Product Cost & Profitability Analysis: Icai-Wirc

ICAI-WIRC
Product
Cost &
Profitability
SAP Analysis
for Webinar Oct 11, 2020
Finance
Transformation
CMA Jayesh P Desai
www.jayeshdesai.com
www.jayeshdesai.com 1
Disclaimer
“SAP” is a trademark of SAP AG, Neurottstrasse 16, 69190 Walldorf,

Germany.
SAP AG is not the publisher of this material and is not responsible for
any inaccuracy.
This presentation is made in my personal capacity and I do not represent
SAP or any of its subsidiaries.
11-10-2020 www.jayeshdesai.com 2
Profile
Jayesh P Desai & Co.

Cost Accountants
www.jayeshdesai.com
• Practicing Professional (Since 2017)
• Business Valuation
• Data Analytics – Product Costing, Pricing & Profitability
Analysis
• SAP Consulting & Training
• Key Accomplishments
CMA Jayesh P Desai • Developed Financial Model for Start-up in areas such as
Practicing Cost Accountant Blockchain, AI, Data Analytics, Gaming, Online Education, E-
FCMA, CFA, CISA commerce, Electric Vehicle
CIA, PMP, UCLA (PGPX)
Registered Valuer (IBBI)
• Valuation of early and funded start-up, matured companies,
CIRP under Companies Act, FEMA, IBBI and other needs
• Data Analytics for manufacturing companies in power,
Consumer Durables, Injection Molding, Textiles
Jayesh P Desai & Co. • SAP trainer for Institute of Cost Accountants of India.
www.jayeshdesai.com Conducted 2 sessions of 60 hours each with 150 participants
Jayesh@jayeshdesai.com • Conducted several Webinars on SAP for Finance Professionals
for over 200 participants
DesaijayeshP
• Corporate Professional (1991-2016)
• Financial Accounting, Product Costing, Profitability Analysis,
Internal/ System Audit, Corporate Restructuring
• SAP Implementation, Data Analytics, Project & Delivery
Management
• Building Global Teams & Leadership, Leading Innovation
CMA Jayesh P Desai
• Key Accomplishments
• Worked with General Mills, IBM, Colgate, Bayer, Shaw
FCMA, CFA, CISA Wallace, General Motors
CIA, PMP, UCLA (PGPX)
Registered Valuer (IBBI)
• Over 20 years SAP experience as delivery manager,
consultant and power user
• Implemented 4 SAP FICO projects with integration
• Domain experience in Finance & Controlling in SAP
Jayesh P Desai & Co. environment
www.jayeshdesai.com • Specialised in SAP Controlling (CCA, PC, COPA, PCA)
Jayesh@jayeshdesai.com • Lead & Delivered global SAP & Data Analytics projects.
Managed Global Teams in India, US, UK
• Lead Innovation and Data Analytics initiatives across various
DesaijayeshP functions and countries
Content in the Series
Overview of SAP SAP Controlling Overview
• Design of SAP • CO Enterprise Structure
10th October
9th October
• Enterprise Structure • Controlling Master Data

• Modules & Business • Cost Control
Processes • SAP Live, Q & A
• SAP Live, Q & A
PC & CO-PA
• Product Costing
11th October
• Material Ledger
• Profitability Analysis
• SAP Live Q & A
SAP Product Costing
Content
MAP versus SP
Value Flow in Production
FS in Mfg. Companies
Standard Costing Design
Components of Standard Costing
SAP Live
- Purchasing
- Consumption
- COGM
- COGS
- Variances
MAP versus SP
• Moving Average Price

Price that changes in consequence of usage and In SAP, MAP is indicated by Price Control
entry of invoices. Calculated by dividing the value indicator as ‘V’ and Standard Price is
of material by the quantity in stock. indicated by ‘S’ in the material master
Automatically recalculated based on activity.
• Standard Price
Constant price without considering usage or
invoices. Price variances are posted to price
difference accounts; not affecting the standard
price. Usually calculated at the beginning of each
year.
The decision on method of valuating material is taken at the time of creating/ extending the material master.
Finished goods are valuated with standard price while RM/ PM may be MAP or standard price.
Value Flow in Production – GR/GI
Using a simple scenario
Step 1: Goods Receipt (movement type 101), PO value Rs 3,600
Dr. RM Stock A/c Rs 3,600

Cr. GR/ IR Clearing A/c Rs 3,600 GR/ IR Clearing account gets
nullified during invoice
40 Kg @90 processing MIGO
Step 2: Goods Issue to Production Order (movement type 261)

Production Order No. 100251
Dr. Consumption A/c Rs 1,800 Issue of material to shop

floor is recorded as
Cr. RM Stock A/c Rs 1,800 consumption and not WIP
20kg @90
Value Flow in Production - Activity
Step 3: Production Order “Confirmed”

No FI entry, only CO transfer from cost center to production order
Activity Rate INR 40 per kg
Finished Goods
Dr Production Order No. 100251 Cr
Goods issue of RM (step 2) 1,800
Machine Activity 800
Value Flow in Production – GR of FG
Step 4: Good Receipt of Finished Goods from shop floor (movement 101)
Standard Cost per Kg
Dr. Finished Goods Stock A/c Rs 2,400 Raw Material 80
Cr. COGM A/c Rs 2,400
Activity 40
Total 120
Finished Goods
Dr Production Order No. 100251 Cr
Goods issue of RM 20 kg 1,800 Goods receipt of Finished Goods 2400

20 kg
Machine Activity 800
Value Flow in Production - PGI
Step 5: Good issue during PGI – 10 Kgs
Dr. Cost of Sales A/c Rs 1,200

Cr. Finished Goods Stock A/c Rs 1,200
Dr P& L Account Cr
Consumption A/c 20 kgs 1,800 COGM 20Kgs 2,400
COGS 10 kgs 1,200
Value Flow in Production - Variance
The variance, like WIP is calculated and maintained Production Order-

wise and the formula for valuation also is the same, namely, the balance
in the account, which is nothing but the difference between the total
debits and the total credits in each Production Order.
Given that variance and WIP are calculated based on the same formula,
it is understood that a Production Order can either be in WIP or have
Variance. The entry that is passed for variance is
(20*80-20*90)
Dr Production Variance a/c Rs 200
Cr Cost of Goods manufactured a/c Rs 200
Financial Statement
Manufacturing Account
Particulars Qty Rate Amount Particulars Qty Rate Amount
Consumption 20 90 1800 COGM 20 120 2400

Conversion Cost 1200 COGM- Variance 20 10 200
Standard Cost per Kg
Under-absorbed Cost 400
3000 3000 Raw Material 80
Profit & Loss Account
Activity 40
Variance 200 Sales 10 250 2500
Under-absorbed Cost 400 Total 120
COGS 10 120 1200
Other Cost 500
Profit 200
2500 2500
Balance Sheet
Inventory – FG 10 120 1200
Inventory - RM 20 90 1800
Cost Component
Mfg.
Plant Material Master RM/ PM
RM
(IN15) – RM/ PM Price
X Cost
PM
BOM – FG RM/ PM Components
Quantity are assigned
to Value
Material Fields in PA
Master – FG and
Cost Centre/
Activity Rate provides
Cost Elements Cost of Sales
Routings – Work X Activity
FG Centre
Activity Quantity
Base
Costing
Sheet X Cost Elements
OH
OH Rate
Controlled by:
11-10-2020 Costing Variant www.jayeshdesai.com 16
Master Data Configuration
• Material Master for FG, RM and PM • Costing Variant
• Price Control, Costing indicator, Plan price
– Costing type
for RM/ PM, Costing Lot
– Valuation Variant
• BOM – Date Control
• Assembly – Qty structure control
• Item with quantity – Transfer Control
• Base qty
– Reference Control
• Routings • Costing Sheet
• Operations
• Plant, production version, etc
• Work Centre, Cost Centre
• Activities T-Codes
• Resources • Material Cost Estimate/ Costing Run
• Cost Centers/ Cost Elements (CK13N/ CK40N)
• Activity Price Calculations • Cost Centre Planning & activity rates
(KP06, KP26 and KSPI)
Material Ledger
• Cost accounting using actual prices
• Storing values of stock in three different valuations – Legal, group, PCA
The Material Ledger(ML) is a tool within the CO Module that collects all transactional
data for materials whose master data is stored in the material master.
It acts as a subledger for selected materials that captures all goods movements,
invoice values, transfers and price changes. On the basis of this data, the material
ledger calculates and maintains the actual cost for these materials. This actual cost can
then be utilized to valuate the material stock accounts.
The material ledger makes stock valuation in up to three currencies and/or valuations
possible.
Objectives
1. Actual Costing.
During the period, valuation of all goods movements is done with the
preliminary valuation price which is normally the standard price. All variances
from the preliminary valuation are maintained in the ML. At period end,
revaluation of ending inventory can be performed with the determined actual
price. This is not mandatory. Actual prices can be calculated for statistical
purposes only.
2. Parallel currencies and/or valuations of material stocks.
All goods movements in the ledger can be maintained in 3 currencies. The
values are translated into other currencies using the historical exchange rates.
Prerequisite for usage of transfer pricing functionality.
SAP Live
Content
• Income Statement Design
• Operating Concern
• OC & CA relationship
• PA Methods
• Characteristics, Value Field &
Profitability Segment
Income Statement Design
SD
SAP
Modules MM
PP Production
Order
0 Fixed Assets Production
1 Current Assets Cost Centre
2 Net worth
Service
General 3 Other Liabilities
Cost Centre
Ledger 4 Revenue
5 Material Cons. Marketing
6 Primary Cost Cost Centre
7 Other Expenses
8 Secondary Cost
11-10-2020 9 Reporting www.jayeshdesai.com 24
Operating Concern
Operating Operating
Concern Concern
CA1 CA2 CA3
CC 3 CC 2 CC 1 CC 4 CC 5
FY Var FY Var FY Var
COA COA COA

These are few possibilities
Controlling Area & OC
PA Methods
Period accounting method Cost of Sales method
•Revenues •Revenues
The period accounting approach - The total
•Sales deductions •Sales deductions
costs for the period are compared with the total
•Changes in stock •Cost of sales
operating output for the period. Adjustments
•Capitalized internal services (incl. variances for period)
• Work in process
made for stock increase/ decrease. It shows by
Cost Element what was incurred.
Total activities Gross result In the cost-of-sales accounting approach

there is no differentiation according to cost
•Total costs: •Sales and distribution costs elements. Here the sales revenues are
Material costs •Administrative costs compared with the manufacturing costs for the
Personnel costs •Research & Development products sold (cost of sale). The cost-of-sales
Other costs procedure therefore indicates where the costs
were incurred.
Result Result
Characteristics
Value Field
Profitability Segment
A profitability segment corresponds to a market

segment. It is defined by a combination of
characteristic values
You can calculate the profitability of a profitability
segment by setting off its sales revenues against
its costs.
SAP Live
Content
What is Standard Costing?
Costing Methodology
Plant & Kitchen
Components
Price Calculations
Important Settings
Valuation
SAP Live
What is Standard Costing?
Standard Costing is used for determining cost of
manufacturing product/ rendering services before
the goods are sold or services rendered
It helps management in -
• Determining Cost of Goods Sold
Sale – COGS = Gross Profit
• Valuation of Inventories (Legal Valuation)
• Cost controlling
• Profitability forecasting & analysis
• Pricing
In this session, we will deal with manufactured products
Costing Methodology
• Moving Average Price

Price that changes in consequence of usage and In SAP, MAP is indicated by Price Control
entry of invoices. Calculated by dividing the value indicator as ‘V’ and Standard Price is
of material by the quantity in stock. indicated by ‘S’ in the material master
Automatically recalculated based on activity.
• Standard Price
Constant price without considering usage or
invoices. Price variances are posted to price
difference accounts; not affecting the standard
price. Usually calculated at the beginning of each
year.
The decision on method of valuating material is taken at the time of creating/ extending the material master.
Finished goods are valuated with standard price while RM/ PM may be MAP or standard price.
Costing Methodology
• Make to Order • Make to Stock

The planning and manufacturing process is Characteristics of a Make-to-Stock (MTS) process
initiated after receiving the sales orders from are commodity-based end products
the customer.
Production prior to sales order based on forecast

The whole process is customer focused and
throughout the manufacturing process the
connection to the customer can be End products sold from inventory, controlling of
maintained. inventory is critical and distribution and
warehousing of end product is the norm.
The primary benefit of this process is that

manufacturer can meet specific customer
requirements and track the profitability of
We will consider Make to Stock scenario in
each sales order. this presentation
Costing in SAP
• Standard Costing • With Quantity Structure
• Target Costing • Without Quantity
• Life Cycle Costing Structure
• Joint Product • Simulation Costing
• Bi-product
• Mixed Costing
• Batch Costing
• Activity Based Costing
• Split Valuation
Plant & Kitchen Similarity
11-10-2020
Kitchen is a “plant”www.jayeshdesai.com
with several “Work Centre” 39
Tempting Rosgulla!
Rosgulla 100 Psc.
Ingredients Qty Rate Tot
Milk 10 Ltrs 25 250
Sugar 5 Kgs 20 100
Misc. Item 1 Kg 50 50 400
Heating 2 Hrs 25 50
Refrig. 1 Hrs 30 30
Washing 1 Hr 15 15
Storage 5% 20 115
Estimated Cost 515
Per Unit Cost 5.15
Tempting Rosgulla in SAP!
Finished Rosgulla 100 Psc. Costing
Goods (FERT) Lot
Ingredients Qty Rate Tot

B
O Milk 10 Ltrs 25 250
M Raw Material Sugar 5 Kgs 20 100
(ROH)
Misc. Item 1 Kg 50 50 400
Cost
Ro Heating 2 Hrs 25 50 Component
uti Refrig. 1 Hrs 30 30
Activities
ng
Washing 1 Hr 15 15
Overhead Storage 5% 20
CS 115
Standard Cost 515
Per Unit Cost 5.15
Components for Standard Costing
Master Data Configuration
• Material Master for FG, RM and PM • Costing Variant
• Price Control, Costing indicator, Plan price
– Costing type
for RM/ PM, Costing Lot
– Valuation Variant
• BOM – Date Control
• Assembly – Qty structure control
• Item with quantity – Transfer Control
• Base qty
– Reference Control
• Routings • Costing Sheet
• Operations
• Plant, production version, etc
• Work Centre, Cost Centre
• Activities T-Codes
• Resources • Material Cost Estimate/ Costing Run
• Cost Centers/ Cost Elements (CK13N/ CK40N)
• Activity Price Calculations • Cost Centre Planning & activity rates
(KP06, KP26 and KSPI)
Cost Component
Mfg.
Plant Material Master RM/ PM
RM
(IN15) – RM/ PM Price
X Cost
PM
BOM – FG RM/ PM Components
Quantity are assigned
to Value
Material Fields in PA
Master – FG and
Cost Centre/
Activity Rate provides
Cost Elements Cost of Sales
Routings – Work X Activity
FG Centre
Activity Quantity
Base
Costing
Sheet X Cost Elements
OH
OH Rate
Controlled by:
11-10-2020 Costing Variant www.jayeshdesai.com 43
Price Calculations
• RM/ PM prices are based on market forecast or

historical averages.
• These are entered in Planned Price field of
Material Master
• Price Control is mostly ‘V’ but can also be ‘S’
• Activity prices involves cost centers and

activity-dependent planning (KP06 and KP26)
Activity Price Calculations
Cost Centre Head -

Manufacturing
Labor Activity Rate
Machine Activity Rate

Baroda Plant Pune Plant Mumbai Plant
Product Product Product
Fixed Machine Variable

Cost Machine Cost Machine
+ = Activity Price
Capacity Machine Hour Plan Machine Hour

Material Master Key Settings
• Plant • Valuation Class

• Material Type • Price Control
• Lot Size • Base UOM
• Proc Type • Material Origin
• Special Procurement • Overhead Group
• With Qty Structure • Do Not Cost
• Planned Price • Production Version (MRP4)
BOM Key Settings
• Base Quantity
• Production Relevant
• CostingRelevncy
• Assembly
• Material
• Component
• Quantity
• Plant
Routing Key Settings
• Resource
• Operations
• Plant
• Status
• Usage
• Activity Type
• Duration
• Costing Relevancy
Configurations
Valuation
• Once standard cost is released, all finished goods currently in stock,

are re-valuated.
• Difference between old value and the new value gets posted to FI
using MM procedures in OBYC.
• FG stock is reflected at current standard price
www.jayeshdesai.com
Jayesh@jayeshdesai.com
DesaijayeshP
Thanks!
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Product Cost & Profitability Analysis: Icai-Wirc

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ICAI-WIRC

“SAP” is a trademark of SAP AG, Neurottstrasse 16, 69190 Walldorf,

Jayesh P Desai & Co.

• Enterprise Structure • Controlling Master Data

• Moving Average Price

Step 1: Goods Receipt (movement type 101), PO value Rs 3,600

Dr. RM Stock A/c Rs 3,600

Step 2: Goods Issue to Production Order (movement type 261)

Dr. Consumption A/c Rs 1,800 Issue of material to shop

Step 3: Production Order “Confirmed”

Goods issue of RM (step 2) 1,800

Machine Activity 800

Goods issue of RM 20 kg 1,800 Goods receipt of Finished Goods 2400

Step 5: Good issue during PGI – 10 Kgs

Dr. Cost of Sales A/c Rs 1,200

Consumption A/c 20 kgs 1,800 COGM 20Kgs 2,400

COGS 10 kgs 1,200

The variance, like WIP is calculated and maintained Production Order-

Consumption 20 90 1800 COGM 20 120 2400

• Cost accounting using actual prices

• Storing values of stock in three different valuations – Legal, group, PCA

CA1 CA2 CA3

FY Var FY Var FY Var

COA COA COA

Period accounting method Cost of Sales method

Total activities Gross result In the cost-of-sales accounting approach

A profitability segment corresponds to a market

In this session, we will deal with manufactured products

• Moving Average Price

• Make to Order • Make to Stock

Production prior to sales order based on forecast

The primary benefit of this process is that

Ingredients Qty Rate Tot

• RM/ PM prices are based on market forecast or

• Activity prices involves cost centers and

Cost Centre Head -

Machine Activity Rate

Product Product Product

Fixed Machine Variable

Capacity Machine Hour Plan Machine Hour

• Plant • Valuation Class

• Once standard cost is released, all finished goods currently in stock,

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