CO Overview of PP Module

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 Purpose
All functional processes are finally end in posting accounting entries
with various cost objects to FI/CO.
Product costing is used to calculate the costs of goods manufactured
and cost of goods sold for each product unit.
The product cost calculated using this product cost planning
functionality can be compared with actual cost to access the
production efficiency.
Material Cost
+Production Cost
+Production overheads

=Cost of Goods manufactured

+Selling and administrative expenses

=Cost of Goods Sold

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Use
This material would result in improved understanding of
the Controlling Modules other subcomponents
thoroughly On successful completion of this training, you
should have:
Knowledge of various PP processes relevant to
accounting & controlling.
The concepts of PP Master Data
The Production order integration with CO.

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Challenges
Determination of Material Costing with or without
quantity structure.
Method of Product cost Management. Whether Product
cost by Period or Product cost by Order.
Periodicity for revaluation of materials. Base on the
variance analysis.

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Challenges

Method of product cost management.

Whether Product cost by Period or Decisions
Product cost by Order?

Critical analysis of variances to find out the

Exact cause of occurrence Analysis

Periodicity for revaluation of materials

Base on the variance analysis Methods

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 Performance of the system for month end Process
Closing activities

Can we ever expect an actual cost of the product ?

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Content List
PP Organization Structure in SAP ERP
PP Process Flow (with quantity structure)
Master Data in PP
Production order integration with CO
Work in-Process
Variance Calculation

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Organizational Structure

Production planning unit is shown as shaded area

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PP Process Flow (with quantity structure)
Typically a normal cycle of PP process would begin with Goods Issue (GI) of the raw
material to a production order of a component that uses the raw material, which would
then be followed by a goods receipt of the finished component from the production order .
Create Production Order Precost (if applicable)

Secondary cost Goods Issue

-Confirmation -Reservation list
-Activity allocation -Unplanned
-Overhead -Back flush
-Process cost
Other Primary Cost Delivery

Settlement

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Master Data in PP (1/6)
Material Master :- . It is a central data object and contains all information about
materials. The Accounting , Costing and MRP views are relevant to costing.

Accounting View :- Relevant to material valuation, material price control, and

account determination.

Costing View:- Contain the control parameters for material costing.

Also contains characteristics required for Cost Object Controlling.
To be able to cost a material , the costing views must be maintained.

MRP View:- Material Status in PP

Scrap Factors
Special Procurement
Indicators : Co-product/ Bulk material
Production Version
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Master Data in PP (2/6)
Lot Size:- Key that determines which lot-sizing procedure the system uses within
materials planning to calculate the quantity to be procured or produced.

Procurement Type:- A classification determining whether a material is produced

internally, externally, or both.

Bulk Material:- It is usually posted as consumption at production cost centers as soon

as it is procured , so it is not included in cost estimate.

Production Version:- The production version determines production techniques that

can be used to produce a material.

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Master Data in PP (3/6)
Bills of Material (BOM):- . It is a directory of components containing the information
such as the quantity and unit of measure require to produce a finished product.
BOMs are used in :
Material Requirement Planning for procuring parts.
Production for staging parts.
Costing for calculating material costs.
BOM Header Status- It controls subsequent processing of the BOM in various other
organizational areas (for example, engineering, costing, MRP).
It exploded in MRP and released for planned orders.
Alternative BOM- Alternative BOMs can be describe different product structures that
create a product with same properties.
BOM Item Status- Relevancy to costing indicator : Controls the extent to which a BOM
item, operation, or sub operation in the routing is included in costing.
For the standard cost estimate and the calculation of planned costs and actual costs for a
work order, this indicator determines whether the item is included in costing.

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Master Data in PP (4/6)

Routing:- A routing describes a sequence of production steps. Production costs are

determined through routing, the work centers at which the operations are performed .

A routing consists of one or more operations.

Each operation contains information on the work centre , production resource and tools,
material assignment, operation text, standard values ( how long, how much).

Work Centre:- . It is a physical location at which an operation is carried out.

Work centers are defined with reference to a plant.
Work centers are assigned to cost centers.

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Master Data in PP (5/6)
Standard Value Key:- It enables to define six standard values in the operation such
as setup , machine and labor.
Control Key:- It specify the business functions to execute with an operation:
Scheduling
Capacity Planning
Costing: This ensure that the operation is included in costing.
Confirmation
External Processing: Whether the operation is processed internally or externally, or
whether both option are possible.
Link with Cost centre / Activity Type:- Activity types classify the activities
produced in the cost centers within a controlling area. To enable internal activity
allocation, we need to specify which cost centers provide which activity types at
what price. An activity price is the link between CO and PP. It converts the
operation timings into the costs. That is, we may define different Activity Prices
for different kinds of operations like Set up, Machining and Labor. We may also
define the Activities on the basis of the expenditure like Activity Price for
Employee expenses, for Depreciation, etc.

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Master Data in PP-COPC Integration
BOM
FG-Material Master
In house Mfg

Routing

Production
Order

Work Center
Activity Price

Cost Center

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Cost Estimate with Quantity Structure
A function used for planning costs and setting prices for materials using the data from
Production Planning.

The quantity structure can be any of the following which is selected at the time of running
cost estimates.

BOM and routing (production by lot size)

BOM and rate routing (repetitive manufacturing)
Master recipe (process manufacturing)

Valuation of planned quantity structure with planned price. Standard cost estimate is only
used for materials with Price Control S.
It can be used to update the standard price.

Choose
Save Material
Choose Plant Costing Costing
Cost Estimate Price Update
Material or Plant Variant & Run
Lot size

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COPA-Sales Order Planning (SOP)-PP
Sales & Operations Planning (SOP) is a flexible forecasting and
planning tool with which sales, production, and other supply chain
targets can be set on the basis of historical, existing, and estimated
future data.

An interface with Profitability Analysis (CO-PA) allows to use CO-PA

data as the basis for sales planning in SOP.

The sales plan specifies how many units of each finished product or
product group the company predicts it will sell.

The production plan usually is derived from the sales plan. We can
check the feasibility of the production plan using rough-cut capacity
estimates on key resources.

When we disaggregate a plan, we transfer it to a lower level of the

product group hierarchy using the proportion factors. Ultimately a
material plan is transferred to demand management.

After the transfer, planned independent requirements exist for the

materials on the lowest level of the product group.

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COPA-Sales Order Planning (SOP)-PP

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 Cost Centre Planning- Activity Price Plan
Cost center planning forms part of the overall business planning
process, and is a prerequisite for standard costing. The main
characteristic of standard costing is that values and quantities are
planned for specified timeframes, independently of the actual values
from previous periods.

It can take plan costs and plan activity quantities to determine the
(activity) prices. These prices can be used to valuate internal activities
during the ongoing period, that is, before the actual costs are known.

Activity type planning plan activity quantities and capacities determine

the plan volume of costs. All cost center costs to the activity types and
then calculates the prices for each activity type. We can also plan prices
during activity type planning. The prices are not determined by the
system in this case. As well as activity quantities and prices, we can
also plan equivalence numbers during activity type planning.

When the activity types are further allocated, the system credits the
cost centers according to the activity they provide. This requires the
determination and setting of plan prices after cost center planning is
complete. Only then can the cost centers be completely cleared of
costs. Price calculation therefore represents the final stage of cost
center planning.
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Production Order integration with CO (1/2)
Step1: Let us assume there is a production order for manufacture the finished goods. Now
the raw material that has been purchased is issued to the production order generating the
following entry. The movement type is 261-

Consumption a/c..Debit
To Raw material Stock a/c..Credit

Simultaneously , in CO the Production order is debited to the extent of that amount.

It may be relevant to note that here that issue of materials to the shop floor is recorded
as consumption and not as WIP.

Step 2 Confirmations of Activities for the production order- As and when the various
operations are completed , confirmations are entered against each activity in the Routing. A
confirmation books the cost of activity to the production order. There is no entry that is passed
in FI. Hence , the entry that is passed in CO is only a notional booking of cost. Basically this
cost represents the absorption of the cost from the concerned cost centre and hence the
same is credited to cost centre.

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Production Order integration with CO (2/2)

Step3: Finished Goods receipt from shop floor: Now the component ha been produced and
the finished goods is handed over to the store from the Shop Floor . The movement type is
101 which generate the following entry -

Finished Goods Stock a/cDebit

To Cost of goods manufactured (COGM) a/c..Credit

Thus the consumption is booked when Raw Materials are issued and reversed when
the Finished goods is returned to stores.

In CO , the production order which already contains the debit for goods issue for raw material
will now get a credit for the goods receipts.

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Work-in-Process (WIP)
WIP in SAP is calculated in terms of the orders that are incomplete. Thus the
WIP is stated Production Order wise. When the program is executed , the WIP is
calculated for each order by taking the balance in the account as the value of
WIP. Logically the debits represent the inputs into the production order and credit
the output. WIP in the business sense represents the net inputs given to the shop
floor and hence the total of debits minus the total credits in the Production order
becomes the WIP value. The following entry is passed in FI to record the same-

WIP A/c .Debit

To Increase/Decrease in WIP A/cCredit

Whereas WIP a/c is an inventory account, and Increase/Decrease in WIP is a P&L

a/c which will set-off the debit to P&L by way of consumption.

When the component is finished and GR is made for the same in subsequent
period , this entry is reversed and the consumption is then restored.

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Variance Calculation
The variance calculation function does the following:
Shows the variance between target costs and control costs (the control
costs can be the net actual costs, for example)
Determines the difference between the actual costs debited to the object
and the credit from goods receipts (total variance)
Valuates the unplanned scrap quantities with target costs to determine
the scrape variance.
Determines production variances and planning variances for informational
purposes
Shows the causes of the variances and assigns the variances to different
variance categories depending on the cause

Production Order variance a/cDebit

To Cost of goods manufactured a/cCredit

It may be noted that both the accounts in this entry are P&L accounts,
meaning that this entry has no impact in P&L a/c

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Steps for settlement of Production Order
Creation of Production order
Preliminary / Plan Cost of Production Order
Goods issue to Production order
Confirmation of Production Order
Goods receipt from Production Order
WIP Calculation
Partial Settlement of Production Order
Goods receipt of remaining quantities
Production Order Status
Variance Calculation
Full settlement of Production Order

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Create Production Order

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Preliminary / Plan Cost of Production Order

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Goods issue to Production order

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Confirmation of Production order

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Goods receipt from Production order

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WIP Calculation from Production order

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Settlement of Production order

WIP calculated and posted

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Goods receipt of remaining quantities

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Production order status

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Variance Calculation

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Settlement of Production order

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