For profitability and management accounting, the Product Costing module of the Controlling module is utilised to value the internal cost of materials and production. A specialised skill is product costing. Due to its complexity and high level of connection with other modules, pricing is frequently avoided. The goal of this 5-part blog is to make product costing simpler.
Actual costs are the last and final stage in comprehending the fundamentals of product costing. Purchase prices, actual expenses, and verified manufacturing quantities are used to calculate actual costs. Through variance analysis, actual costs are contrasted with standard costs to establish profitability.
- Master Materials (including MRP, Accounting, & Costing views)
- Quantity Organization (Bill of Materials, Routing or Master Recipe, Production Versions are optional)
- Configuration (WIP, Variance, and Settlement) (WIP, Variance, and Settlement)
- CO Master Data (Actual Statistical Key Figures, Primary and Secondary Cost Elements, Activity Types, Actual Assessment/Distribution Cycles)
As purchases are made, payroll is handled, bills are paid, and production happens throughout the course of a specific time period, actual expenses are recorded in SAP. Work in Process, Variance, and Settlement are computed at month’s end. The difference in expenses between actual and standard costs may require adjustments to product costing for the following quarter or year. To prevent material movement or accounting postings in the prior period, costs are paid and the posting period is ended at the conclusion of the month-end procedure.
Actual production yield, scrap, and activity quantities are entered in a production confirmation when using product cost by order. On the production orders, the production expenses are gathered for assessment and settlement. WIP, variations, and settlement are computed using product cost collectors rather than anticipated orders in product cost by period.
Orders must go through a WIP calculation to determine what, if any, of an order is not complete before computing variances and settling orders. For product cost collectors, production orders, and process orders, you can compute work in progress at target costs. The WIP calculation only takes into account orders with valid results analysis keys that are not in the statuses DLFL (Deletion flag) or DLT (Deleted).
The quantities confirmed (aside from scrap) for manufacturing orders or production versions are valued at target cost in Product Cost by Period (repetitive manufacturing) depending on the valuation variant for WIP and scrap. WIP is the difference between the debit and credit of an order that has not yet been completely fulfilled in Product Cost by Order (discrete manufacturing).
On the input (consumption, overhead allocation, actual expenses) and output (production quantity or valuation) sides, SAP provides variance analysis.
|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.
Caused by the use of different materials and activities than were planned in BOMs and Routings/Master Recipes.
|Output Price Variance:|
|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.
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.
Caused by differences between operation scrap in routing and actual scrap confirmed.
We must satisfy our orders or product cost collectors before moving on. Product Price Actual production costs are deducted from collectors and orders. The value with which an order was credited when the goods receipt was posted may be greater or less than the actual costs submitted to an order. When you settle, Financial Accounting receives the difference between the order’s debit and credit (FI).
Assume we are using product costing to determine the worth of our inventory at a bakery that sells cookies. This will teach us to value our finished cookies, semi-finished frosting, and baking ingredients like eggs, milk, and sugar (raw materials).
We identify the ongoing cookie batches (WIP) at month’s end, analyse our actual spending and contrast it with our budgeted spending (variances), and close the books for the month (settlement). The unfinished cookies are those that are still baking (order status not complete). Due to greater milk costs (an unfavourable input price variance), reduced frosting waste (a favourable scrap variation), and a cost difference since we intended to buy a bigger percentage of eggs from a farmer with cheaper costs, we have seen a number of different cost discrepancies (unfavorable mixed price variance). Following an analysis of these variations, we make a few adjustments to our egg inventory costs and hunt for milk cost-cutting measures. As soon as the month’s books are closed, we add our profit and loss to the Income Statement.
Thank you for reading our Product Costing blog series. In my upcoming blog series, I’ll cover unique configuration-related topics related to product costing. Visit TanyaDuncanBlog.com to read further blogs of mine.
Following these links will allow you to catch up if you missed the previous four blogs: