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Product Costing, part of the Controlling module, is used to value the internal cost of materials and
production for profitability and management accounting. Product Costing is a niche skill. Due to costing's
high integration with other modules, many people avoid it due to the complexity. This 5 part blog will seek to
simplify Product Costing.
The fifth and final step in understanding the basics of product costing is actual costs. Actual costs are
determined through purchase prices, actual expenses, and confirmed production quantities. Actual costs are
compared to standard costs through variance analysis to make management decisions and determine
profitability.
Prerequisites:
Material Masters (including MRP, Accounting, & Costing views)
Quantity Structure (Bill of Materials, Routing or Master Recipe, Production Versions are optional)
Configuration (WIP, Variance, and Settlement)
CO Master Data (Primary and Secondary Cost Elements, Activity Types, Actual
Output Variances
Resource-Usage Variance:
Caused by the use of different materials and
at standard price
If price used to valuate inventory is not a mixed price
http://scn.sap.com/community/erp/financials/controlling/blog/2013/01/04/5-steps-to-u... 03/11/2015
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Remaining Variance:
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.
Scrap Variance:
Caused by differences between operation scrap in
routing and actual scrap confirmed.
Finally, we must settle our orders or product cost collectors. Product Cost Collectors and orders are debited
with actual costs during production. The actual costs posted to an order can be more or less than the value
with which an order was credited when the goods receipt was posted. When you settle, the difference
between the debit and credit of the order is transferred to Financial Accounting (FI).
Relatable Example:
Let's say we are using Product Costing to value our inventory in a cookie baking shop. This will help us
value our cookies (finished good), frosting (semi-finished good), and baking items like eggs, milk, and sugar
(raw materials).
At month-end, we determine what batches of cookies are still in progress (WIP), review our actual expenses
and compare to our planned expenses (variances), and close our books for the month (settlement). The
cookies still in the oven are considered WIP (order status not complete). We notice several types of cost
variances due to higher milk costs (unfavorable input price variance), less frosting waste (favorable scrap
variance), and a cost difference because we planned to purchase a higher percent of eggs from a lower cost
farmer (unfavorable mixed price variance). After analyzing these variances, we make a few changes to our
inventory costs of eggs and look for ways to save on milk costs. We close our books for the month and
record our profit and loss to the Income Statement.
Thank you for reading this blog series on Product Costing. I plan to feature special configuration
topics in product costing in my next blog series. You can read more of my blogs at
TanyaDuncanBlog.com.
If you missed the previous four blogs, catch up by following these links:
http://scn.sap.com/community/erp/financials/controlling/blog/2013/01/02/5-steps-to-understandingproduct-costing-part-1-cost-center-planning
http://scn.sap.com/community/erp/financials/controlling/blog/2013/01/02/5-steps-to-understandingproduct-costing-part-2-activity-rate-calculation
http://scn.sap.com/community/erp/financials/controlling/blog/2013/01/02/5-steps-to-understandingproduct-costing-part-3-quantity-structure
http://scn.sap.com/community/erp/financials/controlling/blog/2013/01/02/5-steps-to-understandingproduct-costing-part-4-costing-run
76601 Views
Products: sap_erp_financials Topics: business_process_management, enterprise_resource_planning Tags: scn, sap, erp,
business_process_expert, sap_developer_network, erp_financials, controlling, fico, financials, co, finance, product_costing,
management_accounting, copc
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38 Comments
Luca Palumbo Jan 7, 2013 9:20 AM
Tanya Duncan Jan 23, 2013 8:28 PM (in response to Luca Palumbo)
Ashutosh Jha Jun 13, 2013 11:46 AM (in response to Tanya Duncan)
Hi Tanay,
I have been reading your blogs and i can not explain you how beneficial to me.
Need one help form me, getting answer of below client requirement and if you have
any config document for the same that would be great help to me. Below is the
requirement.
http://scn.sap.com/community/erp/financials/controlling/blog/2013/01/04/5-steps-to-u... 03/11/2015
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How to distribute the cost of one cost center to different profit center.
This is my client requirement.
Hope you help me. Thanks for your help in advance.
Ashu
Like (0)
Tanya Duncan Jul 12, 2013 3:14 AM (in response to Ashutosh Jha)
One should add that real actual costs by product come with the usage of material ledger actual costing.
The variance analysis WIP etc covered here is always by order, not by material, and it doesn't take
multi-level price differences into account.
In the cookie baking exmple above that would mean, if you have a semi-finished material, let's call it
batter, in your production process, you would see the milk price and usage variances only in the daily
orders for batter production, but they would not appear in the cookies.
With Material Ledger you would get a monthly reporting on actual costs for cookies, including all
variances from Milk, Eggs, scrapping etc., based on actual prices and actual consumption and
production quantities.
Like (2)
Tanya Duncan Jan 23, 2013 8:28 PM (in response to Udo Werner)
Very true. I think a follow up blog to this series would be material ledger/actual costing. I
decided to keep it simple with repetitive and discrete orders with standard costing. Material
ledger is a complicated topic for beginners.
Like (0)
Tanya Duncan Jan 23, 2013 8:26 PM (in response to Fernando Almeida)
Thanks for reading Fernando! Let me know if you have suggestions for future blogs.
Like (0)
Raphael Shi Aug 17, 2015 2:41 PM (in response to Zanhua Fan)
Why should you separate it to sales cost and inventory? If you really need it, you should use
Material Ledger.
Like (0)
Very good and informative article related to Product Costing , You have explained the complex Product
Costing module in simple 5 steps.Kudos. It will be understandable even to the end users..Thanks for
your information Tanya..Continue the good work...my best wishes...I registered myself in your blog..
Like (1)
Tanya Duncan Jan 28, 2013 5:15 AM (in response to NTH Hussain)
I appreciate it!
Like (0)
http://scn.sap.com/community/erp/financials/controlling/blog/2013/01/04/5-steps-to-u... 03/11/2015
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Very good............
Like (1)
The cookie baking shop example has added the real value to your article and makes the
readers to understand the real concept of Product Costing in a simple way. Thanks for
sharing the Knowledge.
Hope to get one more article for COPA too in the near future.
Regards
Siva
Like (1)
Tanya Duncan Apr 26, 2013 4:56 AM (in response to Sivakumar Thangarajan)
Thanks Siva! I like the cookie example because it's so easily understood.
Like (0)
Hi, Tanya. Thanks for sharing such informative steps. You really make PC understandable to
everyone. Best regards.
Like (1)
Dear Tanya,
Many thanks for sharing the Product costing knowledge transfer. through this blog i understand the
product costing very clearly .I hope this thread will be useful for many viewers.
Hope if you share threads on CO-PA it will be very grateful.
Thanks in Advance
Ganesh.
Like (0)
Hi Tanya,
Good Work and Easy to understand all point
Thanks
Muthu
Like (1)
Dear
Tanya Duncan,
Ultimate Job...!!!
Thank you for sharing and putting a lot of effort.
Regards,
Alok Tiwari
http://scn.sap.com/community/erp/financials/controlling/blog/2013/01/04/5-steps-to-u... 03/11/2015
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Like (0)
Erika Mae Santillan Sep 24, 2013 8:27 AM
I am new to product costing and this blog helped me understand the basics. I love the cookie example
too. Thanks Tanya!
Like (0)
Hi Tanya,
Thanks for your detailed blog on PC with suitable instance. Great effort and good job.
Regards,
Prakash.S
Like (0)
Hi Tanya,
Good explanation about Input Variance and Output Variance. Keep up the good work!
I like the way you have documented. Keep sharing and motivating others!
Good Luck! Happy New Year 2014!
Regards.
Hari Suseelan
Like (0)
Great Effort!!!!!
Amit
Like (0)
Hi Tanya,
Thanks for sharing.
Enjoyed Reading!
Regards,
Ajay
Like (0)
Hi Tanya,
Article is great help to people who are new to PC.
Thank you for this details.
Regards
Manohar G Shankar
Like (0)
Hello,
Thank you very much for excellent and super document.
Good work.
http://scn.sap.com/community/erp/financials/controlling/blog/2013/01/04/5-steps-to-u... 03/11/2015
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Like (0)
Great article... have you ever had an issue with the cost collector during separated back flush? For
example, we have an issue with the product cost collector being blocked during back flush processes.
Any idea what might be causing the error?
Like (0)
Thank you Tanya. Have you developed any document on Profit Center and Profitability Analysis? If you
develop on different modules of controlling. That would be very helpful
Like (0)
Great work
Like (0)
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