WIP and variance calculation in Product cost by Period process with manufacturing orders
This Blog post is for all experienced Controlling Consultants and beginners. By reading this blog, you understand how the WIP and variance calculation in product cost by period process and also link manufacturing orders with PCC.
In repetitive manufacturing scenario, we use production cost by period method in product costing. if a product manufacturing process takes more than a month or manufacturing a product continuously without quantity structure changes, If client would like to do analysis of a product in each period of manufacturing cost of that material, it is recommended to use product cost by period scenario with Product cost collector as a cost object. At month end we execute all month end activities at product level. By using this method, calculation of WIP and variance of a product at month end is possible.
If you are using manufacturing orders in product cost by order method, we analyze costs of manufacturing orders periodically by lot size than period level. Total manufacturing cost that we posted to the order will be settled to Finance as WIP. However, Variance will not be calculated till the complete delivery happens to an order. If client wanted to calculate WIP for unfinished goods and Variance for the quantity that was received at each operation level at month end, then we use product cost by period method with Product cost collector as a cost object. At month end, we calculate WIP and variance at product level. If Client would like to do all logistic transactions at manufacturing orders level however, all financial transactions need to be executed at product level, it is possible by suing decupling scenario in product cost by period scenario. Here, we link manufacturing orders to Product cost collector. Goods issue and confirmation of operations will happen at manufacturing orders level and this cost will be posted to PCC. Manufacturing orders are not cost objects so, we do not perform month end activities order level instead we perform at product level.
In product cost by period method, we can create Product collect collectors or Cost object hierarchies as a cost objects. For example, if we are manufacturing chemicals that takes over a month, when we have a common cost in production process that can’t be posted to each product cost collect/ manufacturing orders, we create cost object hierarchy, post all common costs to COH (Cost object Hierarchy) during the month, assign PCC’s / Manufacturing orders under cost object hierarchy. At month end, we distribute this common cost to PCC / manufacturing orders assigned in that cost object hierarchy and then perform moth end activities at cost object hierarchy.
I tried to explain a scenario where production order linked to Product cost collect, How the WIP and variance calculation for product level with Target cost.
- Check Costing Variants for Product Cost Collectors (OPL1): In this configuration step we create a costing variant which is required to calculate preliminary cost estimate for PCC. PREM is the standard SAP costing variant available. Preliminary costing for Product Cost Collectors check box should be selected for the costing type that we use in costing variant.
Figure 1: Costing variant configurations settings
2. Create a new costing variant for Simultaneous costing: PPP3 is the standard SAP costing variant available. Here we assign our costing sheet to the valuation variant.
3. Create Order type with order category 5 – product cost collector: Here, we assigned our settlement profile and assigned number ranges.
Figure 2: Order type creation with PCC category.
4. Define Cost-Accounting-Relevant Default Values for Order Types and Plants:
In this step, we maintain default value to update in PCC automatically at the time of creation. STR is the default settlement type for PCC. PPC6 costing variant for preliminary costing for PCC and PPP3 costing variant is for actual costing. Result analysis key will be determined in PCC from this configuration step.
Figure 3: Default values for order type and plant.
5. Check Control Data for Repetitive Manufacturing Profiles :
We create RME profile in Repetitive Manufacturing process. “GI Backflush at GR posting” we select this check box if we want to post Goods Issue to the PCC at the time of GR with backflush (MFBF). We choose “RP backflush” to process RP backflush for each operation. If we want to calculate WIP and scrap for PCC, we have to choose RP backflush check box. Under Cost Accounting header, we choose whether activities based on the preliminary costing of PCC or standard costing of Materials. We choose first radio button when you are producing a material without changes in quantity structure in a period. Else, we select 2nd radio button when we produce a material with multiple production versions within the period.
Figure 4: Repetitive Manufacturing profile creation with WIP settings.
6. Period-End Closing:
Under this step, we maintain configuration settings of WIP, Variance and settlement that are similar to by order scenario. However, there are few changes in WIP configuration steps.
- Define Valuation Method (Target Costs): Here, when you click on new entries, system will show separate window with options. we choose Target costs option where the WIP calculations happens based on target cost in by period scenario.
Figure 5: Choose “Target costs” option while creation of Valuation method.
Figure 6: System will create entries once you submit valuation method by selecting Target cost option.
- Define Valuation Variant for WIP and Scrap (Target Costs):
Here we choose valuation strategy priority for calculation of WIP and scrap in by period scenario. 1st priority is given for Preliminary cost estimate in below screen shot.
Figure 7: Valuation variant for scrap and WIP calculation
- Assignment of Valuation Variant for WIP: We assign above valuation variant to our controlling area.
- Define Updates: We maintain Result analysis cost elements to the Line ID categories and Result analysis key.
- Define Posting Rules for Settling Work in Process: Balance sheet and P&L accounts maintained in this step for each Result analysis cost elements.
- Target cost version: we do this configuration step to calculate total variance. Total variance = Control cost (Total actual cost – WIP- scrap) – target cost ( Total actual quantity * standard cost estimate).
Figure 8: Target cost version to calculate variance.
- Settlement Profile:
Figure 9: Settlement profile creation screen
7. Define order type-dependent parameters (OPL8):
We select “Cost Collector” check box for order type that is created for production order. So that production order is created with reference to PCC. All Logistic transactions like Good issue and Operations confirmation will be posted to Production order and the same cost will be carried to PCC. The Default settlement rule has to be PP2 which is for Periodic settlement.
Figure 10: Maintain Order type dependent parameters with Cost Collector option
Test This scenario :
- Create FG Material and maintain RME profile in MRP 4 tab as shown in below screen shot. Create Production version and assign BOM and routing that we created for this SFG material.
Figure 11: Material master creation with REM profile and Production version
2. Create Quantity structure: RM21 and RM32 components used in BOM and 4 operations created where each options has 2 qty to manufacture 1 FG qty. the activity hour price is 10/- for all activities used here.
Figure 12: Quantity structure maintained for SFG material
TO post auto GR after final operation confirmation, make sure that we configure Control keys with mile stone confirmation option in OPJ8 Transaction code. Here, I am going to use 2 control keys RAO1 and RAO2. First one is configured with milestone confirmation and without Auto GR check box. 2nd key created with Auto GR and milestone confirmation. These control keys are assigned in Routing for each Operation as shown in above screen shot.
Figure 13: Control key confirmation screen
3. Create Product cost collector using KKF6N transaction code:
We have 3 options to create production version. Create PCC with Production version, Create PCC with specific BOM and routing & create PCC without quantity structure by entering only production and planning plants.
Figure 14: Product cost collector creation screen.
We can see the Preliminary cost estimate of PCC in below screen shot.
Figure 15: Preliminary cost estimate screen for PCC
4. Create Production order with reference to PV used for PCC:
Go to CO01 transaction code and provide material number, production plant and production order type that we created with “Cost Collector” check box in order type dependent parameters configuration. Once you press enter, system will take us to inside of the production order. Enter total quantity, start date and finish date. Then click on Production version button that displays on top right side, choose production version that was used to create PCC and then select “Choose”.
When you go to “Control data” tab, we see a new product cost collect button where this Production order linked to PCC. If you click on this button, system will take to you the PCC screen. Click on release button on top left side of production order and save it. Here, “RA Key” and “Variance Key” fields are blank because, we perform Result analysis and variance calculations at Product level and not at production order level.
Figure 16: Production order created with reference to production version
Figure 17: Product cost collector linked with production order
5. We confirmed Operation 1 for the production order using CO11N:
Figure 18: Operation confirmation with component materials
6. End of the First Month, we perform month end activities. Below is the OH calculation:
Figure 19: Overhead calculation for SFG
7. WIP calculation (KKAS – Calculate):
Figure 20: Work in process calculation for 1st month
8. Variance calculation (KKS6 – Individual Processing):
Figure 21: Variance calculation
Below is the detailed item level standard cost estimate and preliminary cost estimate for SFG materials.
Figure 22: Standard cost estimate and preliminary cost estimate of SFG
Below is the screen shot that shows actual cost posted in 1st month. Also we can see detailed information of WIP and variance calculation;
Figure 23: Explanation how the WIP & Variance values calculate after 1st operation confirmation.
Figure 24: PCC actual cost screen shot, variance is credited to the PCC after settlement.
9. Operation 2 confirmed with Yield 120, issued Remaining components to PCC.
Operation 3 is also confirmed with Yield 100 qty. (No components here)
Below is the screen shot of Operation 2 with Goods Issue.
Figure 25: Operation 2 confirmation in 2nd month with remaining components.
Figure 26: Operation 3 confirmation in 2nd month.
Perform Month end activities for 2nd Month.
10. Actual OH calculation: (CO42 – Individual Processing):
Figure 27: Actual OH calculation in 2nd month.
11. WIP Calculation: (KKAS – Calculate)
Figure 28: WIP calculation.
12. Variance Calculation (KKS6 – Individual Processing)
Figure 29: Variance calculation.
Below is the screen shot that show with actual cost posted in 2nd month and cumulative cost of 1st and 2nd months.
Figure 30: Actual cost posted in 2nd period and the total actual cost till 2nd period.
Below is the screen that shows detailed information of WIP and variance calculation in 2nd month;
Figure 31: WIP and Variance calculation at each actual cost item level.
Accounting document posted with the variance amount and credited to PCC.
Figure 32: Accounting document screen after settlement in 2nd period.
if we see below PCC actual cost, variance credited to PCC.
Figure 33: PCC actual cost screen shot where Variance is posted.
13. Final Operation confirmed with Yield 100 qty and GR is posted 100 qty as per production order plan quantity.
Figure 34: Final operation confirmation in 3rd period and GR posted.
14. WIP Calculation (KKAS – Calculate):
Figure 35: WIP calculation screen after final operation processed with GR quantity.
15. Variance calculation (KKS6 – Individual Processing)
Figure 36: Variance calculation screen.
in below screen shot, We see the actual cost posted in period 3, and detailed explanation of WIP and Variance calculation after final Operation confirmation with total GR quantity.
Figure 37: We can observe in above screen shot how the WIP and Variance calculation happens.
After all 3rd Month end activities completed, below is the PCC actual cost screen shot where WIP and Variance amount adjusted.
Figure 38: PCC actual cost screen shot where WIP and Variance amount adjusted.
Note: I see that in S/4HANA, “Cost object hierarchy” is removed. as an alternative option, we can book all common cost to one of the cost center and then distribute to the manufacturing orders using template allocation process with Environment 001 or 009.
Hope, this blog helps you to understand the configuration settings, Manufacturing orders creation with reference to PCC, actual cost book to the order that reflects into PCC and how the WIP and Variance calculation based on the target cost in product cost by period scenario in each month.
Thanks for spending time on this blog. If you have any feedback, please leave a comment.