The change in stock for WIP is not created as a cost element because the amount is not credited to

production order when WIP is created as it is a financial entry and the balance is already held in the order. The
COGM account is defined in GBB / VKA and it is the account that should be credited when finished or semi
finished goods are received in stock from the order. The change in stock account (BSV) is debited when the
materials are issued to production or cost center. The change in stock account for raw materials is RM
Consumption Account, for semi finished goods the same may be defined in the following way.
Strategy 1:
Define 1 single account as 'Increase / Decrease in SFG' and define it as COGM account in GBB / VBO as well as
change in stock account in BSV.
Strategy 2:
Define 2 different accounts in GBB / VBO and BSV and group them at one place in your financial statement
version so that the net change is always reported.
Remember, WIP and Semi finished goods are not same from SAP point of view. The COGM account for WIP is
maintained in OKG8 and do not create a cost element for the same.
For Finished Goods maintain COGM account in GBB / VBO and nothing is to be maintained in BSV.
I hope this clarifies.

ERP Post Implementation Challanges Part 1

Understanding COGM, COGS, Price Difference &
Closing Stock Calculation
Author: Ranjit Simon John
After our Go-Live we had gone through various tough stages while trying to stabilise the system.
Major challenge we faced was resistance from end users, lack of confidence on the new system by
the external and internal stake holders. Finally after working so hard on the various points raised by
the internal as well as external team, we succeeded.
In this blog I would like to highlight the most important challenge we faced. Mainly they are two in
number;
1) Clarity on COGM, COGS & Production Order Price Difference general ledger accounts.
2) Trying to equate the formula
Opening Stock + Receipt Issue = Closing Stock
1) COGM, COGS & Production Order Price Difference general ledger accounts.
Let us start with COGM;

There will be mainly two entries posted in Cost of Goods Manufactured;

1) During Production Order Confirmation
2) During Production Order Settlement
First let me try to explain the GL entries posted during various stages starting from Raw Material
receipt to Finished Good sales.
The postings can be divided into various Parts;
Part 1: Raw Material Receipt
Step 1: Raw Materials are received. (Goods Receipt MIGO_GR)
Part 2: Vendor Payment
Step 2: Invoice Receipt
Step 3: Vendor Payment
Part 3: Raw Material Issue to Production
Step 4: Raw Material used for the production of Semi-Finished Good 1
Step 5: Semi Finished Good 1 used as raw material for the production of Semi Finished Good 2
Step 6: Semi Finished Good 2 used for the production of Finished Good
Part 4: Finished Good received in Inventory
Part 4: Step 7: Finished Good Receipt
Part 5: Sales
Step 8: Sales Delivery
Step 9: Billing released from Accounts
Step 10: Customer Payment
Part 1: Raw Material Receipt
GL Entries during Step 1: Raw Materials are received at Inventory
Debit
Stock of Raw Material

XXX

Raw Material GR/IR

XXX
Table 1.0

Part 2: Vendor Payment

Credit

GL Entries during Step 2: Invoice Receipt

Debit
Raw Material GR/IR

Credit

XXX

Vendor Account

XXX

Table 2.0
GL Entries during Step 3: Vendor Payment
Debit
Vendor Account

Credit

XXX

Bank Account

XXX
Table 3.0

Part 3: Raw Material Issued to Production

GL Entries during Step 4: Raw Material used for the production of Semi Finished Good 1
Debit
Raw Material Consumption

Credit

XXX

Stock of Raw Material

XXX

Stock of Semi Finished Good 1

XXX

COGM of Semi Finished Good 1

XXX
Table 4.0

GL Entries during Step 5: Semi Finished Good 1 used as raw material for the production of Semi
Finished Good 2
Debit
Stock of Semi Finished Good 2

Credit

XXX

COGM of Semi Finished Good 2

XXX

COGM of Semi Finished Good 1

XXX

Stock of Semi Finished Good 1

XXX
Table 5.0

GL Entries during Step 6: Semi Finished Good 2 used for the production of Finished Good

Debit
Stock of Finished Good

Credit

XXX

COGM of Finished Good

XXX

COGM of Semi Finished Good 2

XXX

Stock of Semi FInished Good 2

XXX
Table 6.0

Part 4: Finished Good Received in Inventory

GL Entries during Step 7: Finished Good Receipt

Debit
Stock of Finished Good

Credit

XXX

COGM of Finished Good

XXX

COGM of Semi Finished Good 2

XXX

Stock of Semi FInished Good 2

XXX
Table 7.0

Part 5: Finished Good Sales

GL Entries during Step 8: Sales Delivery

Debit
COGS

Credit

XXX

Stock of Finished Good

XXX
Table 8.0

Live posting example during sales delivery. VL01N/VL02N.

GL Entries during Step 9: Billing released from Accounts

Debit
Customer Account

Credit

XXX

Finished Good Sales

XXX
Table 9.0

Live posting example during sales invoice release from accounts using VFX3.

GL Entries during Step 10: Customer Payment

Debit
Bank Account

Credit

XXX

Customer Account

XXX
Table 10.0

Now let us try to understand COGM, COGS and Production Order Price Difference Accounts;
Finished and Semi Finished Material will be valuated at "Standard Price" for all COGM, COGS and Closing
Stock calculation.
1.1) COGM: Cost of Goods Manufactured
Transactions hitting COGM account are;
a) Goods Produced
b) Goods Issued to Production Order
c) Reversal of Goods Produced
d) Entries posted during settlement of Production Orders ( Variance)
I have broken down the COGM entries for clear understanding. Please find the below screen shots.

The above figure is divided into three sections;

Section 1: Materials Produced

Section 2: Materials Issued
Section 3: Production Order Settlement
The below attached image shows how the Production Order Settlement amount of 1,403,463.52 has been
arrived.

If
ML
is
not

activated we will not be able to apportion the total variance between stock, COGM and COGS. We follow the
below mentioned procedure to split the variance.

In the first column the total variance for each product has been entered. Second column we enter the total
quantity produced for the material. So Total Variance / Production Quantity = Variance Per Ton.
You have the quantity for Closing Stcok, COGM and COGS of the material. Multiply it with Variance per ton.
Closing Stock Quantity * Variance Per Ton
COGM * variance Per Ton

COGS * Variance Per Ton

1.1.a) Goods Produced:
When a finished or semi finished good is produced i.e after confirmation stock of the finished or semi finished
good will be Debited and cost of manufacturing the finished or semi finished good will be Credited with document
type "WA". (Refer Table 6.0)
Entires will be posted against the particular material i.e with material number.

Figu
re 1.0
1.1.b) Goods Issued to Production Order:
When a Semi finished good is issued against a production order Stock of the semi finished good is credited and
cost of manufacturing the semi finished good is debited with document type "WA". (Refer Table 6.0)
Entires will be posted against the particular material i.e with material number.

Figur
e 2.0
1.1.c) Reversal of Goods Produced:
When a finished / semi finished good "A" Quantity is produced at "X" rate and reversed "B" Quantity at "Y" rate,
the quantity will be reversed at "Y" rate and the difference in price "X - Y" will be posted in Price Difference and
COGM account.
GL entries posted will be;
(For GL entries posted when Raw Material is Issued to Production of Semi Finished Good refer Table 4.0)
Debit
COGM of Semi Finished Good

Credit

XXX

Stock of Semi Finished Good

XXX

Stock of Raw Material

XXX

Raw Material Consumption

XXX

Production Order Price Diff Account

XXX
Table 11.0

1.1.d) Entries posted during settlement of Production Orders ( Variance)

During settlement of production order variance will be posted to Production Order Price Diff Account and COGM
KIndly chek my blog "Understanding Production Order Variance Part - 1 "
(http://scn.sap.com/community/erp/manufacturing-pp/blog/2012/03/13/understanding-production-order-variance-part-1).
Note: There is no hard and fast rule for analysing COGM. Analyse COGM based on the analysis I have given
above, if any other entries are posted we have to analyse those entries one by one.
Let me try to explain COGM entry for one material.
COGM entry posted for material "FG1" is 27,134.90 AED.
Let me explain the entries. "FG1" produced is (Execute Transaction Code MB5B for movement type 101 + 102 )
28,507,148.10 AED.
"FG1" issued to production order is (Execute Transaction Code MB5B for movement type 261 + 262 )
28,480,013.2 AED.
COGM -> 28,507,148.10 - 28,480,013.2 = 27,134.90
1.2) COGS: Cost of Goods Sold
For calculating Cost of Goods Sold materials will be va;luated at standard price maintained in the material
master.
Execute Transaction Code MB51 for movement type 601 + 602. Also consider price difference during sales
reversal.
Both the 601 & 602 values should match with COGS general ledger (If no price diference for sales reversal is
there).
MB5B 601 + 602 Report

Figure 4.0
FBL3N COGS Report

Figure 5.0
1.3) Production Order Price Difference Account

KIndly chek my blog "Understanding Production Order Variance Part - 1 "

(http://scn.sap.com/community/erp/manufacturing-pp/blog/2012/03/13/understanding-production-order-variance-part-1).
2.0) Closing Stock:
Formual for closing stock;
( Opening Stock + Receipt ) - Issues = Closing Stock
i.e Opening Stock + COGM = Closing Stock
But in most of the cases if we apply the formula the closing stock will not match. All material movement has to be
considered while calculating closing stock of material.
Let us try to analys few Scenarios:
Scenario 1: Material Stock Transfer
Let us consider two materials RMOPCK2 and RMSRCK1
Material

Opening

Receipt

Issue

Closing

FG1

276,120.06

116,157,464.09

115,882,172.88

814,101.12

FG2

0.00

7,868,063.25

7,616,416.50

0.00

Table 12.0
If we substitute the values in the formula the closing stock will not match. We need to consider all material
movements.
Material
FG1
FG2

Opening

Receipt

276,120.06 116,157,464.09
0.00

7,868,063.25

Issue

Price Diff. (0 Qty)

Material Transfer

Closing

115,882,172.88

37,161.73

225,528.12

814,101.12

(251,646.75)

0.00

7,616,416.50
Table 13.0

Formula modified as below;

( Opening + Receipt + Price Diff. + Material Transfer ) - Issue = Closing Stock
Sustituting the Valyues
FG1 -> (276,120.06 + 116,157,464.09 + 37,161.73 + 225,528.12) - 115,882,172.88 = 814,101.12
FG2 -> (0.00 + 7,868,063.25 + 0.00 + (251,646.75)) - 7,616,416.50 = 0
Useful Transaction Codes:
MB5B - Material Movement Report
MB51 - Material Movement Report

FBL3N - General Ledger Report

In my previous blog "ERP Post Implementation Challenges - Part 1" I have explained the concept of COGM,
COGS and deriving the closing stock. In this blog I will be concentrating on the Reconciling GL, Raw Material
Consumption, Semi Finished / Finished Goods Production and Vendor Invoice.
Let me divide the topic into;

Reconciliation 1:
Opening Stock + Raw Material Receipt - Raw Material Consumed = Raw Material Closing Stock

Reconciliation 2:
Receipt of Raw Material = Invoice received from Vendor

Reconciliation 3:
Raw Material Consumed = Raw Material Issued for the Production of Finished Good
= Raw Material Consumption GL

Reconciliation 4:
Raw Material Closing Stock = Stock GL of Raw Material
Now let us analyze each scenario;

Reconciliation 1: Opening Stock + Raw Material Receipt - Raw Material Consumed = Raw Material
Closing Stock
As explained in my Previous Blog "ERP Post Implementation Challenges - Part 1" all material movements
should be considered for calculating the closing stock of material.

Reconciliation2: Receipt of Raw Material = Invoice received from Vendor

The Raw Material received should be matching with the invoice received from the vendors. I have done quite a
lot of research to generate report on the list of invoices received against a material.
Material Receipt (MB5B) with movement type 101+102 = Stock GL of Raw Material + Price Diff GL of Raw
Material with Type "WE"
To find the list of Invoice generated against the Raw Material:
There can be invoice and Credit/Debit notes posted against the material.
To generate Invoice list generated against the material:
We have to combine few tables for generating the report.
Execute SQVI and create a query with the following data.
Tables: RBKP, RSEG, LFA1
Joining Condition:

Tables RBKP-RSEG -> Joining Fields BELNR,GJAHR

Tables RBKP-LFA1 -> Joining Fields LIFNR

Figure 1.0

Figure 2.0
To generate Credit Note / Debit Note list generated against the material:
We have to combine few tables for generating the report.
Execute SQVI and create a query with the following data.
Tables: RBKP, RBMA, LFA1
Joining Condition:

Tables RBKP-RBMA -> Joining Fields BELNR,GJAHR

Tables RBKP-LFA1 -> Joining Fields LIFNR

Figure 3.0

Figure 4.0
Debit / Credit will be recorded as "S" or "H"

Reconciliation 3: Raw Material Consumed = Raw Material Issued for the Production of Finished Good =
Raw Material Consumption GL

Raw Material will be consumed for the production of Semi / Finished Good, which will be created against Process
Order. The total raw material consumed against a process order can be generated from transaction code KOB1.
Let me explain with an example:
Raw Material 1 (RM1) is used for the production of three Finished Good (FG1, FG2, FG3)
Material

Process Orders

Quantity Produced

FG1

10000035

67,981.00

FG2

11000035

343,842.00

FG3

12000035

61,601.00

Total Raw Material RM1 issued during the period is 106,136.00 TO. This is the quantity used for then production
of 473,424.00 TO of FG1, FG2, FG3.

Figure 5.0
Table 1.0
(Report from MB51 movement Type 101 + 102)
From transaction KOB1 we will be able to equate the Finished Good Produced and Raw Material Consumed
quantity.

Figure 6.0

Figure 7.0
Raw Material (RM1) Consumption GL should be updated with the value of 1,061,360.00
(Report from FBL3N Raw Material (RM1) Consumption GL + Raw Material (RM1) Price Difference GL)

Fugure 8.0
GL Entries Posted During the Process;
Raw Material Consumed for Production of Finished Good

Reconciliation 4: Closing Stock = Stock GL of Material

Generate Closing Stock report for Material from MB5B

Figure 9.0
Stock Report of Material From FBL3N

Figure 10.0
Generally We can reconcile opening, receipt, issue Closing by inputting values in the table listed below;

Issu
e To
Cost
Cent Physic
Mat

Issue To

Receipt

Producti
Price

0 Qty

ion

al
Invent

on Order 201

(101+102 Revaluvat MIR

Mater Opening
ial

er

+
261 + 262 202

ory

GL

Postin Consumpt
g

ion

Sales
Closing

K
(A+B+C+
D) -

D+E+F+G
FG1

1,683,916 54,700. 7,539,313 256,027.2 670. 7,543,679

.80

53

.34

28

.84

0.00 0.00

0 Quantity - Execute Transaction MB5B. Sort Based on Movement Type

0 Qty of FG1 Entry:

0 Qty Other = 54,700.53 +
Price Revaluation = 256,027.28
0 Qty -> 310,727.81

Figure 11.0

+H

J)

7,800,377. 161,430 1,828,847

Table 2.0

0 Quantity Included Price Revaluation & MIR7 entries

(F+G+H+

40

.24

.87

Debit
Raw Material Consumption

Credit

XXX

Stock of Raw Material

XXX

Stock of Finished Good 1 (FG1)

XXX

COGM of Finished Good 1 (FG1)

XXX
Table 3.0

Important Transaction Codes:

Transaction Code

Description

MB5B

Material Report

MB51

Material Report

FBL3N

GL Report

FBL1N

Vendor Report

KOB1

Production Report

MCBE

Material Report

MC.A

Material Report

MC+E

Sales Report

SQVI

Dynamic Query

Table 4.0

Calculation of COGM and COGS

Use
You can use the Product Cost Planning functions to calculate the cost of goods manufactured
(COGM) and cost of goods sold (COGS) for products such as materials and services. The costs may
then be analyzed and used in business decisions (such as whether to make or buy).
The cost of goods manufactured is composed of material and production costs, process costs and
overhead (such as material and production overhead). The cost of goods sold consists of the cost of
goods manufactured together with sales and administration overhead costs.

Features
The following graphic shows how the COGM and COGS are calculated using Product Cost Planning:

To calculate the COGM and COGS for materials, you can execute a material cost estimate (with or
without quantity structure). For further information, see the following:

WIP
I gonna try to explain it from bookkeeping point of view (simplified version).
Basically you have 2 environments in the books: P&L and Balance Sheet.
You start doing something during the month so you consume costs (materials, activity, OVH, etc.).
If you finish and sale it till the end of the period the whole thing will go to your P&L.
If not, all costs you consumed have to go to the stock (Balance Sheet).
So, you have to credit a P&L account and debit a BS account. Normally you might want to credit the whole
production order since virtually the whole thing went to the stock and nothing left on the shopfloor. And when you
decide to continue your work, you take out the stuff from stock and do your work.
Now, the problem with SAP that there is no standard mechanism which will reverse this WIP posting with the
production order assigned. That is why the WIP posting happens beyond production order and that's why you
can't create cost element.
I fyou want to check what is in your WIP you can go to FBL3N and run a report for the P&L/WIP account which
you will find in OKG8, where you configure these postings.

The accounts for WIP should not be defined as cost element in CO to avoid that WIP is posted
incorrectly into CO.
A cost element requires account assignment to a cost object. So if you define the WIP account as a cost element
you need to assign a cost object for this which will result in duplicate costs in CO
Example: settlement of order 'XYZ': WIP was posted on account '1111' (Stock change -WIP). Since '1111' is also
a cost element and the CO account assignment is order 'XYZ' again, we have an inconsistent scenario: cost
which are already posted on the order now come in 'through the backdoor' again as additional cost.
I believe SAP issues error message KQ119 (G/L account cannot be created as a cost element) in such cases.

Dear Andy
In product cost by order scenario the WIP or Variance calculation is dependent on order status. If the Order has a
status of REL or PDLV, the system will calculate WIP and if the order status is DLV or TECO the system will
calculate variance on this order. At the time of calculation of WIP or Variance no accounting entry i generated but
when you settle the order at that time FI documents are passed in the books.
Ans1- In product cost by order WIP or variance is calculated based on the actual cost debited to the order and
value of GR made to the order. System does calculation by the formula GR value-(GI value+Activity value+
Overheads)
Ans2- As I said at the time of calculation no FI entries are passed but at the time of settlement FI entries are
generated. The method of calculation is the same as described in Ans1.
Ans3- Entry at WIP settlement WIP (P&L) a/c Dr and WIP Offsetting(B/S a/c) Cr.
Entry at variance settlement : Variance a/c dr/cr and COGM cr/dr.
and if there is already a WIP posted for this order then at settlement WIP entry is reversed provided we have
calculated WIP again the the month of settlement of variance
Note for Anand: Dear Anand we need to calculate WIP again in the period when the order status is changed to
DLV or TECO otherwise system will not pass reversal entry of WIP. Kindly test it in your IDES and let me know if
you find something on the contrary