferred from sale order/item account assignment category to PSG account assignment category

GL Account Line item browser report (FAGLL03H) will show COGS split with COPA characteristics using Primary GL accounts.

When checked in COPA Actual line item Report (KE24), it would show COGS breakdown information which is aligned to GL line item report

Attributed COPA:

It is also termed as Simplified Profitability Analysis which ensures cost and revenue information in COPA is always current and 100% reconciled with the income statement. COPA characteristics are derived either based on Derivation Rules (like in case of Cost Center) or Settlement Rule where receiver is Profitability Segment (like in case of Internal Order/Sale Order). As and when Cost and Revenue are posted, statistically COPA characteristics are updated. Thus, financials with COPA characteristics are only shown in reports but not available in follow-on process in COPA like Top Down Distribution.

Use Case 3: Both Result Analysis and Settlement are not required 

If business case doesn’t require cost/revenue recognition as per Result Analysis (RA) and nor order settlement is part of value chain, then functionality of Attributed COPA / Simplified COPA available in SAP S/4HANA can be leveraged to report financials with COPA characteristics.

In the given example, COPA characteristics are derived from SO/item settlement rule and update along with primary posting like Purchase Price variance during goods receipt, Production variance settlement, Goods Delivery to Customer etc.

Key configuration notes:

  • Leverage Attributed COPA / Simplified COPA feature and activate it for Sale Order

Retrieve COPA Characteristic information from Settlement Rule

Accounting & Reporting

  • Purchase Price variance during Good Receipt

COPA characteristics are updated but COPA is not a real cost object. In a GL line browser report, we can notice that field “Object class” is not assigned with “Profit Analysis” and field “PA Obj CO” is not checked.

  • Production order settlement

Attributed COPA updated during production order settlement and variance split which is transferred to sale order/item is updated with COPA characteristics

  • Good Delivery to Customer (PGI)

Attributed COPA updated during PGI and COGS split is booked to sale order/item and same time updated with COPA characteristics

  • COGS split Revaluation when periodic Actual Costing task performed

Attributed COPA updated during COGS Revaluation accounted as part of periodic actual costing and actual cost component split is booked to sale order/item and same time updated with COPA characteristics

Final Notes

As demonstrated above, account-based COPA gives more flexibility in SAP S/4HANA to deal with COGS split requirement.

Thank you for going through the post. I hope, I have been able to summarize the way-forward approach to deal with COGS split requirement in MTO scenario.

Your feedback will help me in making this post more useful and relevant to many more business use cases.

Further references

SAP Help – COGS Split Posted with Two Journal Entries

SAP Help – Account-Based COGS Split

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4 Comments
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  • Sat Sri Akaal Singh Saab, you have all the patience in the world to write such a detailed, yet crisp blog without missing the continuous flow.. You have the writing skills and do take my words seriously !!

    I have a follow up Q or comment for you – A MTO scenario not necessarily uses the standard cost estimate for inventory valuation / COGS.. It uses Sales Order cost estimate in many cases. I currently dont see the strategy in Cost Splitting Profile to read the sales order cost estimate.. Is it done using the BADIs or is there some other way ?

    Also, just fyi, SAP note suggests not to use the Variance Splitting with ABCOPA when you have CKMLCP running..

    Regards

    • Dear Ajay,

      It’s really encouraging to have feedback from you.

      Answer to Q – Standard Price/Cost referred in this post is “Sale order Cost Estimate” and no BADI used to build this case. Standard Strategy Type has supported to read “Sale Order Cost Estimate”.

      With regard to Production Variance split along with Actual Costing, I do agree with the SAP recommendation mentioned in SAP Note 2829427.

      In my example, I tried to split production variance by Cost Element on the basis of Cost Component Structure so until Actual COGS split is not available, Price Difference split information would be available by Origin.

      Hope this helps.

       

      Regards,

      Randeep