5 Steps to Understanding Product Costing- Part 1 Cost Center Planning

January 2, 2013 | 3,952 Views |

Tanya Duncan
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FIN Controlling
FIN (Finance)SAP Business Process ManagementSAP ERP beginnerbusiness process expertbusiness process
managementcocontrollingenterprise resource planningerp

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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 costings high integration with other modules, many people avoid it due to the complexity. This
5 part blog will seek to simplify Product Costing.
The first step in understanding the basics of product costing is Cost Center Planning. The goal of
cost center planning is to plan total dollars and quantities in each Cost Center in a Plant.
Prerequisites:

Organizational Structure is configured:

Company Codes

Plants

Master data is created

Profit Centers

Cost Centers

Primary and Secondary Cost Elements

 Activity Types

Overview:
Cost Center dollars are planned by Activity Type and Cost Element in Transaction KP06. Variable
and fixed dollar amounts can be entered. You can plan all costs in production cost centers where
they will end up through allocations, or you can plan costs where they are incurred and use plan
assessments and distributions to allocate. Cost Center activity quantities are planned in by Activity
Type in Transaction KP26. You can also manually enter an activity rate based on last years actual
values. Note that if you enter an activity rate instead of using the system to calculate a rate, you
lose the opportunity to review actual vs. plan and see dollar and unit variances. It is a best
practice to plan activity quantities based on practical installed capacity which accounts for
downtime. If you plan at full capacity, plan activity rates will be underestimated.
Relatable Example:Lets 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). In order to calculate costs, we need to
come up with rates for each activity, such as mixing baking items, oven baking, and cookie
cooling. Since a rate is a dollar per unit, we can either come up with a rate based on previous
years actual rates, or enter our total costs and total units.

Further information:

You can customize layouts and user profiles to your needs.

You can activate integrated Excel planning to see a spreadsheet instead of a fixed format.

You can also configure the system to upload Excel files instead of typing in values.

In the next blog, I will explain how activity rates are calculated based on the plan Cost Center
dollars and quantities. If rates are manually entered, activity rates do not need to be calculated,
but there is a valuable report to review them prior to proceeding.

Continuing Reading Part 2 on Activity Rate Calculation:

http://scn.sap.com/community/erp/financials/controlling/blog/2013/01/02/5-steps-to-
understanding-product-costing-part-2-activity-rate-calculation

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 costings high integration with other
modules, many people avoid it due to the complexity. This 5 part blog will seek to simplify Product Costing.
Now that you understand Cost Center Planning, the next step in understanding the basics of product costing is Activity Rate
Calculation. The goal of Activity Rate Calculation is to calculate the plan activity rates for each activity in each Cost Center in
a Plant.
Prerequisites:
 Cost Center Plans are entered:

Plan Costs in KP06

Plan Activity units in KP26

Overview:
Now that our Cost Center dollars and activity quantities are planned, we need to calculate Activity Type Rates. Activity Type
Rates are used to value internal activities to produce products.
If you manually entered activity rates based on last years actual values instead of planning total dollars and units. You can skip
most of this blog, and simply review activity rates in Transaction KSBT. Note that you can use a mixed approach and plan rates for
some activities/cost centers and calculate rates for others.

If you planned all costs in production cost centers where they will be allocated, you can skip the next step of plan allocations.

If you planned costs where they are incurred in overhead cost centers, you will need to use plan assessments and/or
distributions to allocate costs. The specific details on Assessments and Distributions could be an entire blog in itself.The main
difference between assessments and distributions is that distributions maintain the identity (primary cost element) of the cost.
Assessments use Secondary Cost Elements which act as cost carriers to move costs, and therefore lose the identity (primary cost
element) of the cost. You can choose to use Assessments or Distributions only, or use a mixed process. Plan Assessments and
Distributions are created in Transactions KSU7 and KSV7 and executed in Transactions KSUB and KSVB.

After costs are allocated, it is important to review the Cost Center Actual/Plan/Variance report, Transaction S_ALR_87013611.
Ensure that allocations credited sending cost centers and debited receiver cost centers.
Next, execute plan cost center splitting which splits costs when you have more than one activity type in a cost center and you want
to split the costs between two activities based on activity qty or some other basis. This is a great place to use Cost Center groups to
easily select desired cost centers since you cannot enter a range. Cost splitting uses Transaction KSS4.
Finally, Activity Type Rates are calculated using Transaction KSPI. If rates are undesirable, you can revise your cost center plans
and recalculate rates. Rates are not final until you use them to calculate and release product costs. This is an iterative process, and
it is expected that you will make several attempts at desirable rates.
After calculating Activity Type Rates, you can review rates in Transaction KSBT.
Relatable Example:
Lets 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).
In order to calculate costs, we need to come up with rates for each activity, such as mixing baking items, oven baking, and cookie
cooling. We planned overhead costs like our building rent, electricity, and baker wages at an overhead cost center. We need to
allocate those costs to our production cost center in order to include those costs in our product cost.
Prior to calculating costs, lets assume there are some overhead costs in a cost center that should be split into multiple activities.
Once we split these costs, then we calculate rates for activities. Now we have a dollar per unit for activities like indirect labor, direct
labor, setup, and overhead to use in product costing.
Further information:

You can use Cost Center Groups and Cost Element Groups to simplify selecting Cost Centers and Cost
Elements in KSBT and KSPI and in other Cost Center/Cost Element Reports.

You may find that your rates are not appearing for certain months, or that they are averaged over 12
months. Make sure you review the Period Overview screen in Cost Center planning Transactions KP06
and KP26. This screen shows costs and units by each month.
 You can reverse Assessments and Distributions if results are undesirable.

In theory, your plan Assessments and Distributions should match your actual Assessments and
Distributions.

The next blog in the series explains how production data like BOMs (Bills of Material), Routings/Master Recipes and Work Centers
integrate with Product Costing.
http://scn.sap.com/people/tanya.duncan/blog/2012/11/11/5-steps-to-understanding-product-costing-part-3-
quantity-structure
If you enjoyed this blog, you can look forward to my next book, Practical Product Costing Guide for CO-
PC (Product Cost Controlling) coming out this summer. You can stay up to date by subscribing
to TanyaDuncanBlog.com.

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 costings high integration with
other modules, many people avoid it due to the complexity. This 5 part blog will seek to simplify Product Costing.
The third step in understanding the basics of product costing is Quantity Structure. Quantity Structure enables

you tocalculate the cogs of goods manufactured and cost of goods sold for products based on

the BOM and Routing (PP) orMaster Recipe (PP-PI).

Prerequisites:

Master data is created

Material Masters (including MRP, Accounting, Costing views)

Bill of Materials

Work Centers (with Cost Centers and Activity Types)

Routings (Production Planning) OR

Master Recipes (Production Planning- Process Industries)

Production Versions (optional)

Product Cost Collectors (PP-REM Repetitive Manufacturing)

Overview:
Quantity Structure is an important concept in Product Costing because it is a key integration point
between the Finance and Logistics modules in SAP. There are several components of Quantity Structure.
A material master is created for each product with a unique fit/form/function in a plant. The material
master contains many views including Material Resource Planning (MRP) views, Accounting views, and
Costing views. Two costing-relevant fields on the MRP 2 view are procurement type and special
procurement key. The procurement type field indicates if a material is produced internally, purchased or
both. The special procurement key further designates if a material is subcontracted, a phantom,
purchased from another plant, etc. It is important that these two fields are correct when costing a
material.
For each internally produced material, a bill of materials (BOM) is created. A BOM contains the
component materials and quantities required to produce a finished or semi-finished good. The material
cost of a product is calculated using the standard or moving average price of the BOM components
depending on the price control (S for standard, V for moving average).
A work center (PP) or resource (PP-PI) identifies a machine or work area where a production process is
performed. Each work center or resource utilizes a standard value key which is a unique set
of activitiesrelated to a work center. I previously discussed activity types in part 1 of this blog series.
In addition to a BOM, a routing or master recipe is created to indicate the processes required to
produce a material. In Production Planning (PP) manufacturing, a routing is made up of a series of
operations that include work centers and activity quantities which define a production process. In
Production Planning- Process Industries (PP-PI), a master recipe is used for batch-oriented process
manufacturing. A master recipe contains the processes required for producing a material including the
resources (instead of work centers) required for production.
Repetitive manufacturing utilizes rate routings and product cost collectors. Product cost collectors are
created for each production version (see below) and capture costs per period rather than per order.
If there are multiple ways to produce a material including different material combinations or activities,
production versions can be used. Production versions indicate a combination of a BOM and routing or
master recipe required to produce a material. The first production version should be the most frequent
or realistic
Relatable Example:
Lets 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).
In order to calculate costs, we need a list of ingredients (Bill of Material) and a recipe of steps to follow
(Routing or Master Recipe). There may be several ways that we can bake the same cookie by
substituting ingredients or baking in different ovens, so we can have several versions of our ingredients
and recipe (Production Version). In order to accurately calculate costs of producing our cookies, we
need to define the places where baking activities occur (work centers or resources).
For example, we may use a refrigerator, mixing station, oven, cooling station, and packaging station.
Each would be considered a work center, and we assign different activities like labor and overhead to
each work center. The work centers and amount of each activity are indicated in our recipe (Routing or
Master Recipe) as operations. Using the costs for each ingredient (Material Master) in our ingredient list
(BOM) and the rates for activities in our recipe (Routing or Master Recipe), we can calculate the cost of
producing a cookie.
Further information:

Material Master MRP settings are crucial in product costing with quantity structure.

You must re-calculate and release costs to reflect changes in production data like BOMs, Routings or Master
Recipes, Production Versions.
In my next blog, I connect the concepts of cost center planning, activity rate calculation and quantity structure to
the costing process. This blog includes executing a costing run, costing an individual material, and marking and
releasing costs.
http://scn.sap.com/community/erp/financials/controlling/blog/2013/01/02/5-steps-to-understanding-product-
costing-part-4-costing-run

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
costings high integration with other modules, many people avoid it due to the complexity. This 5 part
blog will seek to simplify Product Costing.
The fourth step in understanding the basics of product costing is the costing run. Costing runs are
used to cost mass amounts of materials in a single company code. The costing run allows you to select
certain materials, explode their quantity structure, cost, analyze, and mark and release.
Prerequisites:

Material Masters (including MRP, Accounting, & Costing views)

Quantity Structure (Bill of Materials, Routing or Master Recipe, Production Versions are optional)

Purchase Info Records and Condition Types (If desired for costing)

Configuration (Cost Component Structure, Costing Variant, Valuation Variant, Costing Sheet if
required)

CO Master Data (Primary and Secondary Cost Elements, Activity Types, Mixed Costing Ratios &
Alternatives if required, Additive Costs if required)

Overview:
During the annual or monthly costing process, materials are costed in a costing run. Transaction CK40N
is used to execute costing runs, analyze results, and mark and release costs. The costing run must be
created using a costing variant (read more in configuration section), costing version, controlling area,
company code, and transfer control. Therefore, a costing run can only be created for one company code
at a time. The costing run is also created for a particular date range.
The costing run contains six steps: Selection, Structure Explosion, Costing, Analysis,
Marking, andRelease. Each step requires you to enter parameters, save, and then execute.
The selection parameters are entered which indicates which materials should be costed. In
the structure explosion step, the selected materials are exploded to pick up component materials from
BOMs.
As discussed in the previous blog on Quantity Structure, a bill of materials (BOM) is created for each
internally produced material. In the costing step, finished good materials selected from the previous
step are costed based on their BOM and routing or master recipe. A routing or master recipe is also
created to indicate the processes required for a material. Component materials are also costed based
on costing configuration.
You can analyze the costing results using the available reports in the analysis parameters. In
the markingstep, you open the lock to authorize marking for a company code, costing variant, and
period. Once marked, costs appear as planned standard cost estimates in the material master. After
executing marking, you releasethe costing results. Once released, costs are valid for the given date
range and appear as current standard cost estimates in the material master.
After executing each step, it is important to review the error log and resolve errors. Once resolving
errors in a given step, you must re-execute each step from the beginning to see the effect. If results do
not update after executing, you can press the refresh button. You have the option to execute any step
in background when processing a large number of materials or if you prefer to execute a step at a given
date and time.
Configuration:
Configuration of costing and valuation variants and cost component structure are required to set the
strategy for costing materials. The costing variant holds the criteria for costing. Costing variants
contain a costing type, which determines the object to be created, and valuation variant. Valuation
variants contain parameters for valuation of a cost estimate. In a valuation variant, you can specify the
strategy sequence for how costs are selected. For produced materials, the components standard cost,
moving average price, purchase info record price, or planned prices may be selected. You can also
choose a particular plan/actual version and average the plan activity rates for the year or take the
current activity rates. The cost component structure is used to indicate which costs should be included,
whether to include the variable or total costs, and group costs in logical groupings called cost
components.
Relatable Example:
Lets 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).

Using the costs for each ingredient (Material Master) in our ingredient list (BOM) and the rates for
activities in our recipe (Routing or Master Recipe), we can calculate the cost of producing a cookie. In
costing our cookies, we will cost the ingredients. Once we are satisfied with our standard cost, we can
choose to value our inventory at that cost (release).
Further information:

Product Cost Collectors, used in repetitive manufacturing, must be costed in a separate

transaction (Individual- KKF6N or Mass- KKF6M).

You must re-calculate and release costs to reflect changes in production data like BOMs,
Routings or Master Recipes, Production Versions.

Note that only the first production version will be used in costing.

In the final blog of this series, I will explain how actual costs are calculated and plan to actual variance
analysis.
http://scn.sap.com/community/erp/financials/controlling/blog/2013/01/04/5-steps-to-understanding-product-
costing-part-5-actual-costs

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 costings 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 Settlementare 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
Mixed Price Variance:
Input Price Variance:
Caused when the system determines a different mixed
Caused by differences between plan and actual
cost than the released cost estimate. Must be selected in
material and activity prices. Only calculated if
the variance variant to see.
material origin is selected on material master.

Output Price Variance:

If standard price changed between delivery to

stock and when variances are calculated
Resource-Usage Variance:
Caused by the use of different materials and
If price control V materials are not delivered to
activities than were planned in BOMs and
stock at standard price
Routings/Master Recipes.

If price used to valuate inventory is not a mixed

price

Material Quantity Variance: Lot Size Variance:

Caused by different material and quantities than Differences between the planned and actual costs that
were planned in BOMs. dont vary with lot size.
Remaining Variance:
Remaining Input Variance:
Differences between target and allocated actual costs
This occurs when costs are entered without a
that cannot be assigned to any other category. Also used
quantity or when OH rates are changed.
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:
Lets 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 atTanyaDuncanBlog.com.

Special Topics in Product Costing Config- Planning Profile & Layouts

January 24, 2013 | 202 Views |

Tanya Duncan
more by this author
FIN Controlling
FIN (Finance)SAP ERP beginnerbusiness process expertcocontrollingcopcenterprise resource planningerp

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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
costings high integration with other modules, many people avoid it due to the complexity. In my last
blog series, I simplified Product Costing into 5 parts. I think an important follow up to that blog series is
diving in to some of the configuration that support product costing.

In my blog on Cost Center Accounting, I discussed that you need to enter plan total dollars and quantities in each Cost
Center in a Plant.

Cost Center dollars are planned by Activity Type and Cost Element in Transaction KP06. Variable and fixed
dollar amounts can be entered.

Cost Center activity quantities are planned in by Activity Type in Transaction KP26. You can also manually
enter an activity rate based on last years actual values.

Statistical Key Figures are planned by Cost Center in Transaction KP46. SKFs can be used in cost
allocations.

When planning Cost Center dollars, activity quantities or rates, or SKFs its important to ensure that your planning profile
and layout are suitable for your requirements. For example, the default layout uses the Controlling Area currency. If your
Company Code currency is not the same as the Controlling Area currency it will be confusing for users to convert
currencies for planning purposes. You may also choose change your layout to make mass cost center planning possible
rather than one sheet per cost center.

Below is the step by step process to create Planning Profiles and Layouts including best practices and tips.

1. KP34 Define User-Defined Planner Profiles

If you need to make changes to planning layouts, you will need to edit the Planner Profile. It is a best practice to create a
new Planner Profile if changes need to be made instead of editing a SAP Planner Profile. You can use one Planner Profile
with multiple Planning Layouts, or separate layouts into different Planner Profiles. To create: Click New Entries, enter the
Profile, Description, and save.

2. Select the Planning Profile and click General Controlling. Drop down on Planning Areas and select the relevant planning that
should be included in this Planning Profile. You can enter multiple Planning Areas in the same Planner Profile. Once entered,
save. We will come back later to add more details.
3. KP65 Create Planning Layouts for Cost Element Planning
Enter the Planning Layout and description. You can also copy from an existing layout. It is best practice to copy from and
create a new Layout if necessary. Click Create. The Report Painter screen shows the Planning Layouts for Cost Element
Planning and the Planning Layout just created. Double click on any header field to change the column field or column description.
Make any necessary changes to the fields in the layout and save.

Double click on any header field to change the column field or column description. Make any necessary changes to the
fields in the layout and save.

4. KP34 Define User-Defined Planner Profiles

Select your previously created Planner Profile and click General Controlling. Select the Planning Area previously created and
click Layouts for Controlling. Select the layout you created. Click the Overview and Integrated Planning check boxes. The
overview option allows users to write over the default parameters on the selection screen. This usually makes sense to select. The
Integrated Planning option allows the user to plan in an Excel sheet in SAP, or save an Excel file into SAP. We can deselect this
later, but we need it to get our file description. Enter and save.

5. Select the layout and click Default Settings. You will be taken to the selection screen where Cost Element Planning is
done. You can enter default parameters for any of the fields. For now, you must enter a Version, From Period, To Period, Fiscal
Year, Cost Center and Cost Element. You can change defaults later.
6. Click the Overview button (F5). A popup will say File description 0X_XPX_XXXX_XXXX has been generated. Click
enter. An excel upload template will appear. Copy and paste text to an excel file to save for users to upload. Click Save file
description. If you click Save file layout, the layout on screen will appear for users when they enter planning. Some users may
prefer this view. I find that users prefer the more structured standard layout versus the excel layout.

7. Green arrow back to the Default Parameters screen. Correct any default parameters and save. Green arrow back to the
Layouts for Controlling screen. Deselect the Integrated Planning check box if desired. Notice that the File Description is
now populated. Save.
8. Repeat steps 2 7 for any other Planning Layouts:
KP75 Create Planning Layouts for Activity Type Planning
KP85 Create Planning Layouts for Statistical Key Figure Planning
9. Now that this configuration is in place, users can upload an excel file or file directory instead of manually typing
planning in SAP.
Go to KP06, KP26, or KP46. Extras-> Excel Planning-> Upload. Select Import single file or file directory. Enter the
file path on your desktop. Enter the file description from configuration. Select the proper decimal notation and
separator. Execute. The excel upload function is very finicky, but when it works, it can save a lot of time for users.