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SAP ERP Financials - Controlling

5 Steps to Understanding Product Costing- Part 5


Actual Costs
Posted by Tanya Duncan in SAP ERP Financials - Controlling on Jan 4, 2013 9:07:58 PM
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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

Assessment/Distribution Cycles, Actual Statistical Key Figures if required)


Overview:
Throughout a given period, actual expenses are recorded in SAP as purchases are made, payroll is
processed, bills are paid, and production occurs. At month-end, Work in Process, Variance, and Settlement
are calculated. The variance between actual costs and standard costs can result in changes to product
costing for the next period or year. Costs are settled and the posting period is closed at the end of the month
end process to avoid material movement or accounting postings in the previous period.
In product cost by order, actual production yield, scrap, and activity quantities are entered in a production
confirmation. The production costs are collected on the production orders for review and settlement. In
product cost by period, product cost collectors are used to calculate WIP, variances, and settlement instead
of the planned orders.
Prior to calculating variances and settling orders, orders must run through WIP calculation to determine what
part (if any) of an order is not complete. You can calculate work in process at target costs for Product cost
collectors, Production orders, and Process orders. Only orders that have a valid results analysis key and are
not in status DLFL (Deletion flag) or DLT (Deleted) are included in WIP calculation.
In Product Cost by Period (repetitive manufacturing), the quantities confirmed (other than scrap) for
manufacturing orders or production versions are valued at target cost based on the valuation variant for WIP
and scrap. In Product Cost by Order (discrete manufacturing), WIP is the difference between the debit and
credit of an order that has not been fully delivered.
SAP offers variance analysis on the input (consumption, overhead allocation, actual expenses) side and
output (production quantity or valuation) side.
Input Variances

Output Variances

Input Price Variance:


Caused by differences between plan and actual
material and activity prices. Only calculated if
material origin is selected on material master.

Mixed Price Variance:


Caused when the system determines a different mixed
cost than the released cost estimate. Must be selected in
the variance variant to see.

Resource-Usage Variance:
Caused by the use of different materials and

Output Price Variance:

activities than were planned in BOMs and


Routings/Master Recipes.

If standard price changed between delivery to stock

and when variances are calculated


If price control V materials are not delivered to stock

at standard price
If price used to valuate inventory is not a mixed price

Material Quantity Variance:


Caused by different material and quantities than
were planned in BOMs.

Lot Size Variance:


Differences between the planned and actual costs that
don't vary with lot size.

http://scn.sap.com/community/erp/financials/controlling/blog/2013/01/04/5-steps-to-u... 03/11/2015

5 Steps to Understanding Product Costing- Part ... | SCN

Remaining Input Variance:


This occurs when costs are entered without a
quantity or when OH rates are changed.

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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

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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

Great job, thanks for your knowledge sharing!


Like (2)

Tanya Duncan Jan 23, 2013 8:28 PM (in response to Luca Palumbo)

Thanks for reading Luca!


Like (0)

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

5 Steps to Understanding Product Costing- Part ... | SCN

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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)

Ashu- sorry for the delayed response. I don't check my notifications


frequently enough on SCN. I'm wondering if you really want to distribute
the costs in one cost center to another cost center that has the profit
center you want to use. Or perhaps you want to change an existing cost
center to have the proper profit center. Can you explain more?
Like (0)

Udo Werner Jan 7, 2013 10:41 AM

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)

Fernando Almeida Jan 16, 2013 2:53 PM

Thank you Very much for your great Inputs Tanya


Like (3)

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)

Zanhua Fan Jan 24, 2013 8:05 AM

Hi Tanya, thanks for your know-how.


Gegarding the variance, I have following question.
If the Material Ledger is inactive, how to classify the variance after settlement?
For example:
Finished Goods A, the plan quantity of the production order is 10, the standard cost is 9 while the
actual cost is 7. in current month, the production order is completed. and the variance of the production
order is 20. the FI document as follows:
Dr: COGM offset
20
Cr: COGM Variance 20
All the variance settled to PL account. That figure should be ok is all the Finished Goods is sold out in
same period. But, If the quantity of the FG sold out is 6 in same period, we should split the variance
manually. Amount 20*4/10=8 repost to inventory while amount 20*6/10=12 posted to Cost of Good
Sold. some developed reports required to determine rate between Good sold and Inventory.
Is there any standard solution for that case?
Hope this is clear and look forward to your reply.
Thanks
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)

NTH Hussain Jan 27, 2013 8:45 AM

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

5 Steps to Understanding Product Costing- Part ... | SCN

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RAHEEM BAKSH Apr 23, 2013 2:05 PM

Very good............
Like (1)

Sivakumar Thangarajan Apr 25, 2013 3:21 PM

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)

Alexandre Costacurta May 28, 2013 7:13 PM

Hi, Tanya. Thanks for sharing such informative steps. You really make PC understandable to
everyone. Best regards.
Like (1)

Tanya Duncan Jun 3, 2013 2:10 AM (in response to Alexandre Costacurta)

Thank you for reading Alexandre!


Like (0)

Ganesh kumar Lakshmanasamy Jun 4, 2013 6:45 AM

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)

Louise O'Driscoll Jun 21, 2013 11:06 AM

Very clear description and easy to understand


Thanks Tanya
Like (1)

Muthukumareshan vijayan Jun 24, 2013 6:40 AM

Hi Tanya,
Good Work and Easy to understand all point

Thanks
Muthu
Like (1)

Jignashu Bodawala Jun 28, 2013 5:32 PM

I loved your series. Excellent Work.


Like (1)

vijay kumar Jul 17, 2013 9:49 AM

Thank you for sharing.......... Is it possible to share COPA as well please..........


Like (0)

venkata ramana Jul 17, 2013 3:07 PM

Thank your for sharing. and i want to copa


Like (0)

Alok Kumar Tiwari Jul 20, 2013 2:50 PM

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)

Srinivasan Prakash Dec 27, 2013 2:53 PM

Hi Tanya,
Thanks for your detailed blog on PC with suitable instance. Great effort and good job.
Regards,
Prakash.S
Like (0)

Suseelan Hari Dec 27, 2013 3:08 PM

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)

Devendra F Feb 12, 2014 5:50 AM

Well done for five star contribution.


Like (1)

Amit Kumar Kataria Apr 21, 2014 10:17 AM

Great Effort!!!!!

Amit
Like (0)

Venkatesh B Apr 22, 2014 9:53 AM

Hi Tanya, Thanks a lot for sharing.


Regards
Venkatesh Bandi
Like (0)

Ajay Jawalkar May 15, 2014 9:05 AM

Hi Tanya,
Thanks for sharing.
Enjoyed Reading!
Regards,
Ajay
Like (0)

Manohar Gowri Shankar Jun 23, 2014 6:34 AM

Hi Tanya,
Article is great help to people who are new to PC.
Thank you for this details.
Regards
Manohar G Shankar
Like (0)

Erwin Leitner Jun 27, 2014 11:09 PM

Hello,
Thank you very much for excellent and super document.

all the best Erwin


Like (0)

SAP Boss Dec 21, 2014 4:23 PM

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)

Chris Coviello May 19, 2015 7:12 PM

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)

Sneh A May 25, 2015 4:57 PM

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)

Raphael Shi Aug 17, 2015 2:10 PM

Great article.....specially the variance part.


Like (0)

Junaid Shera Oct 15, 2015 7:55 AM

Great work
Like (0)

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