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SAP Product Costing 101

Product Costing Overview


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Welcome to Product Costing 101


This course is designed to provide a management level introduction to
SAP Product Costing.
At the end of this course you should be able to:
Explain standard cost accounting principles.
Understand general SAP Cost Center Accounting concepts.
Define SAP Product Costing functionality.
This course will illustrate concepts using the below vehicles:
Industry-Specific Business Process Scenarios.
SAP Functionality.
Key Terms.

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Course Outline
TOPICS
I. Cost Accounting Overview
II. SAP Controlling Overview
III. Product Costing Overview
A.
B.
C.
D.
E.

SAP Product Costing Data


SAP Product Cost Planning
SAP Cost Object Controlling
SAP Actual Costing/Material Ledger
SAP Product Costing Reporting

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Introduction to Cost Accounting


Traditionally accounting has two major branches financial accounting
and cost accounting:
Financial Accounting: provides legally required financial
information to external parties like investors and the government.
Cost Accounting: focuses on the costs incurred while running a
business.
This module is concerned with the process of managing cost
accounting.

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Cost Accounting Defined


What is it?
Cost Accounting is the part of accounting that is concerned with
budgeting and analyzing costs.
Cost Accounting enables managers to make decisions with the goal
of improving organizational profitability.
Purpose of Cost Accounting:
Provides financial information about the overall operations of a firm.
Assess the profitability of a product or service.
Track Profitability.
Plan Costs.
Develop Budgets.

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Direct Costs & Indirect Cost


Cost Accounting groups similar costs to enable analysis of a products
cost. At a high level costs can be grouped as Direct or Indirect Costs:
Direct Cost Costs that can physically be traced back to the
production of a good or service (raw materials).
Indirect Cost Costs not directly associated with the production of a
good or service (Human Resources salaries).

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Cost Diagram
A products cost is the combination of the direct and indirect costs
incurred to produce the product.

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Full Absorption and Variable Costing


There are two commonly used methods in cost accounting, Full
Absorption Costing & Variable Costing:
Full Absorption Costing: measures the cost of all manufacturing
resources both fixed and variable used to produce a good or
service.
Variable Costing: is a method of costing where all variable
manufacturing costs are included in costs and fixed costs are
excluded.
This material follows SAP Product Costing as applied to full absorption
costing.

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Costing Method Use by Country


Full Absorption Costing is the predominant costing method in the world
but variable costing is still used in some places.

United
States

China

Estonia

Finland

India

Malaysia

Norway

Full
Absorption
Costing

76%

68%

55%

31%

48%

46%

29%

Variable
Costing

24%

32%

39%

42%

50%

23%

55%

Both
Systems

__

6%

28%

2%

31%

16%

__

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All Rights
Reserved.Copyright
2008Reserved.
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2008
Accenture All Rights
Reserved.Copyright 2008 Accenture All Rights Reserved.

Course Outline
TOPICS
I.
II.
III.

Cost Accounting Overview


SAP Controlling Overview
Product Costing Overview
A. SAP Product Costing Data
B. SAP Product Cost Planning
C. SAP Cost Object Controlling
D. SAP Actual Costing/Material Ledger
E.

SAP Product Costing Reporting

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SAP Controlling
What is it?
Controlling (CO) is module with in SAP.
Enables business management to make
internal (Managerial and Cost) accounting
decisions.
Highly integrated with the Financial
Accounting (FI) module.
What does it do?
The CO module is used by management to
answer such questions as:
Where in the business are costs incurred?
Where does the business generate revenues?
How profitable is the business and its
components?

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FI

SD
MM
PP

CO

SAP
ECC

QM
PM
HR

TR
PS

EC
IM

SAP Controlling
SAP Controlling consists of the following components:
Cost Center Accounting:
Identifies where costs are incurred in the business.

Profit Center Accounting:


Tracks profits and measures profitability.

Internal Order:
Tool used to capture costs and revenues.

Product Costing:
Derives standard costs for products/services and collects actuals.
Note: This sub module will be the focus of future courses.

Profitability Analysis:
Analyzes profits and contribution margin for various market segments.

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Course Outline
TOPICS
I.
II.
III.

Cost Accounting Overview


SAP Controlling Overview
Product Costing Overview
A. SAP Product Costing Data
B. SAP Product Cost Planning
C. SAP Cost Object Controlling
D. SAP Actual Costing/Material Ledger
E.

SAP Product Costing Reporting

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Product Costing Overview


What is it?
Product Costing is a tool for managing costs associated with the
manufacturing process.
It is a component within the Controlling (CO) module that is highly
integrated with other SAP modulessuch as Financial Accounting (FI),
Production Planning (PP), Materials Management (MM), etc.
Product Cost Controlling provides information about a companys costs
that enables a company to lower costs and therefore improve profitability.

Purpose of Product Costing:


Plan standard costs.
Track actual costs incurred and quantities used during the
manufacturing process.
Report and analyze variances.

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Product Costing Overview (continued)


Product Costing Components:
Product Costing Data
Data elements must be created to enable product costing functionality.

Product Cost Planning


Process of forecasting and planning costs.

Cost Object Controlling


Tracks manufacturing costs incurred during production.

Actual Costing/Material Ledger


Keeps track of a products cost as they are incurred.

Reporting
Reporting enables users to perform detailed analysis of product costing
data.

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Product Costing Process


Product Costing is a cyclical process consisting
of the following steps:
Setup Product Costing Data: Data is
established before data processing begins.
Plan Standard Product Costs: Standards
are planned for the costing period.
Collect Actual Costs: Actual product costs
are collected during the financial period.
Control Cost Objects: Determine the
products actual cost.
Period Closing: Close the financial period
and begin processing the next
Setup Product
period data.
Costing Data
Reporting & Analysis is ongoing.

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Period
Closing

Reporting
& Analysis

Control
Cost
Objects
Collect
Actual
Costs

Plan
Standard
Product
Costs

Course Outline
TOPICS
I. Cost Accounting Overview
II. SAP Controlling Overview
III. Product Cost Controlling Overview
A.
B.
C.
D.
E.

SAP Product Costing Data


SAP Product Cost Planning
SAP Cost Object Controlling
SAP Actual Costing/Material Ledger
SAP Product Costing Reporting

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SAP Product Costing Data


Product Costing is heavily dependent on cross-module integration and
master data setup.
The data can be categorized into two groups:
Organizational Data
Reflects an organizations operating structure. Establishment of this
structure enables the organization to identify where costs are incurred.
Example: Profit Centers, Cost Centers, Cost Elements, etc.

Production Master Data


Data that directly relates to the production process.
Example: Material Master Records, Bill of Material (BOM), Routings,
Production Order, etc.

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Organizational Data
Key Terms
Cost Center: Organizational unit that represents a defined location
where costs can be planned/incurred.
Cost Center Hierarchy: Grouping of cost centers based on specified
criteria (i.e. location, cost center type, etc.)
Cost Element: Account, equivalent to a P/L account, that exists in SAP
CO to enable internal cost accounting.
Profit Center: Organizational unit that represents a managementoriented structure for ones business. Contains cost/revenue balances.

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Production Master Data


Key Terms
Material: Any physical substance that is consumed or produced during
the production process.
Bill of Material (BOM): Itemized list of material/packaging components
and assemblies required to manufacture a finished good.
Activity Type: Describes certain functions performed in a cost center.
They are measured in units of time or quantity. Organizations can define
activity types based on their manufacturing process. A common activity
type is labor.
Operation: Activity that takes place within a work center.
Work Center: Locations where operations are performed in the
production process (Example: packaging)
Routing: Defines sequence of operations (work centers) performed
during the manufacturing of a product.

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Product Costing Data Integration in SAP


Organizational and Production Data integrate together enabling Product
Costing activities.

Overhead Cost Center


Manufacturing
Cost Center 1

BOM

Manufacturing
Cost Center 2

Work
Center 1

Work
Center 2

Work
Center 3

Activity Types

Activity Types

Activity Types

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Routing

Finished
Good

Course Outline
TOPICS
I. Cost Accounting Overview
II. SAP Controlling Overview
III. Product Cost Controlling Overview
A.
B.
C.
D.
E.

SAP Product Costing Data


SAP Product Cost Planning
SAP Cost Object Controlling
SAP Actual Costing/Material Ledger
SAP Product Costing Reporting

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SAP Product Cost Planning


Overview
What is it?
Process that facilitates the planning of costs incurred during the
manufacturing process.
Tool within the Product Costing component for creating costs
estimates and releasing standard price in the material master.
Costs serve as the basis for actual comparison during the course of the
year.

What does it do?


Calculate the cost of goods manufactured (COGMs) and the cost of
goods sold (COGS).
Set Standard Price to be used for inventory valuation purposes.
Updates Material Master record.

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SAP Product Cost Planning


Cost Types
A Product Cost contains two types of costs material and conversion. A
products total cost is the combination of the two cost types.
Product Cost = Material Costs + Conversion Costs.
Material Costs:
Calculate material costs for all components within a BOM.
Example: Raw materials, packaging, semi-finished goods, finished goods.

Conversion Costs:

Allocate fixed costs (overhead) to product.


Calculate activity/conversion costs on routing/rate routing.
Display cost composition for material cost.
Valuation of inventory in Material Master.

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Standard Cost Creation Process

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Standard Cost Process-Material Costing


Material costing is the process of establishing prices for a products
material components.
BOMs must be setup with correct components for each manufactured semifinished and finished good.
Component costs include raw materials, packaging items and semi-finished goods that are
rolled up to derive the material cost for the finished good.

Each component must have a cost assigned to it based on its procurement


cost.
All component material costs are rolled up to calculate the finished goods
material cost.

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Standard Cost Process-Conversion


Costing
Conversion costing is the process of determining operational costs
required to produce the finished good.
Conversion costs can be activity-dependent and activityindependent costs.
Examples include overhead and fixed & variable manufacturing cost.

Plan for the cost/quantity of activities consumed during the


manufacturing process.

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Standard Cost Process-Conversion


Costing
Conversion Costs are calculated via the following process.
Create Cost Centers, Activity Types, and Routings: Conversion Costing
Master Data is established by the organization.
Create Plan Allocations: Allocations are created to distribute overhead costs
to manufacturing cost centers.
Perform Activity Type Planning: The organizations planning department
plans how much a defined quantity of activity will cost (labor hours).
Execute Plan Allocations: The amount of cost planned at overhead cost
centers is allocated to manufacturing cost centers.
Execute Plan Cost Splitting: This assigns dollars from production cost
centers to the activity types defined by the organization.
Calculate Activity Rates: SAP calculates the cost of each activity at each
work center. It is defined as: Activity Rate = Total Activity Cost/Total Activity
Quantity.

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Preliminary Costing
What is it?
Performed after standard cost for material is calculated.
Determines the planned cost for production orders at the beginning of
the year.
Can be updated due to input price changes.
What does it do?
Used to identify planned costs for the material being produced.
Used as the baseline in the calculation of production variances.

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Course Outline
TOPICS
I. Cost Accounting Overview
II. SAP Cost Center Accounting Introduction
III. Product Cost Controlling Overview
A.
B.
C.
D.
E.

SAP Product Costing Data


SAP Product Cost Planning
SAP Cost Object Controlling
SAP Actual Costing/Material Ledger
SAP Product Costing Reporting

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SAP Cost Object Controlling


Overview
What is it?
Process of capturing costs incurred during the production of a
finished good.
What does it do?
Reports actual costs incurred during the period.
Compares standard and actual costs.
Compares target and actual costs.
Allows for investigation of production-related variances.
Helps facilitate settlement and closing books at month end.

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Cost Object Controlling


Costing Methods
Depending on the type of product and the manufacturing process, there
are three ways to track costs incurred during production in SAP:
Product Cost by Period:
Costs are captured on cost objects as they occur. Production variances are analyzed
and settled at the end of the fiscal period.
Typically used by companies that use repetitive manufacturing processes.

Product Cost by Manufacturing Order:


Costs are recorded on a manufacturing order and variances are settled once the
manufacturing order has been satisfied.
Typically used by companies that utilize repetitive manufacturing on products with
longer manufacturing times.

Product Cost by Sales Order:


Costs are recorded on a sales order and variances are settled once the sales order
has been satisfied.
Typically used by companies that produce customized goods.

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Month End Closing


What is it?
Process of closing the financial books at the end of an accounting
period.
Characteristics:
Month-end activities can include (but are not limited to):
Actual cost allocation: Process of distributing actual overhead costs to
manufacturing cost centers.
Revaluation at actual prices: Determining actual cost materials
procured/produced and activities performed.
Variance calculation: Process of calculating expense- and usage related
variances incurred during production.
Settlement: Zeroing out cost object. Enables period profitability analysis.

Performed completely on the cost object.


EX: Product cost collector, manufacturing order, sales order, etc.

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Course Outline
TOPICS
I. Cost Accounting Overview
II. SAP Cost Center Accounting Introduction
III. Product Cost Controlling Overview
A.
B.
C.
D.
E.

SAP Product Costing Data


SAP Product Cost Planning
SAP Cost Object Controlling
SAP Actual Costing/Material Ledger
SAP Product Costing Reporting

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SAP Actual Costing:


Overview
What is it?
Actual Costing is the determination of the products cost as actual
costs are incurred.
Calculated actual cost is known as the periodic unit price.

Actual Costs are recorded throughout the financial period.


What does it do?
Actual costing calculates the actual price of materials in a period.
Used to value raw material, semi-finished, and finished goods
inventories.
Materials are valuated at the end of the period.
Determines variances for materials at the end of the period.
Actual price is used as standard price for the next period.

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Material Ledger
What is it?
Tool used to keep track of inventory level, value and usage.
Relevant Information Includes:
Actual price of purchased materials.
Price of raw materials.
Actual cost of production of semi-finished goods.

What does it do?


The Material Ledger is highly integrated with Inventory Management
to easily track changes to inventory values and balances in realtime.

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Course Outline
TOPICS
I. Cost Accounting Overview
II. SAP Cost Center Accounting Introduction
III. Product Cost Controlling Overview
A.
B.
C.
D.
E.

SAP Product Costing Data


SAP Product Cost Planning
SAP Cost Object Controlling
SAP Actual Costing/Material Ledger
SAP Product Costing Reporting

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SAP Product Costing Reporting


What is it?
Reports are used for the analysis of usages and variances.
Types of SAP Product Costing Reports:
Summarization:
Costs are rolled up to cost object to perform analysis.

Detail:
Displays detailed line items posted at selected cost objects.

Drill Down:
Low-level information capable of displaying specific data for a given
line-item.

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SAP Product Cost Planning:


Reference Materials
Cost Accounting: A Managerial Emphasis
Charles T. Horngren
Srikant M. Datar
George Foster

Accenture SAP ECC CO Bootcamp


Accenture SAP Home Page:
http://kx.accenture.com/Products/Pages/SAP.aspx

SAP Online Library:


http://help.sap.com

SAP Product Costing Course:


AC505 Product Cost Planning
R/3 Product Costing Made Easy

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Contact Information
For any questions please contact:
Daniel Izzo:
daniel.c.izzo@accenture.com
Samrat Sengupta:
samrat.sengupta@accenture.com

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