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Author's profile photo Shuge Guo

Production Accounting for Universal Parallel Accounting

Why Universal Parallel Accounting in Production Accounting?

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Figure #1: Production Accounting – Overall Innovations

In this blog post we will introduce the innovation of Universal Parallel Accounting solution in Production Accounting. In the blog (New in Production Accounting – Event-Based Production Cost Posting), the Event-Based Production Cost Posting for Product Cost by Order was introduced. The Event-Based Production Cost Posting (as shown in figure #1 above) is the prerequisite for Universal Parallel Accounting in Production Accounting, so it is highly recommended to read the blog (New in Production Accounting – Event-Based Production Cost Posting) first before you start to explore this blog. Please note, this blog post focuses on the introduction of Universal Parallel Accounting solution in Production Accounting made for Product Cost by Order.

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Figure #2: Overview: Universal Parallel Accounting

As you know, global organizations have requirements to:

  • Submit financial statements based on different principles: group accounting principle (e.g. IFRS) and local accounting principle (local GAAP) which is valid for the individual country/region.
  • Use multiple currencies for reporting purposes: group currency, company code currency and freely defined currency. ​

In the past, we were able to fulfill the above requirement, however, this required in some cases complex configuration and manual efforts due to the underlying architecture. With Universal Parallel Accounting in SAP S/4HANA Cloud 2105, we establish a parallel value flow across end-to-end processes to fulfill the above requirements. As shown in the figure #2 above, the new features of Universal Parallel Accounting enable the simplified configuration and processes and comprehensive reporting. The new features of Universal Parallel Accounting also establish the foundation for future innovations. For more detailed information on Universal Parallel Accounting and how to get there you can follow the blog series below which mentioned in the blog Finance in SAP S/4HANA Cloud 2105. This blog is the 4th blog in the series.

  1. Asset accounting for universal parallel accounting
  2. Overhead accounting for universal parallel
  3. Inventory prices, product cost planning, actual costing for universal parallel accounting
  4. Production accounting for universal parallel accounting

For production accounting, the Universal Parallel Accounting enables you to analyze the value of Actual Costs, WIP (work in process), Target Costs, and Variance for each accounting principle with parallel ledgers.

Before you begin production accounting, remember that the standard costs of goods manufactured can potentially be different depending on the accounting principle. In a make-to-order environment the values for sales order costing can also be different depending on the accounting principle. This also means that the production variances can potentially be different depending on the accounting principle.

What are key innovations of Universal Parallel Accounting in Production Accounting?

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Figure #3: Parallel value flow in Production Accounting

The general idea behind Universal Parallel Accounting is explained in figure #3 above. If we look at the value flow shown here, we see two separate standard costs for the finished goods depending on the group or local accounting principle, resulting in two different credit postings as these goods are delivered to stock.

In the course of production, semi-finished goods are issued to the shop floor and production activities are confirmed, again resulting in different debit postings to the order. These in turn result in different overhead costs, also debited to the order. The combination of material usage, production activity, and overhead is immediately capitalized as WIP (work in process) according to the accounting principle, as we showed in the previous blog (New in Production Accounting – Event-Based Production Cost Posting).

The sum of the material costs, production activities and overhead costs results in production variances with respect to the standard costs, again resulting in a different variance in the group and local accounting principle. This variance can be broken out by category and is either written off to profit and loss or included in inventory if you have activated Actual Costing as an optional scope item.

Starting from SAP S/4HANA Cloud 2105, in production accounting the Universal Parallel Accounting capability is implemented with the Event-Based Production Cost Posting solution (Scope Item: 3F0) for production orders and process orders in the following production scenarios:

  • Make-to-stock production: the make-to-stock inventory (order receiver = material).
  • Make-to-order production with valuated sales order stock: the valuated sales order stock (order receiver = material).

As we saw in figure #3 above, these processes require you to establish the planned costs for the material manufactured. In a make-to-stock environment you will need to prepare material standard costs and in a make-to-order environment you will need to perform sales order costing before you begin production. This will ensure that when the finished goods are delivered to stock, the goods movement can be valued in accordance with the assumptions captured in the plan.

The following cost key figures can be viewed with multiple currencies and parallel ledgers in Event-Based Work in ProcessEvent-Based Production Costs and Event-Based Order Costs apps in production accounting:

  • Material standard costs (see above)
  • Sales order costing (see above)
  • Actual costs
  • Target costs (calculated based on material/sales order standard cost)
  • Work in process (and reserves for unrealized costs, if cost-related processes have not been captured at the time of goods receipt)
  • Total Price Differences and Variance split by categories

To understand what the Universal Parallel Accounting in Production Accounting offers in more detail, watch the Video ‘Demo: Production Accounting for Universal Parallel Accounting’.

This part of video demonstrates how to do the following:

  1. Check Material Cost Estimate in the different ledgers using the Display Material Cost Estimates app
  2. Check the different Inventory Price in the different ledgers with the Manage Material Valuations app
  3. Create and release a production order with order type YBM1 which initiate event-based production cost posting using the Create Production Order app
  4. Post goods issues for your production order in the Post Goods Movement app
  5. Check Total Actual Cost and Total WIP for the different ledgers in the Event-Based Production Costs app
  6. Post production operations in the Confirm Production Operation app
  7. Check Total Actual Cost and Total WIP for the different ledgers in the Event-Based Production Costs app
  8. Post final goods receipts for your finished production in the Post Goods Movement app
  9. Check both variance and cleared WIP for different ledgers in the Event-Based Production Costs app

How does the Universal Parallel Accounting work in Production Accounting?

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Figure #4: Production Accounting in S/4HANA Cloud – Scope Items

We’ll now look at how the conversion process works.

For new customers with SAP S/4HANA Cloud 2105, Event-Based Production Cost Posting (Scope Item:3F0) is the default Scope Item delivered, there are no additional setups. However there are new apps that help you to identify errors in the process, please refer to the blog (New in Production Accounting – Event-Based Production Cost Posting) for details.

For existing customers running the production scenario with Period-End Production Closing Posting (Scope Item: BEI), then follow the steps below to set up Event-Based Production Costing Posting (Scope Item: 3F0) to switch the valuation of your production processes:
Step 1: Extend scope item 3F0 to include Event-Based Production Cost Posting in scope.
Step 2: Following customizations required for Set Up.

  • Setup event-based costing sheet with Define Costing Sheets.
  • Assign event-based costing sheet to valuation variants with Define Valuation Variants per plant.
  • Assign WIP source accounts with Event-Based WIP and Variance Posting.
  • Setup Event-Based WIP posting account determination with Event-Based WIP and Variance Posting.
  • Assign valuation variant and event-based result analysis key with Define Order-Type-Dependent Parameters for Production Orders and Define Order-Type-Dependent Parameters for Process Orders

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Figure #5: Order Master Data

After the customization steps are implemented successfully, the RSEBW will be derived automatically in the RA Key (results analysis key) field and the Event-Based Posting checkmark will also be derived during the creation of production order as shown in figure #5 above. For more details about the configuration and guidance please check here (SAP Help Portal).

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Figure #6: Overall Process of Event-Based Posting

As shown in figure #6 above, Event-based posting links costs, WIP, and Variances posting to business events, such as goods issues, operation confirmation, goods receipts and technical completion of the order. For more details about Event-based production cost posting, please refer to the SAP blog New in Production Accounting – Event-Based Production Cost Posting.

Besides, for the existing customers running with the Period-End Production Cost Posting solution (Scope Item: BEI) and would like to move to the Event-Based Production Cost Posting solution (Scope Item: 3F0) with the Universal Parallel Accounting capability, it is highly recommended that you complete any manufacturing processes that have already started (close your production orders and process orders) before creating any ledger-specific prices for materials.If you are currently using product cost collectors and manufacturing orders that settle to non-material receivers (cost center, order and so on), then follow the steps described in the Customer Guide.

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Figure #7: Transition Solution for Existing Customers

There are special cases that you are running with Period-End Production Cost Posting solution (Scope Item: BEI) but need create ledger-specific material prices and standard cost estimates before the existing non-event-based production orders and process orders are closed completely. In the example shown in figure #7 above, you decide to create ledger-specific material prices and standard cost estimates after the upgrade of SAP S/4 HANA Cloud and period end closing of May, 2021. Yet there are still non-event-based production orders and process orders which are not closed completely. At this decision point, you should also decide to extend the Scope Item 3F0 firstly, then use the transition solution (job template: Production Settlement in Parallel Ledgers) to settle the correct values for WIP and Variance in different ledgers at the period end closing in June.

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Figure #8: Production Settlement in Parallel Ledger – Detailed Procedures

To ensure the correct values are settled for WIP and Variance in parallel ledgers, the following steps should be executed in period end:

  • Overhead calculation with app/job Run Overhead Calculation.
  • WIP and WIP Quantity calculation with app/job Calculate Work in Process (Single/Collective).
  • Variance calculation with app/job Run Variance Calculation (Single/By Lot/Period). This is not a mandatory step if you aren’t concerned about target costs and variance split in different categories.
  • Run settlement with the Job Template Production Settlement in Parallel Ledgers from the Schedule Product Costing Jobs

After the execution of the steps above, the period end relevant reports should show the values only in leading ledger since the production orders are originally created as non-event-based orders.

Please don’t use the existing non-Parallel Ledger Settlement apps Run Actual Settlement, Settle Orders  and job Actual Settlement to settle those orders already settled by the Job Template Production Settlement in Parallel Ledgers, because settlement with those apps and job may cause incorrect value in other currencies and non-leading ledgers.

Please check here (SAP Help Portal) for the guidance of settlement in parallel ledgers.

You can look at how to include these production variances in Actual Costing in the blog (Inventory prices, product cost planning, actual costing for universal parallel accounting).

What are limitations for the Universal Parallel Accounting in Production Accounting?

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Figure #9: Restrictions

As shown in figure #9 above, the Universal Parallel Accounting in Production Accounting cannot be used by the following scenarios:

  • Make-to-stock production in repetitive manufacturing with product cost collectors
  • Make-to-stock or make-to-order production with manufacturing orders settle to non-material receivers
  • Make-to-stock or make-to-order production with distribution rule other than PP1 (PP2, PP5, PP6 etc.)

The above scenarios all work with their own order types and for these scenarios you should keep using BEI (period-end closing) solution without ledger-specific material price.

The different prices in different ledgers should not be assigned for the materials used for:

  • Manufacturing orders running with Scope Item BEI (period-end closing)
  • Manufacturing orders settle to non-material receivers
  • Manufacturing orders assigned with distribution rule other than PP1
  • Product cost collectors

Because when different prices are assigned in different ledgers against the above cost objects, it may cause the following:

  • Remaining order balance cannot be fully settled in non-leading ledger with company code currency, group currency and freely defined currency.
  • Failure when setting order status to ‘closed’

For more details about the limitations please check here (SAP Help Portal), and SAP Note 3049064, 3042696 and 3042679.

Where to get more information?

 

 

 

 

 

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      1 Comment
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      Author's profile photo Liling Jia
      Liling Jia

      Hi Shuge Guo ,

      thank you so much for sharing this informative blog to us!

      best regards,

      liling