07/21/11 1

Goals

• To understand the SAP functionality of product costing along

with the corresponding configuration settings.
(This is part 2 of a series of multiple sessions planned)

• To discuss real issues reported in production system, analyze

the root cause of the issue and identify potential solution
approaches

• To identify potential areas of improvement to the design

currently in place at ConAgra

2
Agenda for this Session

 SAP functionality overview on Product Cost Planning:

 Process Order Costing
 Overheads Application
 Period End: WIP/Variances/Settlement
 FI Entries for Process Order Steps and PE Closing
 Actual Activity Price Calculation and Cost Center absorption

 CAG Production issues on the above topic if any brought up

3
Product Cost Controlling Components

4
Process Order Process Chain

5
Order Data

6
Preliminary Costing

The quantity structure master data

(BOM and routing) in Logistics gets
copied onto the cost objects e.g.
Process order

Preliminary costing costs the

Process order using this quantity
structure

The planned costs are used for

comparing with actuals

Order Data:
Variance Key, Costing Variants,
Profit Center, Settlement Rule, RA
Key, Apportionment Structure etc.
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Preliminary Costing

8
Preliminary Costing

• The system valuates the planned quantities of the material

components using the materials list.

• The system determines the planned activity quantities using the

master recipe.

• To valuate the planned material components, activities, and

business processes, the system uses the planned valuation
variant specified in the default values for the order type and plant.
The overhead expenses are calculated using the costing sheet
specified in the planned valuation variant. If template allocation is
being used, the template is selected through the costing sheet
and the overhead key.

• The planned costs are updated to the manufacturing order.

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Phase and Operations in Recipe

• Master recipe contains operations and phases. An operation is performed on a

primary resource. Operations are divided into phases. A phase is a self-contained
work step that describes one part of the production process in detail. It uses the
primary resource of the operation. Operations and phases can use secondary
resources in addition to the primary resource.

• For each operation or phase, one or more materials that are required for the
execution of that step can be defined

• In process manufacturing only the phases are costed, not the operations. A phase
contains standard values for activities. These standard values are used to
determine dates, capacity requirements, and costs. The relevant to costing
indicator in the phase must be selected.

• If the materials list contains co-products, you can add additional co-products. You
cannot, however, delete co-products from the materials list. To check whether a
material component is relevant to costing, go from the materials list to the detail
screen for the material.

• If no co-products are being used, the costs are updated to the order header.

10
 Phase and Operations in Recipe

Phases contain “Standard Values”;

Operations do not

11
Results of Preliminary Costing

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Results of Preliminary Costing

• A preliminary cost estimate is generated for the process order when it is saved or
released, in accordance with the Customizing settings in the default values for the
order type and plant.

• The order costs are calculated for the order header and distributed to the co-
products on the basis of equivalence numbers. The equivalence numbers are
entered in an apportionment structure.

When a process order is created, the system automatically generates the following:

• On the basis of the apportionment structure, the system generates a settlement

rule that distributes the total order cost to the co-products (the order items). The
costs are distributed to the order items both in the preliminary cost estimate and in
the actual data.

• The system generates a settlement rule for each item, in accordance with the
default rule. These settlement rules control the settlement of the distributed costs
to materials.

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Process Order

14
Process Order

• Process orders are orders of order type 40 (process order).

• Process orders are usually analyzed by lot. That is, the variances are not
determined until the order has the status delivered or technically completed. For
orders that are analyzed by lot, SAP supplied default rule PP1 (Production
Material Full Settlement) is assigned in the order type. This ensures that
settlement type FUL (full settlement) is specified in the settlement rule for
process orders of the relevant order type.

• A results analysis key must be specified in all manufacturing orders for which
WIP needs to be calculated

• For preliminary costing and simultaneous costing, costing variant and valuation
variant are defined in the order type. This defines the valuation procedure for
materials, internal activities, external activities, and business processes. It also
determines which overhead structure is used to calculate overhead.

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Process Order Process Chain

16
Process Order Simultaneous Costing

17
Process Order Simultaneous Costing

• Process orders are charged with actual costs through confirmations in Logistics.

• Charged with primary costs through material withdrawals (material back flushes,
goods issues) that are generated automatically when the confirmation is entered.

• Charged with secondary costs through internal activity allocations that are executed
automatically when the confirmation is entered.

• In addition, the goods receipt can be posted automatically when the confirmation is
entered.

• Actual costs are charged to the order header as they are incurred. When a goods
receipt for a co-product is posted, the order item is credited accordingly.

• To be able to see the actual costs for each co-product, it is required to perform the
Preliminary Settlement for Co-Products, Rework function in the period-end closing
process.

• Milestone operations (specified in Control key) must be confirmed specifically;

Operations that are not milestones are automatically confirmed when the milestone
is confirmed.
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Process Order Process Chain

19
Preliminary Settlement of Process Order

20
 Period End Closing Steps

Functions in the period-end closing of Product Cost by Order:

• Template allocation
• Revaluation of activity types and business processes at actual prices
• Calculation of overhead expenses
• Preliminary settlement of co-products, rework
• Calculation of work in process: In Product Cost by Order, the work in process
is valuated at actual cost.
• Variance calculation
• Settlement
- Work in process is settled to Financial Accounting (FI)
- Order balance is settled to FI, Actual Costing/Material Ledger (CO-PC-ACT)
- Variance categories are settled to Profitability Analysis (CO-PA).

21
Process Order Costing

Cost Object Controlling Order Plan Actual WIP Target Variance Sett

Preliminary Costing, Debit

Simultaneous Costing Material

Plan Actual Labor

Material $ Material $ Overhead
Labor $ Labor $
Overhead $ Total ... Process
Process $
Credit
Total ...

Final Costing
Stock Change #
Period-End Closing
Order Release
Work in process Goods Issue, Confirmation, Goods Receipt
Scrap
Overhead Calculation
Variances Periodic/
WIP Calculation
Settlement closing
Variance Calculation
activities
# Settlement

22
Sequence

Periodic Process Costs

Costs
Revaluation

Overhead

Distribution for Co-Products

Analyzing Work in Process

Costs
Scrap, Variances,
Target Costs

FI/CO -Posting Settlement

23
Preliminary Settlement of Process Order

• At the end of the period, the actual costs on the order header are
distributed to the order items. This charges each co-product with its share
of the actual costs. When it distributes the actual costs, the system uses
the equivalence numbers defined in the apportionment structure.

• Preliminary settlement for co-products is carried out after period costs

have been allocated to the header of the process order

• Actual costs must be distributed to the order items before you can
calculate WIP and variances

• If an apportionment structure has not been specified in the material

master record or in the production version, equivalence numbers should
be entered for distribution in the settlement rule of the order header

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Preliminary Settlement of Process Order

Reporting Before Distribution Reporting After Distribution

25
WIP Calculation

26
 WIP Calculation

Work in process for co-products is always valuated at actual cost. The WIP is
valuated using the actual costs posted to the order item less the credits from
goods receipts.
Valuating WIP at actual cost requires that the order item have a settlement
rule with settlement type FUL (full settlement). Settlement type FUL is derived
from default rule PP1 (Production Material Full Settlement) which is specified
in the order type. If a manufacturing order for co-products uses settlement
type PER (default rule PP2), no work in process can be determined for it
The calculation of work in process depends on the status of the
manufacturing order. The system continues to calculate work in process for
the co-products until the header of the manufacturing order has the status
DLV (delivered) or TECO (technically completed).
The manufacturing order only receives the status DLV when all order items
have been delivered (Final Del Indicator is set). When the order has the
status DLV and TECO, the WIP calculation function cancels any WIP from the
previous period.

27
Process Order Process Chain

28
Variance Calculation

29
Variance Calculation

In the case of manufacturing orders that have co-products and whose order
item has settlement type FUL, variances can only be calculated when all
order items have been delivered (that is, when the delivery completed
indicator is set for all order items and the status DLV is set for the order).
For manufacturing orders without co-products that have the settlement type
FUL, variances can only be calculated after the status DLV has been set for
the order.
For manufacturing orders that have co-products for whose order item the
settlement type is PER, the order balance is always interpreted as a
variance (regardless of the status). No work in process is calculated for
these manufacturing orders. For manufacturing orders without co-products
that have the settlement type PER, variances and work in process are
determined using the target cost calculation.
No scrap variances can be calculated for co-products. Therefore use a
variance key for which the Scrap indicator is not selected.

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Target Cost Concepts

Target Costs are the costs that should have been incurred to achieve a given
“actual” output i.e. the benchmark cost for a given output.
The bench mark could be:
- Standard Cost Estimate of the material produced adjusted for the actual
output. i.e. if the standard cost is $1000 for 100 units and in a process
order only 40 units are produced then target cost is 40% of $1000 = $400
- Planned Cost (Preliminary Cost Estimate) of the Process Order
Target Cost Version 0 considers the “Standard Cost” as the benchmark cost
and calculates the variance between “Adjusted Standard Cost” and “Actual
Cost”
Target Cost Version 1 considers the “Planned Cost” as the benchmark cost
and calculates the variance between “Adjusted Planned Cost” and “Actual
Cost”
Target Cost is calculated ONLY if there is a receipt of
finished product on a process order

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Target Cost Concepts

Standard Cost Planned Cost of Actual Cost of

based on year Order based on based on actual
beginning Recipe Current Recipe consumption

Target Cost
Version 1

Target Cost Version 0

• Shop-floor execution is held responsible/accountable for variances

reported under Target Cost version 1
• Process Engineering Improvement department is held accountable for
variances reported under Target Cost version 0

The above are very analogous to “Standard price”, “PO Price” and “Vendor
Invoice Price” in a Purchase Cycle

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Variance Categories: Overview

Variance Categories

Input Variance Output Variance

Input Price Variance Lot size Variance

Input Quantity Variance Output Price Variance

Scrap Variance Mixed Price Variance

Resource-Usage Variance Remaining Variance

Remaining Input Variance

33
Variance Categories: Overview

34
Variance Postings

FI:ONE Price Difference

Cost Object Account per valuation FINANCIAL ACCOUNTING
Cost Items Plan Actual class determined via
account assignment Stock Stock change

Glass 1,500 1,800

Plug 2,000 2,200 Price Difference
Cable 500 600

Material 4,000 4,600 Variances via

Labor 2,500 2,800 Settlement

Overhead 1,500 1,600 PROFITABILITY ANALYSIS

Process 1,000 1,500 Product
group
Total Costs 9,000 10,500
Maximum Detail in CO-PA: Plant
Delivery Value 9,000 One value field
per combination Region
Order Balance 1,500 variance category
& cost element group
possible

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 WIP / Variance
relevance and valuation in
order based costing

36
Status Relevance

Actual Costs Actual Costs

- -
Actual Costs Delivery Delivery
Value Value
= = =
WIP WIP
Variances
at Actual at Actual

Order
Status

Pre-Released or Released Partially Delivered Finally Delivered or Technically Completed

37
WIP Calculation

Cost Object
Cost Items Plan Actual

Glas 1,500 150

Plug 2,000 300
Cable 500 50
Material 4,000 600
Labor 2,500 200
Overhead 1,500 100
Process 1,000 50
Total Costs 9,000 950

WIP at Actual Costs

950

38
WIP Calculation

Cost Object
Cost Items Plan Actual

Glas 1,500 900

Plug 2,000 1,100
Cable 500 300
Material 4,000 2,300
Labor 2,500 1,400
Overhead 1,500 855
Process 1,000 745
Total Costs 9,000 5,300
Delivery Value 4,000
Order Balance 1,300 WIP at Actual Costs
1,300

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WIP and Variance Calculation

Cost Object
Cost Items Plan Actual

Glas 1,500 1,800

Plug 2,000 2,200
Cable 500 600
Material 4,000 4,600
Labor 2,500 2,800
Overhead 1,500 1,600
Process 1,000 1,500 WIP at Actual Costs
Total Costs 9,000 10,500 Zero
Delivery Value 9,000
Order Balance 1,500 Variances
1,500

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WIP Posting and Reversal

Status Period WIP +/- EC-

PCA

950 950 FI

EC-
PCA

1,350 400
FI

EC-
PCA
0 -1,350
FI

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Accounting Entries

42
Goods Issue to Process Order

PP
Components issue
PP Order HBL2810
FI
to production order
Planned Costs Expense Stock change
RAW 10 $
ACTIVITY 40 $
BURDEN 60 $
Stock Credit
Actual Costs
RAW 12 $
Sales
Customers Revenue

Dr. 511230 Consumption a/c (Cost object = process order)

Cr. 116003 Raw Material Stock a/c
(Standard Cost * Actual quantity issued)

Back flush: Quantity issued = Qty planned for actual production

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Labor / Machine Costs (on Activity Confirmations)

CO

PP
Labor or M/c hours
PP Order HBL2810 issue to production
Planned Costs
RAW 10 $
ACTIVITY 40 $
BURDEN 60 $

Actual Costs
RAW 12 $
ACTIVITY 50 $

Dr. Process Order

Cr. Cost Center (Secondary Cost Element)
(Std Activity price * Actual hours)

No FI entry. Only a statistical posting to Cost Center.

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Overheads Application

PP
CO
PP Order HBL2810 Apply Overheads
Planned Costs
RAW 10 $
ACTIVITY 40 $
BURDEN 60 $

Actual Costs
RAW 12 $
ACTIVITY 50 $
BURDEN 70 $

Dr. Process Order

Cr. Cost Center
(Std OH rate * Actual hours)

No FI entry. Only a statistical posting to Cost Center.

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Goods Receipt

PP
Receive
PP Order HBL2810
FI
Finished Product
Planned Costs Expense Stock change
RAW 10 $
ACTIVITY 40 $
BURDEN 60 $
Stock Credit
Actual Costs
RAW 12 $
ACTIVITY 50 $ Sales
Customers Revenue
BURDEN 70 $
Factory output – 110 $

Dr. 116013 FG Inventory a/c

Cr. 511315 Manufacturing output a/c (Cost object = process order)
(Std cost of finished product * qty received)

Process Order status is set to “Delivered”

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Variance Calculation

PP
Calculate
PP Order HBL2810 Variance
Planned Costs
RAW 10 $
ACTIVITY 40 $
BURDEN 60 $

Actual Costs
RAW 12 $
ACTIVITY 50 $
BURDEN 70 $
Factory output – 110 $
Variance - 22 $

No FI entry.
Target cost and Variance are just
calculated and stored.

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Settlement

PP
Settle
PP Order HBL2810
FI
production order
Planned Costs Expense Stock change
RAW 10 $
ACTIVITY 40 $
BURDEN 60 $ Prod Variance Credit
Actual Costs
RAW 12 $
ACTIVITY 50 $ Sales
Customers Revenue
BURDEN 70 $
Factory output – 110 $
Variance - 22 $

Dr. 511250 Production Variance a/c

Cr. 511315 Manufacturing output a/c (Cost object = process order)

Balance in process order = zero

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Activity Price Calculation (KSII)

49
Actual Activity Price Calculation

• Actual prices can be determined for activity types based on actual

dollar costs spent on the cost centers and the actual absorption
hours consumed during the month.

• The cost object is charged with the difference between the actual
price and the price originally allocated to it.

Benefit: Cost center variances (Under/Over absorption can be

allocated to materials produced and to analyzed by product lines)

50
Actual Activity Price Calculation

Revaluation of
allocated
activity types
at actual prices
• Internal Orders
• Sales Order line item
• Other Cost Objects

51
Actual Activity Price Calculation

52
 Push Cost Center Variances to Product Lines

Costs get transferred from cost center (admin profit

center) to product lines through process order

Cost Production Plant Production Product Line

Transaction
Element Cost center PC Order Profit center

Wages and other Exps Primary 100,000 100,000

Labor absorption Secondary (78,000) (78,000) 78,000 78,000

Material Consumption Primary 60,000 60,000

Finished Goods Std Cost Primary (132,000) (132,000)

Result 22000 22000

28000 28000
Under/(Over) Absorption 22,000 22,000

Production Variance 0 0 6,000 6,000

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 Useful Transaction Codes

COR1,2,3: Process Order KSII: Activity Price Calculation

Confirmations: COGI: Material Movement Errors

CORK: Enter, CORT : Display COFC: Confirmation Errors
CORS : Cancel

For a Single Order: For the entire plant:

MFN1: Revalue Activity Costs
CO8B: Preliminary Settlement
KGI2: Overheads application
KKS2 : Variance Calculation
KKAX: WIP Calculation
KKAY: Display WIP
KO88: Settlement
CON2: Revalue Activity Costs
CO8A: Preliminary Settlement
CO43: Overheads application
KKS1 : Variance Calculation
KKAO: WIP Calculation
KKAQ: Display WIP
CO88: Settlement

S_ALR_87013611 – Cost center Report

S_ALR_87013167, Z3167 – Process Order Cost Report
S_ALR_87013161 – Report for multiple orders

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