Understanding Product Costing in SAP

4/6/2019 Understanding the concept of product costing and how it's done in SAP?
- TECH CONCEPT HUB
TECH CONCEPT HUB

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Understanding the concept of product costing and how it’s

done in SAP?
What is Product costing?

Estimating the cost of a product is referred as product costing. Now in order to estimate cost of any
product, below information is needed
What materials and in how much quantity are consumed in producing finished good? List of all the
materials which are consumed is referred as Bill of Materials (BOM).
How much is the making cost in producing finished product? Making cost comes from activities that
are being performed on materials to produce finished product. Each and every activity which is
performed has cost associated with it. Hence if we calculate cost of each activity and add it up, we
will arrive at making cost of finished product.
Each activity might have different cost associated with it. Hence making cost of finished product depends
upon which activity is performed in how much quantity in producing finished product. Hence, adding up
the cost of various activities in order to arrive at making cost of finished product is referred as Activity
Based Costing.
Maintaining the list of all the activities and their respective quantities which are performed in producing
finished product is referred as Routing.
How much is the overhead cost in producing finished product. Overhead cost is the indirect
cost which is involved in producing finished product. Example of overhead cost Electricity, Wifi, cleaning
cost, telephone bills etc.
Let’s say that over the years of experience, business has learned that overhead cost is normally 1% of
material cost and .5% of making cost. Hence overhead cost is calculated by applying certain % on material
cost and similarly on making cost.
Hence for calculating overhead cost, we can use a formula which will calculate overhead by applying
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certain % on material cost and certain % on making cost. This kind of formula is referred as Costing Sheet.
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4/6/2019 Understanding the concept of product costing and how it's done in SAP? - TECH CONCEPT HUB
Hence to estimate cost of a finished product, we need to create BOM, Routing and Costing sheet.
Material is created by SAP MM team.
BOM and Routing is created by SAP PP team
Costing sheet is created by finance team.
Let’s say Bom, Routing & Costing sheet is created. Then in order to estimate the cost of finished product,
we need to execute cost estimate run. The estimate run picks up the list of materials consumed from
BOM, picks up the list of activities from Routing and calculates overhead cost using Costing sheet.
Output of cost estimate run is, estimate cost of finished product divided at lower level. Total cost of
finished product is broken down at lower level for analysis purpose. These broken down lower level of
Cost is referred as Cost Component.
In our example, total cost can be broken down into lower levels (cost components) like Material cost,
Making cost & overhead cost. These cost components add up to make cost of finished product.
Defining the cost components into which total cost estimate is to be broken down is referred as Cost
Component Structure.
Let’s understand the above concepts along with example:
Let’s try to do cost estimate for finished product “CARROT Halva”.
Suppose for producing 1kg of Carrot Halva, estimated material consumption is Milk (1 liter), Sugar (.5
kg), Carrot (1kg), Ghee (.2kg) and Dry fruits(.2 kg).
Activities involved for producing 1 kg of Carrot Halva are Cutting (crushing the carrot) and then heating
the material for cooking.
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Overhead is 2% on raw material cost.
Above picture shown BOM for 1 kg of finished project “Carrot Halva”.
Above is routing
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Above is the costing sheet showing material overhead is 2%
How costing sheet is defined and used will be covered in detail in later articles. As of now let’s just say
that material overhead is 2% on raw material cost.
Below screenshot showing cost component structure
Above cost component structure ‘GH’ showing total cost is to be broken down into three components
namely Raw material, Making cost and Material overhead
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Below is the output of cost estimate run:
Above screen showing, total estimated cost of producing 1 kg of carrot halva is 457.6 INR.
Cost of items involved is as shown below:
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product costing overview
Let’s focus on work of SAP FICO consultant in product costing.

As discussed above, cost component structure is created by finance team.
As shown above, different cost accounts need to be mapped to respective cost components. As a result
when cost estimate is run, cost is clubbed in respective cost components as specified in cost component
structure.
As discussed above, costing variant is maintained by FICO consultant. Let’s understand what is the use of
costing variant? Costing variant provides answer to below questions:
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What is the purpose of cost estimate run?
How values will be arrived for material, activities, subcontracting and external processing?
Which costing sheet is going to be used for overhead calculation?
Which dates to be defaulted when running cost estimate run? E.g. Costing from date, costing to date etc.
There can be multiple BOM and multiple Routing. Which BOM and Routing to use when running cost
estimate run?
How cost estimate is updated in material master as standard cost?
Below steps to be executed to update cost estimate in material master:
Cost estimate run:
Run estimate run is executed so that cost estimate is calculated using costing variant. If cost estimate is
calculate correctly (without any error), calculated cost estimate is saved.
Marking:
Marking refers to updating calculated cost estimate in material master as future standard cost.
As shown in above picture, as a result of marking future cost is updated in material master.
Release:
Release refers to making future cost as current cost estimate and current cost become previous cost.
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What happens when estimated cost is updated in material master as standard cost?
When new standard cost is updated in material master, existing inventory is revalued at new standard
cost. The difference arising out of revaluation is posted (finance document) in account books.
Existing quantity of material 1476 is 7000
Previous standard cost was 557.6
Hence, inventory value = Quantity (7000) X Standard cost (557.6) = 3,90,3200
When release happen, future price is updated as current standard cost.
New standard cost is 457.6
New inventory value = Quantity (7000) X Standard cost (457.6) = 3,20,3200
Hence value of inventory is reduced by 7,00,000
As a result of revaluation, below document is posted automatically:
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Since above document is posted automatically, hence system needs to be provided with GL accounts to
be picked for posting. This account determination is done in T code: OBY6

What is the use of standard cost which is updated in material
master?
Use of standard cost in purchase order:
When good receipt (GR) is done, then below document gets posted.
As you can see, any difference between purchase price and standard price is posted to price difference
account. (Assuming material is maintained at standard price and not at moving average price)
If price difference account is posted with big value then it reflects that purchase department has
procured material at significantly high price than it should have done. Hence, price difference account
balance reflects efficiency of purchase department.
Finance controller runs report of price difference account every month and check if purchases are being
made at reasonable prices.
This way standard cost is helping in cost controlling.
Use of standard cost in sales order:
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You can see above, material as well as Cost of goods sold (COGS) is valued at current standard cost.
Later on customer invoice is posted as below:
Revenue is booked 1000
COGS booked is 457.6
These help in arriving at profit margin (Revenue – Expenses)
Use of standard cost in production order:

During manufacturing, cost is accumulated in production order and compared with target cost to check
the efficiency of production. High production variance means cost of production is too high as compared
to target cost. Production variance is important for cost control purpose. Production variance is getting 
calculated by using standard cost.

Best practices followed in product costing?

Standard cost is updated at start of the year for the whole year.
For all the materials which are maintained at price control “s”, standard cost is updated at the start of
year and is valid for the entire year.
Cost valid from date: First day of the fiscal year
Cost valid to date: Last day of fiscal year
Only in case of fast moving consumer goods (where prices keep changing frequently), there is need to
updated standard cost of material every month. (Valid from 1st day of month to last day of month)
Cost estimate run, Marking, Release is performed at di erent dates.

Let’s say new standard cost is to be updated from 1st day of the new fiscal year.
Consider a finished good which might be composed of hundreds of raw material. For finished good
costing to happen, all the involved raw materials should have standard cost. Hence before we do standard
costing of finished good, we should have completed standard costing of all the raw materials involved.
Thank You !
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Understanding Product Costing in SAP

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4/6/2019 Understanding the concept of product costing and how it's done in SAP?

- TECH CONCEPT HUB

TECH CONCEPT HUB

Understanding the concept of product costing and how it’s

What is Product costing?

Material is created by SAP MM team.

BOM and Routing is created by SAP PP team

Costing sheet is created by finance team.

Let’s understand the above concepts along with example:

Let’s try to do cost estimate for finished product “CARROT Halva”.

Above picture shown BOM for 1 kg of finished project “Carrot Halva”.

Above is the costing sheet showing material overhead is 2%

Below screenshot showing cost component structure

Below is the output of cost estimate run:

Cost of items involved is as shown below:

product costing overview

Let’s focus on work of SAP FICO consultant in product costing.

Which costing sheet is going to be used for overhead calculation?

How cost estimate is updated in material master as standard cost?

Below steps to be executed to update cost estimate in material master:

Cost estimate run:

Existing quantity of material 1476 is 7000

Previous standard cost was 557.6

Hence, inventory value = Quantity (7000) X Standard cost (557.6) = 3,90,3200

When release happen, future price is updated as current standard cost.

New standard cost is 457.6

New inventory value = Quantity (7000) X Standard cost (457.6) = 3,20,3200

Hence value of inventory is reduced by 7,00,000

As a result of revaluation, below document is posted automatically:

This way standard cost is helping in cost controlling.

Use of standard cost in sales order:

Later on customer invoice is posted as below:

Revenue is booked 1000

COGS booked is 457.6

These help in arriving at profit margin (Revenue – Expenses)

Use of standard cost in production order:

Cost valid from date: First day of the fiscal year

Cost valid to date: Last day of fiscal year

Cost estimate run, Marking, Release is performed at di erent dates.

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