5 Steps to Understanding Product Costing- Part 5 Actual

Costs
blogs.sap.com/2013/01/04/5-steps-to-understanding-product-costing-part-5-actual-costs/

Former Member
Posted on January 4, 2013 3 minute read

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
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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: Mixed Price Variance:

Caused by differences between Caused when the system determines a

plan and actual material and different mixed cost than the released cost
activity prices. Only calculated if estimate. Must be selected in the variance
material origin is selected on variant to see.
material master.

Resource-Usage Variance: Output Price Variance:

Caused by the use of different If standard price changed between

materials and activities than were
planned in BOMs and
Routings/Master Recipes.
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: Lot Size Variance:

Caused by different material and Differences between the planned and

quantities than were planned in actual costs that don’t vary with lot size.
BOMs.

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 Remaining Input Variance: Remaining Variance:

This occurs when costs are entered
without a quantity or when OH
rates are changed.
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-
understanding-product-costing-part-1-cost-center-planning

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

http://scn.sap.com/community/erp/financials/controlling/blog/2013/01/02/5-steps-to-
understanding-product-costing-part-3-quantity-structure

http://scn.sap.com/community/erp/financials/controlling/blog/2013/01/02/5-steps-to-
understanding-product-costing-part-4-costing-run

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Related Questions
Great job, thanks for your knowledge sharing!

Thanks for reading Luca!

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.

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

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?

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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.

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.

Thank you Very much for your great Inputs Tanya

Thanks for reading Fernando! Let me know if you have suggestions for future
blogs.

5/10
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

Why should you separate it to sales cost and inventory? If you really need it,
you should use Material Ledger.

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..

I appreciate it!

Very good…………

6/10
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

Thanks Siva! I like the cookie example because it’s so easily understood.

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

Thank you for reading Alexandre!

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.

Very clear description and easy to understand

Thanks Tanya

Hi Tanya,

Good Work and Easy to understand all point

Thanks

Muthu

I loved your series. Excellent Work.

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

Thank your for sharing. and i want to copa

7/10
Dear Tanya Duncan,

Ultimate Job…!!!

Thank you for sharing and putting a lot of effort.

Regards,

Alok Tiwari

I am new to product costing and this blog helped me understand the basics. I love
the cookie example too. Thanks Tanya!

Hi Tanya,

Thanks for your detailed blog on PC with suitable instance. Great effort and good
job.

Regards,

Prakash.S

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

Well done for five star contribution.

Great Effort!!!!!

Amit

Hi Tanya, Thanks a lot for sharing.

Regards

Venkatesh Bandi

8/10
Hi Tanya,

Thanks for sharing.

Enjoyed Reading!

Regards,

Ajay

Hi Tanya,

Article is great help to people who are new to PC.

Thank you for this details.

Regards

Manohar G Shankar

Hello,

Thank you very much for excellent and super document.

➕➕➕

all the best Erwin

Good work.

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?

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

Great article…..specially the variance part.

Great work

Thanks for your sharing. It helps a lot, especially the activity rate planning part.

all the parts are written in very nice manner enabling even for beginners to
understand the concepts.

Thanks Tanya Duncan

Good explanation

9/10
This is an awesome series on product costing for beginners

Really appreciate your efforts.

10/10