SAP CO - Product Costing

Key Terms & Concepts:

1. Results Analysis Key – This key determines how the Work in Progress is calculated
2. Cost Components - The breakup of the costs which get reflected in the product costing eg.
Material Cost, Labor Cost, Overhead etc.
3. Costing Sheets - This is used to calculate the overhead in Controlling
4. Costing Variant - For All manufactured products the price control recommended is Standard
Price. To come up with this standard price for the finished good material this material has to be
costed. This is done using Costing Variant. Further questions down below will explain this
concept better.
5. Back Flushing -- If you want your auto goods receipt or good issues that will further result in
saving in the manual interference and in so doing the cost using an instinctive process in the
respective system you have to use a process which is known as back flushing, for this you have
to activate with in the operation overview work center and material master.

What are the configuration settings maintained in the costing variant?

Costing variant forms the link between the application and Customizing, since all cost estimates are
carried out and saved with reference to a costing variant. The costing variant contains all the control
parameters for costing.
The configuration parameters are maintained for costing type, valuation variants, date control, and
quantity structure control.
In costing type we specify which field in the material master must the price be updated.
In valuation variant we specify in what order the system should go about accessing prices for the
material master (planned price, standard price, moving average price etc.). Further which is the price
which should be considered for activity price. How the system should select BOM and routing.

How does SAP go about costing a Product having multiple Bill of materials within it?

SAP first cost the lowest level product, arrives at the cost and then goes and cost the next highest level
and finally arrives at the cost of the final product.

What does the concept of cost roll up mean in product costing context?

The purpose of the cost roll up is to include the cost of goods manufactured of all materials in a
multilevel production structure within the cost of material located at the top of the structure.
The costs are rolled up automatically using the costing levels.
1) The system first calculates the costs for the materials with the lowest costing level and assigns
them to cost components.
 2) The materials in the next highest costing level (such as semi-finished materials) are then costed.
The costs for the materials costed first are rolled up and become part of the material costs of
the next highest level.

Describe the concept of Cost Sheet?

In the conventional method, overhead is applied to the reference object as a percentage rate or a
quantity-based rate. The overhead is applied by means of costing sheets. The very purpose of using
a cost sheet is that we want to apply indirect costs to the final cost of the product or process. Costs
that cannot be assigned to the product cost collector directly can be allocated by determining the
overhead expenses and applying them to the cost collector. Overhead costing is the means by
which we allocate indirect costs to the appropriate objects.

The costing sheet links all the functions of overhead calculation. The direct costs to which overhead
is applied (calculation base),The conditions under which overhead is applied (dependency),Whether
overhead is allocated on a percentage basis or on a quantity basis, The amount of the overhead
percentage, or the amount of overhead for each unit of measure (overhead), The validity period for
the overhead, Which object (cost center, process, or order) is credited, and under which cost
element in the case of actual postings (credit key)

Define Costing Sheet- T CODE KZS2

Screenshot 1- AAAAA costing sheet has been created for Example

Costing Sheet has 3 important components within it.

-Base
-Overhead rate

-Credit

Defining Base- T CODE KZB2

The calculation base consists of a group of cost elements to which overhead is to be applied according to
the same conditions. This process involves assigning individual cost elements or cost element intervals
for each controlling area to a calculation base.

We can apply different overhead amounts to the fixed and variable portions of the same base cost
element. We can also make the amount of the overhead dependent on not only the direct costs, but also
on the material itself. We can define material-specific calculation bases by entering the origin groups in
the material master record and by specifying them in the calculation bases.

Screenshot 2 Example ZV01 base

The calculation base determines to which cost elements overhead is applied together.

For each controlling area, we assign individual cost elements or cost element intervals, or origins or
origin intervals, to the calculation bases.

For production overhead costs, we can differentiate between fixed and variable costs for the
calculation base. In this way, we can charge the fixed and variable portions of the activity price
differently for activity types.

For material overhead costs, we can differentiate the materials used. If we want to define different
material overhead costs for particular raw materials, we can define origin groups and define where
own calculation bases for particular origin groups. (Origin group need to be defined)

If we do not specify any origins for a cost element interval, the SAP System considers all the origins in the relevant
interval.

-Overhead rate here we can define Quantity or percent base overhead rate

Percent based Overhead rate T CODE KZZ2

Screenshot 3 Percent based overhead rate

Quantity based Overhead rate- T CODE KZM2

Screenshot 4 Quantity based overhead rate.

-Define Credit T CODE-KZE2

Cost allocation is part of the process of determining overhead rates. If this leads to an object being
debited with actual costs, another object in Cost Accounting must be credited at the same time. This
can be either a cost center, order or a business process. This type of posting is recorded under a
secondary cost element of cost element category 41 (overhead rates) in the SAP System.
When you define credits, you also specify which credit object is to be credited under which cost
element when overhead is to be applied to an object in the actual.

You can also define what percentage of the overhead is to be allocated as fixed costs.

Screenshot 5 Defining credit (Cost center being credited in the example)

Define Origin Groups T CODE OKZ1

Here you can create origin groups. These groups serve to subdivide the material costs further. For
controlling purposes, materials assigned to the same cost element by automatic account
determination can be separated into origin groups. You enter the origin group in the costing view of
the material master record. Account determination assigns each material to a G/L account and thus
also to a primary cost element.

Screenshot 6
Screenshot 7

If an origin group is entered in the costing view of the material master record, the combination of
origin group and cost element is updated in the Controlling module.

If the Material origin indicator in the costing view of the material master record is specified in addition
to the origin group, the costs are updated under the combination of material number and cost
element in the Controlling component.

You can do the following for each cost element and origin group:

Calculate overhead

If you have maintained origin groups for the raw materials, you can define a calculation base in the
costing sheet for each group of raw materials. This enables you to define different overhead
surcharges for each group of raw materials.
Screenshot 8

Make assignments to cost components

If you have maintained origin groups for the raw materials, you can create separate cost
components for important materials or groups of materials.

Screenshot 9

What is a settlement profile and why is it needed?

All the costs or revenues which are collected in the Production order or Sales order for example have to
be settled to a receiver at the end of the period. This receiver could be a a gl account, a cost center,
profitability analysis or asset. Also read the question "What is a cost object " in the section Controlling.
In order to settle the costs of the production order or sales order a settlement profile is needed.
In a settlement profile you define a range of control parameters for settlement. You must define the
settlement profile before you can enter a settlement rule for a sender.
The Settlement Profile is maintained in the Order Type and defaults during creating of order.
Settlement profile includes:-
1) the retention period for the setttlement documents.
2) Valid receivers GL account, cost center, order, WBS element, fixed asset, material, profitability
segment, sales order, cost objects, order items, business process
3) Document type is attached here
4) whether 100% validation, % settlement, equivalence numbers, variances to costing based CO-PA
5) Allocation structure and PA transfer structure is attached to the settlement profile e.g. A1
The settlement profile created is attached to the order type.

What is Transfer or Allocation structure?

The transfer structure is what helps in settling the cost from one cost object to the receiver. It is
maintained in the Settlement profile defined above.
The Transfer structure has 2 parts:
a) Source of cost elements you want to settle
b) Target receiver whether it is a Profitability segment or fixed asset or cost center
So basically for settling the costs of a cost object you need to define the Transfer structure where you
mention what are the costs you want to settle and the target receiver for that.
This information you fit it in the settlement profile which contains various other parameters and this
settlement profile is defaulted in the Order type. So every time a order is executed the relevant
settlement rule is stored and at the month end by running the transaction of the settlement of orders all
the cost is passed on to the receiver
So to put in simple terms:
a) You define your cost object which could be a production order a sales order for eg
b) You collect costs or revenues for it
c) You determine where you want to pass these costs or revenues to for eg if the sales order is the cost
object all the costs or revenues of a sales order could be passed to Profitability Analysis

What do you mean by primary cost component split?

Primary cost split is defined when you create a cost component structure. When you switch on this
setting, the primary cost from the cost center are picked up and assigned to the various cost
components.

How do primary costs get picked up from cost center into the cost component structure?

This is possible when you do a plan activity price calculation from SAP. The primary cost component
structure is assigned to the plan version 0 in Controlling

Is it possible to configure 2 cost component structures for the same product in order to have 2
different views?

Yes it is possible. We create another cost component structure and assign it to the main cost component
structure. This cost component structure is called Auxiliary cost component structure which provides
another view of the cost component structure.

How do you go about configuring for the sales order costing ?

The flow is as follows:

Sales order -> Requirement Type-􀃆 Requirement Class-> All settings for controlling
In a sales order you have a requirement type . In configuration the requirement Class is attached to the
requirement type and in this requirement class all configuration settings are maintained for controlling.
In the requirement class we attach the costing variant; we attach the condition type EK02 where we
want the sales order cost to be updated, and the account assignment category. In the account
assignment category we define whether the sales order will carry cost or not. In case if we do not want
to carry cost on the sales order we keep the consumption posting field blank.
We also define here the Results Analysis version which helps to calculate the Results Analysis for the
Sales order if required.

What are the Journal Entries for Product Costing?

The entries which flow for product costing are as follows:

For Material issue

To Raw Material Inventory(Credit)
Raw Material Consumption (Debit)

Activities Performed

Respective cost center (Credit)

To Set Up cost (Debit)
Machining Cost (Debit)

Good Receipt

Cost of Production (Credit)

To Inventory of Finished Goods (Debit)
Please note that this entry will come from MM module and at Standard Price.

Settlement Of Production Order

Cost of Production( Variance)
To Price Difference Account

Post goods Issued

Inventory of Finished Goods (Credit)

To Cost of goods Sold (Debit)

What are the Flow of Product Costing ?

The production order captures all the cost, which are incurred during the production process. The
details of each cost are as below.

1. For every batch of production a production order is raised in the production department. The
production order contains the details of BOM and recipe.

2. The Bill of Material (BOM) details the raw material and packing material in the required
portions that are required for production.

3. The recipe contains the detail process of production activity including resource such as
manufacturing machineries, equipment. Each operation is assigned to its resource and each
resource assigned to relevant activities such as Labor, fuel, power etc. (maximum of six
parameters for each resource). Each resource is attached to a cost center.
 4. The recipe and BOM are copied to production order automatically when the order is created.
The quantities of materials and activities are determined at standard levels (Planned costs).

5. A production order may contain several phases and each phase requires individual
confirmation.

6. Once a phase in production process is complete the production person gives his approval by
the way of confirmation.

7. At the time of giving confirmation he inputs the actual quantities incurred for material and
activities. Using these inputs the Actual Cost can be arrived.

8. From controlling module, the planned rates of activities are uploaded on periodical basis.
monthly or annually. The cost of material is taken at Moving Average price.

9. Once the batch production is complete the production person gives his final approval to the
order as u201CTechnically completed (TECO)u201D.

10. At the month end / period end all these process orders are settled at the costing department.

11. The settlement results in calculating the overheads on predetermined rate and transferring the
total cost of the production on to the finished product. The following entry is generated

Finished goods stock Account Dr

To factory output Account Cr.

12. The work-in-process is calculated based on the status assigned to production order. If the
order has a status of u201Cu201CTechnically completed (TECO)u201D. the work-in-process is
not calculated, but the order will be totally settled.

13. The standard cost of finished product is released at the beginning of every month. The
standard cost is calculated based on the Bill of Material and recipe defined independently for
each finished and semi finished product.

14. The variance is calculated on the difference of standard cost of material and the actual cost
incurred in the production.

15. When the actual cost of power, fuel, Labour are accounted against respective cost centres in
the month end, the system automatically determines the under absorption or over absorption
of production costs. This difference cost will be apportioned to all the batches on a
predetermined basis.

Revaluation of Production orders

Initially cost planned in cost centre accounting against activity types are used for valuating the
materials that are produced. At the month end when actual cost are booked from financial accounting,
revised activity price calculation is carried in cost centre accounting and with this prices the production
orders are revalued. The revaluation is carried to the extent of difference between planned vs. actual
activity prices. The revaluation production orders will not be carried, as production orders will be
settled Immediately.
The actual cost of every batch is determined using above process. A report is generated to know the
cost for each batch.

The standard cost fixed with each customer for each product is maintained in a separate database.
The Costing department should compare these details with the actual cost of production and identify
the difference. Accordingly a Debit/Credit note can be generated.

Once a standard cost estimate is created, it updates the material master with that rate.

Cost Object Controlling is an area in cost accounting that assigns the costs incurred in the production
of company activities (such as internally manufactured materials) to those activities. Cost Object
Controlling supports you in:

Reaching make-or-buy decisions

Determining price floors

Performing complex cost analysis (such as target/actual analysis)

Determining inventory values

Cost component Structure:

A control of how the results of activity price calculation or material costing are stored.

In Product Cost Controlling (CO-PC), the cost component structure determines the attributes for
passing on the following costs:

Material costs passed on to material valuation as the standard price or inventory price

Product cost components are

Material, Accessories, Power, Sal & wages, Depreciation , R&M/ Stores , Others, Admin OH

Standard Cost Estimates (Applicable for trading activity)

At the start of the fiscal year standard cost estimates will be released based on the planned raw
material prices and planned manufacturing overheads. These standard prices are updated in the
respective material master. These cost estimates are run only for make-to-stock materials.

The various components of cost are incurred in producing a product is captured. The following cost
components are considered for materials cost, consumables and fuel, direct

Labour cost, utilities. Repairs and maintenance gases, depreciation, administrative overheads. A
costing sheet will be created to capture administrative overheads cost which are not absorbed in the
products as activity cost but are to be considered for inventory valuation In the first step planned
activity outputs for each cost centre are planned, then planned cost that will be incurred against each
activity type and primary cost element are planned, by carrying out activity price calculation the
planned price of each activity is arrived. These activity types are entered in the work centers and
routings. When cost estimates are created, system captures material cost from the prices mentioned
in material master. The manufactured overheads are updated from the activity cost planned in cost
center accounting.

Describe Make to Stock Scenario in Product Costing

In the make-to-stock production process, production or process orders are the manufacturing order
types that collect costs during production. Materials are produced based on a set production plan using
MRP (material requirements planning), and not based on actual customer demand.

Accounting documents are posted throughout the month to both overhead cost centers and production
cost centers in a plant. These are known as direct postings.

As discussed in Chapter 2, costs are planned by cost center to determine plan vs. actuals, variances,
under/over absorption, and activity rates used in production. We can see the cost center variances in
Figure 5.1 that are determined when direct postings are accumulated and these variances can be
posted to CO-PA. Cost center variances result from under or over absorption of overhead costs and
production cost center’s resources.

We also discussed cost allocations in Chapter 2 and two methods: assessments and distributions. This
is where we send overhead costs to production cost centers to be included in the plan vs. actual
comparison and activity rate calculation.

An arrow in Figure 5.1 shows activity confirmations, where the activity rates set up in production cost
centers are used when activities are confirmed on orders. The work center’s cost center is credited
and the order is debited for activity usage.
Figure 5.1: Make-to-stock cost flow

As materials are received, a goods receipt posting is made to raw material or semi-finished goods
inventory on the balance sheet. Any purchase price variance for a standard cost item is posted to a
P&L purchase price variance account. PPV’s can be analyzed and capitalized to the balance sheet if
desired. When materials are backflushed or issued to production, they are issued at their MAP or
standard cost depending on price control. The order is debited for the material expense and the
inventory account is credited.
As materials are produced on an order, they are confirmed and posted to semi-finished good or
finished good inventory on the balance sheet. When materials are sold to a customer, a post goods
issue posting is made to debit inventory.

If an order is not is status TECO or DLV at month end, meaning the order is not yet complete, it goes
through WIP calculation. When an order is TECO or DLV in a subsequent month, the WIP balance is
cancelled and production variances are settled to COPA.

How many Valuated stock scenarios we can have for Product costing for MTO ?

There are 3 type of Valuated sale order stock scenarios:

1. Valuated Sale Order stock with sale Order as controlling object

2. Non - Valuated Sale Order stock with sale order as controlling Object

3. Valuated Sale Order Stock without Sale Order controlling

For Scenario 1 and 2 wherever the Sale Order is the cost object, Sale Order is the final Receiver. Only
the difference is that in valuated sale order stock, stock entries would be passed to FI and in non-
valuated sale order, no goods movement for FG will be there.

Briefly mention Make to Order by Sales Order Costing Scenario :

In MTO will follow the below steps,

1. Create a Sale order for the Header Material.

2. Run MRP for the Header Material, so the procurement proposals will generate for the BOM items.
That will also help to create Planned / Production Order in link to Sales Order.

3. Do the procurement for the components.

4. Once all the component stock is in place, convert the Header Material Planned order to Production
order through MD04/CO08.

5. Issue the components from Inventory to Shop floor (261).

6. Confirm the Production order and receive to stock (101).

7. Now the assembly is in sale order stock.

8. Create delivery to the customer (VL02N).

9. Create billing (VF01).

10. Close the order (TECO).

For MTO the cycle will start from Customer order / Sale order and end with the same.

In Master data you should mention the strategy Group in MRP3 and set in MRP 4 Indiv/coll as "1".

How to Variance are transferred to COPA ?

You can transfer the Total Variance of the manufacturing orders or product cost collector assigned to a sales order
item to the sales order item that carries costs and revenues. You proceed as follows:
 Create the price difference account to which you settle the variances as a cost element (the price difference
account is not normally a cost element).
 Use a price difference account that you select by means of automatic account determination using
transaction GBB and account grouping code AUA. When you settle the total variance to Financial
Accounting (FI), the total variance is assigned to the sales order item.
 Make sure that you don’t settle the total variance to Profitability Analysis (CO-PA) twice. The total variance
can be transferred to CO-PA both when the manufacturing orders or product cost collectors are settled and
when the sales order item is settled. Therefore, turn off the Variances indicator in the settlement profile
specified in the order type.

Some other tips for Variance Settlement to COPA. – Cost Based:

When using cost based CO-PA, manufacturers want as much detail as possible in contribution margin reports. When
settling manufacturing orders, utilize the PA Transfer Structure to assign the settlement variance categories to CO-PA
vale fields. The PA Transfer Structure assigns the variance category and the cost elements of origin to a specific
value field. By leveraging cost element groups, we can provide more details on the origin of the variance. For
example, to post labor quantity variance and material quantity variance to distinct value fields: create two rows in the
structure. Create a row for the cost element group identifying material costs origin and another for the cost element
group identifying labor costs origin; assigning the input quantity variance category QTYV to both. In this way, we can
post variances from consumption of materials to a different value field than variances from consumption of labor. The
PA Transfer Structure is then assigned to the settlement profile of the order type, and the checkbox for settlement to
CO-PA is selected. When variances are calculated and the settlement has posted, reports in cost based CO-PA can
now display the variance amounts separately.