SAP Ebooks

Product Costing in SAP

Product Costing Controlling

Product Cost Planning is a tool for setting standard prices of FG and SFG. The standard price is compared against the actual cost of production and any difference between the standard price and actual cost is recorded as variance by the system. It will also form the basis for valuation of FG and SFG inventories at the period and year end. It uses information from the Overhead Cost Planning to calculate costs such as labour, machine, or factory overhead.

Product Cost Controlling includes:

Overhead Cost Planning: It consists:

•    Planning of activity output quantity and activity prices for production cost center.
•    Overhead rate maintenance in overhead cost sheet for overhead prices.

Product Cost Planning: It consists:

•    Creation / Marking / Release of cost estimate for all in-house manufactured products. It includes the raw material cost and conversion cost like labour, machine or factory overhead from overhead cost planning.

Cost Object Controlling: It consists:

•    Periodic adjustments of actual costs posted to production cost center and activity.
•    Calculation of overhead, WIP cost and variances for production orders/product cost collector and there settlement to FI.

Overhead Cost Planning

Overhead cost planning involves activity wise quantity output & cost planning in respective production cost centers, based on which activity prices are derive for a particular period interval. It forms part of the overall product cost planning process, and is a prerequisite for standard costing in product cost planning. Product Cost Planning accesses material prices of input material in BOM, activity prices of activities performed for an operation under taken in respective work center attached to the production cost center.

Planning is used to determine the activity price on the basis of planned costs and planned activity quantities.  These prices are used to valuate activities during the current period and also for future periods. On the basis of the actual activity output quantity (confirmation through production order) and cost booked in finance in previous periods, the planning data will be updated   periodically to derive new activity prices for the next periods. The actual activity output quantity in production order and cost booked in finance are simultaneously updated by the system in production cost center.

Planning Version

The planning process is not a one-time event, but an iterative process which usually goes through several cycles. The basis for calculation of plan prices and resulting plan prices itself is stored by way of versions in the system. The SAP system allows us to have multiple versions at the same time. We can use these versions as the basis for analysis. These versions are stored separately in the system and can be compared with each other in the information system (plan/plan comparisons, or comparisons of the actual costs with different versions).

When we create a controlling area, the system automatically creates version 0 (plan/actual). The actual values when entering costs in FI or allocating costs using distribution/ Assessment cycles internally in CO and actual activity output quantity in production order are by default posted in version 0 through cost element. Version 0 will also be used to store the plan prices required for internal activity allocation during product cost planning and actual activity confirmation in production order. We will use version 0 for plan/actual comparison as it contains both plan and actual data for analysis purposes. We can use any number of additional plan versions. However, no actual data is recorded in these alternative versions. We can only plan data in these additional versions.

In general, use Version 0 & Version 1 for our planning purpose. The plan and actual data in version 0 will be maintained at average price method on quarterly basis while version 1 will be maintained at periodic price method on quarterly basis. Version 0 plan and actual activity prices will be used in product cost planning and production order to derive internal activity prices. The comparative analysis of activity prices in version 0 and 1 will give the variance between activity prices based on average price method and periodic price method.

Planning Layout

Planning profiles in cost center planning contains list of predefined planning layouts in the standard system. Planning layouts are predefined ‘Forms’ for manual entry of planning data. These forms contains list of objects like cost elements, cost center and activity types for which periodically planning data will be maintained in the respective plan version.

Cost center planning
In production planning (PP module) either each individual machine or a group of machines will be defined as a work center. Each work center will be assigned to a production cost center and the activity type viz. labor hour, machine hour etc for costing. This assignment would be done in the work center master record in PP.

Activity output/Cost element

Activity Output Quantity

The first step in cost center planning is to plan for the activity output for all production cost centers. Activity types are used to determine the quantity-based output of a production cost center.  This will represent the planned utilization (in man hours/machine hours) of various activities at each work centre. These activities should be planned in sync with the planned capacity utilization to meet the product cost planning for the period.

Activity output planning will be done using transaction KP26. In activity output planning, we plan the activities utilized by a production cost center. This represents the quantity-based output of a cost center. During activity output planning we can manually set the plan price per unit of activity with which the SAP system valuates the activity during allocation from production order to production cost center. We can choose to retain this price or have the system overwrite it during plan price calculation.

The planned quantity for the activities associated with the respective cost centre will be revised from quarter to quarter based on the actual activity quantity recorded through PP in the respective cost centre. The revision will be done either manually by looking into the cost centre report or through the auto copy functionality KP98. The planned price per unit of activity after the KSPI run is updated in the fixed price column for the period. The future activity price for standard cost estimate are derived using the planned price in the fixed price column and the activities confirmed in PP are hereinafter valuated with the new rate as updated in the fixed price.

Primary Cost Element Planning

Primary cost planning involves planning of overhead cost that arises because of the production activity. It refers to the activity cost incurred in producing the plan output on a production cost center. It includes direct labour cost, direct machine cost, direct expenses and other indirect overhead.

Primary cost planning is purely a value or amount based planning. In this case the system records the plan cost against the combination of each production cost center, primary cost element and activity type. Primary cost planning is done using transaction code KP06. The planned value for the activities associated with the respective production cost centre will be revised from quarter to quarter based on the actual activity cost recorded through FI in the respective cost centre. The revision will be done either manually by looking into the cost centre report or through the auto copy functionality KP98.

Secondary Cost Element Planning

In addition to primary cost ( direct cost), secondary cost ( indirect cost) are often incurred in the production process. This is because production cost center takes service of other support cost centers to produce its own activity. Secondary cost on the production cost center results from internal cost allocation from support cost centers through distribution or assessment cycle based on statistical key figure, activity type or primary cost already recorded in receiver cost center.

Activity Price Calculation

Activity price calculation is the last stage in the process of overhead cost planning. This is required to be done for all production cost centers. It is through activity price calculation run (KSPI – Plan Activity Price, KSII – Actual Activity Price) that the activity price per unit of activity for an activity type is derived by the system. KSPI updates activity price in the ‘fixed price’ column for the activity type and cost center which can be seen through KP26 and is used for standard cost estimate. It also updates ‘plan prices’ column in KBK6 with plan activity price which is used to valuate activities confirmed through production order. Unlike KSPI, KSII updates only ‘fixed price’ column in KBK6.  The future activities going to be confirmed through production order can also be valuated using this price.

Periodically activity price calculation will be executed for each manufacturing plant for those overheads which should be fully absorbed/loaded on the inventory. Activity price will be calculated automatically iteratively on the basis of the planned activity quantity updated in KP26 for cost center/activity type and value or amount updated for cost center/cost element/activity type through KP06. The price calculation method i.e. average price or periodic price for activity prices will depend on the calculation method maintained in the planning version 0 and 1 respectively.

Overhead Cost Sheet

Costs (other than Direct material, Direct labor & Machine cost), which are not directly attributed to the products are called overhead cost. Overhead cost can be of different types, such as, Material Overhead, Labor Overhead, Production Overhead, Administrative Overhead, Selling & Distribution Overhead.

Cost which will be covered in the above categories will be as follows:

(1) Material Overhead: Cost of all the indirect material which will not be captured through BOM.

(2) Labor Overhead: Cost of all the indirect labor which will not be captured through Routing.

(3) Production Overhead: Other production cost which will not be capture through prime cost as well as material & labor overhead.

(4) Administrative Overhead: Cost of administrative expenses other than production cost.

(5) Selling & Distribution Overhead: Cost of selling & distribution expenses

Allocation of the above mentioned overheads can be on percentage-basis or on quantity-basis. The overhead allocation amount is derived for each of these overhead through overhead costing sheet. The costing sheet includes all parts relevant for the overhead costing, and determines the rules for calculating the values to be posted.

The structure of the costing sheet includes the following parameter:

(1) Calculation Base: it includes the primary cost elements like direct material consumption account, internal activity allocation like direct labour cost to which a particular overhead rate is to be applied. Calculation base condition is specified in the ‘Base’ column of the cost sheet.

(2) Overhead Rate: overhead rate determines under what condition and to what extent the percentage-based or quantity-based overhead rate should be applied to the direct costs specified in calculation base. Overhead rate condition is specified in the overhead rate column of the cost sheet.

(3) Credit: when a production order/product cost collector is debited with overhead an entry is credited to overhead cost center. This overhead allocation is done through overhead cost element specified in ‘credit’ column along with the cost center of the ‘overhead row’.

Leave a Reply

Your email address will not be published. Required fields are marked *