1.Raw materials are withdrawn in Materials Management (MM) for the production order.

These
raw materials are necessary to manufacture the finished product.
Expense for Raw Materials is debited

Posted in controlling to the Production order.

Raw Materials Inventory is credited

2.Personnel expense is incurred in Financial Accounting.
Personnel Expense is debited

Cost centers are charged with the costs incurred.

Bank is credited

3.Costs are allocated from Cost Center Accounting to the production order once
the confirmations were entered in production.
Effects on Cost Center Accounting:
Cost centers are credited by the amount of allocated costs.
Effects on Cost Object Controlling:
Figure 1-3: Business transactions in production and Cost Object Controlling affect
Financial Accounting

Business transaction (4) that generated a posting:

The finished product is transferred to finished goods inventory. A goods receipt takes place in MM
When the goods receipt is posted in MM, the system automatically generates a posting in FI.
Business background:
Expense was posted in FI during production. The expense entered a value added process. The
finished product embodies this value added. The finished product is capitalized in the balance
sheet. Since the finished product is valuated at the standard price (price control indicator S), this
capitalization is made at standard price. In addition, an inventory increase is posted to the
inventory change account (plant activity account). The increase in inventory affects the earnings.
Posting record:
Inventory is debited with 1,400 and Inventory Change is credited with 1,400.
Account determination:
The system uses the following transaction keys for this posting in automatic account
determination in MM:

Transaction key BSX for the determination of the material stock account
Transaction key GBB and account grouping code AUF for the determination of the
inventory change account

Effects on Cost Object Controlling:

The production order is credited with the standard price. This credit uses the cost element that
corresponds to the inventory change account. This cost element is a primary cost element (for
example, in IDES, account number 895000 Finished Goods Inventory Change is defined as a
primary cost element. Credits of production orders resulting from delivery of the finished products
to finished goods inventory are updated to the production order with cost element 895000).
Business transaction (5) that generated a posting:
Since production is completed, the production order should be credited in full. The credit is
effected by settling the production order.
Business background:
Since the amount charged to the production order (1,600) is more than the amount credited
(1,400), a difference of 200 remains on the production order. This difference is settled to Financial
Accounting during the period-end closing process in Cost Object Controlling.
Posting record:
Expense from Price Differences is debited with 200 and Inventory Change is credited with 200.
Account determination:
The system uses the following transaction keys for this posting in automatic account
determination in MM:

Transaction key PRD for the determination of the price difference account

If the amount debited to the production order is greater than the amount credited,
the system debits the Expense from Price Differences account (such as account
231500 in IDES) and credits the Inventory Change account (such as 895000). In
this case, an expense posting is compared against the posting of an inventory
increase.
If the amount debited to the production order is less than the amount credited,
the system debits the Inventory Change account (895000) and credits the
Income from Price Differences account (such as 281500). In this case, an income
posting is compared against the posting of an inventory decrease.

Transaction key GBB for the determination of the inventory change account
You can settle the balance to the same inventory change account that was posted to for
the goods receipt. In this case, the system uses the following setting in automatic account
determination in MM: Transaction GBB, account grouping code AUF (both for goods
receipt and for settlement).
If you want to post to a different inventory change account than that used for the goods
receipt, use the following setting of automatic account determination: Transaction key
GBB, account grouping code AUA. If account grouping code AUA exists, account
grouping code AUF is ignored when you settle. Account grouping code AUF is still used
for the goods receipt posting.

Effects on Cost Object Controlling:

The production order then has a balance of zero.
Effects on income statement:
The postings Debit Expense from Price Differences and Credit Inventory Changes and Debit
Inventory Changes and Credit Revenue from Price Differences have no effect on profit. However,
the profit has already been affected by the previous postings (such as with goods issues).
Effects on balance sheet:
The inventory value is not affected by the settlement of the price difference. The finished product
is still valuated at standard price.
Figure 1-4: Effects of business transactions delivery to customer and invoice to customer

Business transaction (6) that generated a posting:

The material is withdrawn from inventory and delivered to the customer.
Posting record:
Inventory Change from Sale of Finished Products (Cost of Sales) is debited and Inventory is
credited.
Effects on Cost Object Controlling:

Cost Object Controlling is not affected in:

Make-to-stock production
Sales-order-related production with a valuated sales order stock without Product Cost by
Sales Order

In Product Cost by Sales Order with a valuated sales order stock, the sales order item is
charged with the standard cost of goods manufactured of sales (for detailed information,
see the following section: Product Cost by Sales Order: Scenario)

Effects on income statement:

The posting of the inventory change reduces the revenue. For materials with price control
indicator S, the inventory change is posted at standard price (standard cost of goods
manufactured of sales).
Business transaction (7) that generated a posting:

The goods delivered to the customer are invoiced.

Posting record:
Current Assets is debited and Sales Revenues (such as 800000 Sales Revenues - Domestic in
IDES) is credited
Effects on Cost Object Controlling:

Cost Object Controlling is not affected in:

Make-to-stock production

Sales-order-related production with a valuated sales order stock without Product Cost by
Sales Order

In Product Cost by Sales Order with a valuated sales order stock, the sales order item is
charged with the actual revenue

Effects on income statement:

The posting of the revenue increases the revenue.
Figure 1-5: Balance sheet and income statement after production, settlement, delivery, and
billing; income statement after period accounting

Income Statement:

The income statement shows the following values:

Debits
(1) Expense from consumption of raw material 800
(2) Personnel expense 800
(5) Expense from price differences 200
Total expense: 1,800
Credits
(4, 5, 6) Increased inventory (inventory changes
from goods receipt and settlement) 200
(7) Revenue 2,000
Total revenue: 2,200

Profit (balance): 400

The difference between expense and revenue results in a positive balance of 400, which in turn
results in a profit being reported in the income statement.
Balance sheet:
(4) The asset side of the balance sheet shows current assets of 2,000. These current assets
equal the value of the accounts receivable. On the liabilities side, the stockholders equity is
increased by 400 due to the profit.
The balance increases by 400.
Summary:
Since production costs were higher than planned, the additional expenditure negatively affects
the operating profit. This means that the profit decreases by the amount by which the actual costs
charged to the production order exceed the standard price.
The actual costs charged to the production order affect net income just as the posting of the
inventory change at the time of the goods receipt. Since the actual expense was 200 higher than
expected, the operating profit is 200 lower than it would have been if production had been at
standard cost.

The net income will only be correctly affected by the debit and credit of the
production order if a posting that has no effect on net income is made when the
production order is settled.
If you were to make a posting that affects net income when settling the price
differences, the additional expenditure would not reduce the profit. The profit
would be reported as higher.
Example:
Posting at settlement: Inventory is debited with 200 and Inventory Change is
credited with 200.
Result:
o

In the income statement, the inventory increases by 200. The additional

inventory would continue to be USD 200, but it would have no offsetting
expense from the price differences. The revenue of 2,000 would be
added to the additional expenditure on the revenue side. The revenue of
USD 2,200 would be offset by a total expenditure of 1,600. The profit
would be 600.
In the balance sheet, the finished goods inventory is USD 200 (1,400
when received into inventory plus 200 at settlement less 1,400 for
delivery to the customer). The asset side of the balance sheet would
show a total of 2,200 (accounts receivable of 2,000 plus inventory of
200).
(Note: If valuation were at the standard price, the total inventory value
divided by the inventory quantity should equal the standard price. With
this posting, this would no longer be the case).

Figure 1-6: Balance sheet and income statement after production, settlement, delivery, and
billing; income statement after cost-of-sales accounting

Example 2:
Valuation of Internally Manufactured Materials with Price Control
Indicator V; Actual Cost Greater Than Standard Cost
Prerequisites
The price control indicator in the master record of the finished product is set to V. The standard
price is 1,400.
The initial situation and the debit of the production order correspond to the above explanation
(see figures 1-1 and 1-2 and accompanying description). This example begins at the point where
the production order is credited.
The balance sheet and the income statement are shown in example 2 after the business
transactions Delivery of Internally Manufactured Products to Inventory and Settlement of
Production Order. The effects on delivery and billing will not be discussed again explicitly. It
should only be noted that when the product is shipped to the customer, the posting Debit
Inventory Change and Credit Inventory would be at the moving average price. In example 2, the
income statement is compiled in accordance with the period accounting method.

Process Flow
Figure 2-1: Business transactions in Production and Cost Object Controlling affect
Financial Accounting

Business transaction (4) that generated a posting:

The finished product is transferred to finished goods inventory. A goods receipt takes place in MM
When the goods receipt is posted in MM, the system automatically generates a posting in FI.
Business background:
Expense was posted in FI during production. The expense entered a value added process. The
finished product embodies this value added. The finished product is capitalized in the balance
sheet. The preliminary capitalization is at the standard price. In addition, an inventory increase is
posted to the inventory change account (plant activity account). The increase in inventory affects
the earnings.
Posting record:
Inventory is debited with 1,400 and Inventory Change is credited with 1,400.
Effects on Cost Object Controlling:
The production order is credited with the standard price. The debit uses the cost element that
corresponds to the inventory change account.
Business transaction (5) that generated a posting:
Since production is completed, the production order should be credited in full. The credit is
effected by settling the production order.
Business background:

Since the amount charged to the production order (1,600) is more than the amount credited
(1,400), a difference of 200 remains on the production order. This difference is settled to Financial
Accounting during the period-end closing process in Cost Object Controlling.
Posting record:
Inventory is debited with 200 and Inventory Change is credited with 200. The posting on the
inventory change account affects the revenue.
Effects on Cost Object Controlling:
The production order then has a balance of zero.
Effects on income statement:
The posting to the price difference account has a positive effect on the profit.
Effects on balance sheet:
The inventory value is affected by the settlement of the order balance. On the basis of the data
updated to the inventory account, the system calculates a new moving average price of 1,600.
Figure 2-2: Balance sheet and income statement after production and settlement

Income Statement:
The income statement shows the following values:
Debits

(1) Expense from consumption of raw material 800

(2) Personnel expense 800
Total expense: 1,600
Credits
(4) Increased inventory (inventory changes from goods receipt and settlement) 1,600
Total revenue: 1,600
Profit/loss (balance) 0
Balance sheet:
(4) The asset side of the balance sheet shows current assets of 1,600. These current assets
equal the value of the finished products at the moving average price. On the liabilities side, the
balance sheet continues to show liabilities and equity in the amount of 1,600.
Summary:
The costs incurred in production that exceed the planned amount by 200 are posted as affecting
the net income at the time they were incurred. At the time of the goods receipt and when the
order balance is settled, an increase in inventory that affects the net income is posted. These
postings offset each other, however, so they have no effect on the profit.
The finished product is capitalized in the balance sheet at the moving average price. All costs that
are relevant to inventory valuation are capitalized.
The balance total is not reduced.