Product Costing Q&A

Product Costing

What are the important Terminologies in Product Costing?:

Results Analysis Key – This key determines how the Work in Progress is

calculated

Cost Components - The break up of the costs which get reflected in

the product costing eg. Material Cost, Labour Cost, Overhead etc

Costing Sheets - This is used to calculate the overhead in

Controlling

Costing Variant - For All manufactured products the price control

recommended is Standard Price. To come up with this standard price for

the finished good material this material has to be costed. This is done

using Costing Variant. Further questions down below will explain this

concept better.

What are the configuration settings maintained in the costing

variant?

Costing variant forms the link between the application and Customizing,

since all cost estimates are carried out and saved with reference to a

costing variant. The costing variant contains all the control parameters

for costing.

The configuration parameters are maintained for costing type, valuation

variants, date control, and quantity structure control.

In costing type we specify which field in the material master should be

updated.

In valuation variant we specify the following

a) the sequence or order the system should go about accessing

prices for the material master (planned price, standard price,

moving average price etc).

b) It also contains which price should be considered for activity price

calculation and .

c) How the system should select BOM and routing.

How does SAP go about costing a Product having multiple Bill of

materials within it?

SAP first costs the lowest level product, arrives at the cost and then goes

and cost the next highest level and finally arrives at the cost of the final

product.

What does the concept of cost roll up mean in product costing

context?

The purpose of the cost roll up is to include the cost of goods

manufactured of all materials in a multilevel production structure at the

topmost level of the BOM(Bill of Material)

The costs are rolled up automatically using the costing levels.

1) The system first calculates the costs for the materials with the

lowest costing level and assigns them to cost components.

2) The materials in the next highest costing level (such as semifinished

materials) are then costed. The costs for the materials

costed first are rolled up and become part of the material costs of

the next highest level.

What is a settlement profile and why is it needed?

All the costs or revenues which are collected in the Production order or

Sales order for example have to be settled to a receiver at the end of the

period. This receiver could be a Gl account, a cost center, profitability

analysis or asset. Also read the question “What is a cost object “ in the

section Controlling.

In order to settle the costs of the production order or sales order a

settlement profile is needed.

In a settlement profile you define a range of control parameters for

settlement. You must define the settlement profile before you can enter a

settlement rule for a sender.

The Settlement Profile is maintained in the Order Type and defaults

during creating of order.

.

Settlement profile includes:-

1) the retention period for the settlement documents.

2) Valid receivers GL account, cost center, order, WBS element, fixed

asset, material, profitability segment, sales order, cost objects, order

items, business process

3) Document type is also attached here

4) Allocation structure and PA transfer structure is also attached to the

settlement profile e.g. A1

The settlement profile created is then attached to the order type.

What is Transfer or Allocation structure?

The transfer structure is what helps in settling the cost from one cost

object to the receiver. It is maintained in the Settlement profile defined

above.

The Transfer structure has 2 parts:

a) Source of cost elements you want to settle

b) Target receiver whether it is a Profitability segment or fixed asset or

cost center

So basically for settling the costs of a cost object you need

to define the Transfer structure where you mention what

are the costs you want to settle and the target receiver for

that.

This information you fit it in the settlement profile which

contains various other parameters and this settlement

profile is defaulted in the Order type. So every time a

order is executed the relevant settlement rule is stored

and at the month end by running the transaction of the

settlement of orders all the cost is passed on to the

receiver

So to put in simple terms:

a) You define your cost object which could be a

production order a sales order for eg

b) You collect costs or revenues for it

c) You determine where you want to pass these costs or

revenues to for eg if the sales order is the cost object

all the costs or revenues of a sales order could be

passed to Profitability Analysis

What do you mean by primary cost component split?

Primary cost split is defined when you create a cost component

structure. When you switch on this setting, the primary cost from the

cost center are picked up and assigned to the various cost components.

How do primary costs get picked up from cost center into the cost

component structure?

This is possible when you do a plan activity price calculation from SAP.

The primary cost component structure is assigned to the plan version 0

in Controlling .

Is it possible to configure 2 cost component structures for the same

product in order to have 2 different views?

Yes it is possible. We create another cost component structure and

assign it to the main cost component structure. This cost component

structure is called Auxiliary cost component structure which provides

another view of the cost component structure.

How do you go about configuring for the sales order costing?

The flow is as follows:

Sales order -> Requirement Type-à Requirement Class-> All settings for

controlling

In a sales order you have a requirement type .In configuration, the

requirement Class is attached to the requirement type and in this

requirement class all configuration settings are maintained for

controlling.

In the requirement class we attach the costing variant, we attach the

condition type EK02 where we want the sales order cost to be updated,

and the account assignment category. In the account assignment

category we define whether the sales order will carry cost or not. In case

if we do not want to carry cost on the sales order we keep the

consumption posting field blank.

We also define here the Results Analysis version which helps to calculate

the Results Analysis for the Sales order if required.

There are 2 plants in a company code. First plant is the

manufacturing plant and another plant is the selling plant. Finished

goods are manufactured at the manufacturing plant and transferred

to the selling plant. How is standard cost estimate calculated at the

selling plant given the fact that the cost at both the plant should be

the same?

The special procurement type needs to be configured which specifies in

which plant the system is to look up for cost. Here a special procurement

key specifying plant 1 (manufacturing plant) should be configured.

This special procurement type must be entered in the costing view or the

MRP view of the Finished good material master record in plant 2.

When you cost the finished good at plant 2, the system will transfer the

standard cost estimate from plant 1 to plant 2

What is mixed costing in SAP? Give an example to explain.

Mixed costing is required when different processes are used to

manufacture the same material. Mixed costing is required when you have

different sources of supply for purchasing the material.

Let us take an example:-

There is a finished good Xylene which can be manufactured by 3

different processes.

The first process uses an old machine and labour. The processing time is

9 hrs to manufacture.

The second process uses a semi-automatic machine and labour. The

processing time is 7 hrs to manufacture.

The third process uses a fully automatic machine and the processing

time is 5 hrs.

Thus cost of manufacture for the 3 processes is different. By using Mixed

costing you can create a mixed price for the valuation of this finished

good.

What configuration needs to done for using Mixed costing?

Quantity Structure type for mixed costing must be configured. Here we

specify the time dependency of the structure type . The following options

exist

a) You have no time dependency.

b) It is based on fiscal year

c) It is based on period

This quantity structure type is then assigned to the costing version.

Lets say for a product there exists three production versions.

Explain the process how you would go about creating a mixed cost

estimate?

The process of creating a Mixed cost estimate would be as follows:-

1) Create procurement alternatives for each of the production version.

2) Define Mixing ratios for the procurement alternatives

3) Select the configured quantity structure type and execute a

material cost estimate based on the costing version.

What is Mixing ratios and why are they required to be maintained

before creation of cost estimate?

Mixing ratios are weighting factors assigned to the procurement

alternatives. This weighting factor is obtained from the planning

department based on the usage of the procurement alternatives during

the planning year.

For e.g.

Procurement alternative 1 (production version 1) 40% will be

manufactured

Procurement alternative 2 (production version 2) 35% will be

manufactured

Procurement alternative 3 (production version 3) 25% will be

manufactured

This % will be maintained as mixing ratios.

Thus when system calculates the mixed cost estimate, system will first

cost each of the production version and then multiply each of the costs

with the weighting factors.

Thus

240 (cost of prod. Vers 1) X 40 = 9600

210 (cost of prod. Vers 2) X 35 = 7350

160 (cost of prod vers 3) X 25 = 4000

Mixed costs 17350/100 = 173.5

There are Result analysis categories in WIP (Work in Process). What

do you mean by the result analysis category Reserves for unrealized

costs?

If you are calculating the work in process at actual costs, the system will

create reserves for unrealized costs if the credit for the production order

based on goods receipts is greater than the debit of the order with actual

costs incurred. The Result analysis category RUCR (Reserves for

unrealized cost) would need to be maintained. Normally this is not

maintained in most of the companies.

Which is the Result analysis category which is normally maintained

for the WIP (Work in Process) calculation?

The Result analysis category WIPR - Work in process with requirement

to capitalize costs is normally maintained for WIP calculation

How do you define a By-product in SAP?

A By-product in SAP is defined as an item with a negative quantity in the

Bill of Material. By-product reduces the cost of the main product. There

is no Bill of Material for a By-product.

How do you calculate the cost for a By-product in SAP?

The cost for the By-product is the net realizable value. This is manually

maintained in the system for the by-product through transaction code

MR21 Price change.

How do you define a Co-Product in SAP?

A Co-product (primary product or by-product) is indicated by a tick in

the costing view of the material master. In the BOM all the primary

products are represented as an item with negative quantity. A primary

product is also indicated as a co-product in the BOM of the leading coproduct.

For primary products the costs are calculated using the

apportionment method, while for by-products the net realizable value

method applies.

Is it possible to use Standard SAP Co-product functionality in

Repetitive manufacturing?

No. It is not possible to use the Standard Co-product functionality in

repetitive manufacturing

How do you got about defining CO-Product functionality in

Repetitive manufacturing?

In the Repetitive manufacturing you need to use the Costing BOM for the

other co-product. Through arithmetical calculation you need to maintain

the quantities in the costing BOM. This co-product will be shown as a

negative item in the leading co-product.

You get an error while executing a cost estimate which says” Item

no 1 (which is a raw material) is not assigned to the cost component

structure?

What could be the possible cause of error in this scenario?

The consumption GL code for the material master is not assigned to the

cost component structure. To find out how you can know which GL code

to assign read the next question.

In the above scenario how do you know which cost element is being

called for?

In this case you need to the use simulation mode OMWB in MM and

enter the material code plant and the movement type 261 (issue against

production order). You will see the account modifier VBR and against

which the GL code is available.

You get an error while executing a cost estimate, which says” Item

no. 1 (which is a raw material) is not assigned to the cost

component structure?

In this case everything is perfectly configured, what could be the

possible error in this scenario?

In the material master of the raw material the valuation class updated in

the accounting view will be incorrect.

Is it possible to calculate standard cost estimate for a past date?

No. It is not possible to calculate standard cost estimate for a past date.

What is the difference between a product cost collector and

production order?

Both of these are cost objects which collect production costs for

manufactured product. Product cost collector is a single order created for

a material. All the costs during the month for that material is debited to

single product cost collector. No costing by lot size is required in case of

product cost collector.

The latter is where there are many production orders for a single material

during the month. Costs are collected on each of this production order.

Costing by lot size is the main requirement in case of production orders.

What is the meaning of preliminary cost estimate for product cost

collector?

Preliminary costing in the product cost by period component calculates

the costs for the product cost collector. In repetitive manufacturing you

can create cost estimate for specific production version.

Why is preliminary cost estimate required?

The preliminary cost estimate is required for the following:-

Confirm the actual activity quantities.

Valuate work in process

Calculate production variances in variance calculation

Valuate the unplanned scrap in variance calculation

Is it possible to update the results of the standard cost estimate to

other fields such as commercial price, tax price fields in the

accounting view?

Yes. It is possible to update the standard cost estimate to other fields

such as commercial price etc. in accounting view.

How do you configure that the results of the standard cost estimate

are updated in other fields other than the standard price?

The price update in the material master is defined in Costing type. This

costing type is attached to the costing variant.

What do you mean by Assembly scrap and how is it maintained in

SAP?

Assembly scrap is scrap that is expected to occur during the production

of a material which is used as an assembly.

If a certain amount of scrap always occurs during the production of an

assembly, the quantities and activities used must be increased by the

system so that the required lot size can be produced.

To increase the lot size of an assembly you can enter a percentage, flatrate

assembly scrap in the MRP 1 view of the material master record.

This assembly scrap is reflected in all the subordinate components. The

system increases the quantity to be produced by the calculated scrap

quantity. This increases both the materials consumed and the activities

consumed and consequently the cost.

How are scrap costs shows in the standard cost estimate?

Scrap costs are assigned to the relevant cost component and can be

shown separately for a material in the costed multilevel BOM.

How are scrap variances calculated?

Scrap variance are calculated by valuating the scrap quantities with the

amount of the actual costs less the planned scrap costs.

What do you mean by Component scrap and how is it maintained in

SAP?

Component scrap is the scrap of a material that is expected to occur

during production. When an assembly is produced with this component,

the system has to increase the component quantity to enable to reach

the required lot size. The component scrap can be entered in the BOM

item or in the MRP 4 view of the material master

What do you mean by Operation scrap and how is it maintained in

SAP?

Operation scrap is a scrap that is expected to occur during production.

Operation scrap is used to reduce the planned input quantities in follow

up operations and to calculate the precise amount of assembly scrap.

Operation scrap can be maintained in % in the routing and in the BOM.

What are the implications if the operation scrap is maintained in

the routing and if it maintained in the BOM?

If the operation scrap is maintained only in the routing, the costing lot

size is reduced by this percentage.

If the operation scrap is maintained in the BOM, the planned input (not

the output quantity) is increased and any assembly scrap is reduced.

What is the meaning of additive costs in SAP and why is it required?

Additive costs are used to add costs manually to a material cost estimate

when it cannot be calculated by the system. Examples of such costs are

freight charges, insurance costs and stock transfer costs.

What is the configuration required for additive costs?

To include additive costs in the material cost estimate you need to set the

indicator “Incl. additive costs” for each valuation strategy in the valuation

variant.

Further you also need to set in the costing variant to include additive

costs.

How do you configure split valuation?

The configuration steps involved in split valuation:-

1) Activate split valuation – Configure whether split valuation is

allowed for the company code.

2) Determine the valuation categories and valuation types that are

allowed for all valuation areas.

3) Allocate the valuation types to the valuation categories

4) Determine the local valuation categories for each valuation area

and activate the categories to be used in your valuation area.

What is valuation category and valuation type in split valuation?

In split valuation the material stock is divided according to valuation

category and valuation type.

Valuation category determines how the partial stocks are divided

according to which criteria. The following valuation categories are preset

in the standard SAP R/3 system –

B - Procurement type

H – Origin type

X – Automatic batch valuation

Valuation type describes the characteristic of individual stock.

e.g. EIGEN Inhouse production (SAP standard)

FREMD External procurement (SAP standard)

Valuation types are assigned to valuation categories.

What are the steps involved before you run a cost estimate for a

split valuated material?

The following are the steps:-

1) Create procurement alternatives based on the valuation types for

the material.

2) Maintain Mixing ratios for the procurement alternatives

How do you create a material master with split valuation?

To create a split valuated material master proceed as follows:-

1. First create a valuation header record for the material. Update the

Valuation category field on the accounting screen; leave the

Valuation type field blank. In the Price control field, enter V

(moving average price). When you save, the system creates the

valuation header record.

2. Then create the material for a valuation type.

Call up the same material in creation mode again. Due to the fact

that a valuation header record exists, the system requires you to

enter a valuation type for the valuation category.

3. Repeat Step two for every valuation type planned.

When a standard cost estimate is run for a finished good does SAP

calculate cost estimate for its components such as raw and packing

material?

Yes. SAP calculates the cost estimate even for raw and packing material

and stores it in the standard price field for information purposes

How do you prevent the system from calculating the cost estimate

for raw and packing material when you run a standard cost estimate

for the finished goods?

To prevent the system from calculating cost estimates for raw and

packing material, you need to select the “No costing” checkbox in the

costing view of the material master.

How is it possible to apply 2 different overhead rates for 2 different

finished goods?

It is possible through overhead groups. You configure 2 overhead keys.

Define rates for each of this overhead key. These two overhead keys is

then assigned to the two overhead groups. These overhead groups are

attached in the costing view of the finished goods material master.

Work in Progress

In period 1 there is a WIP posted of 22000 USD in period 2 some

further goods issue are done to the extent of 15000 USD . How will

system calculate WIP for period 2?

System will post a delta WIP of 15000 USD in period 2.

What is the basic difference in WIP calculation in product cost by

order and product cost by period (repetitive manufacturing)?

Generally in product cost by order, WIP is calculated at actual costs and

in product cost by period WIP is calculated at target costs

What are the configuration settings for calculating WIP in SAP?

You define secondary cost elements of type 31 first.

You then need to define the Results Analysis version

This results analysis contains line ids which are basically nothing but

break up of costs

Next you define assignments-> here you assign source cost elements to

the line ids defined above

You also define the secondary cost elements which are assigned to the

line ids.

In the end you define the Finance GL accounts which are debited and

credited when a Work in Progress is calculated.

Please refer to the configuration document for more detailed information

How does SAP calculate Work in Process (WIP) in product cost by

order?

The system first runs through all the production order for the month and

checks for the status of each production order. If the status of the

production order is REL (Released) or PREL (Partially released) and if

costs are incurred for that order system calculates WIP for the

production order.

The system cancels the WIP for the production order when the status of

the order becomes DLV (delivered) or TECO (Technically complete).

There is a production order with order quantity 1000 kgs. During

the month 500 kgs of goods were produced. What will be the system

treatment at the month end?

The system will first check the status of the production order. Since the

status of the order is not DLV (Delivered) it will calculate a WIP for the

production order.

Why does the system not calculate variance for the 500 kgs which

has been delivered?

In the product cost by order component the system does not calculate a

variance for partially delivered stock on the production order. Whatever

is the balance on the production order is considered as WIP. In the

product cost by period component, system will calculate WIP as well as

variance provided

Is the WIP calculated in the product cost by order component at

actual costs or standard costs?

In the product cost by order component the WIP is calculated at actual

costs.

Is the WIP calculated in the product cost by period component at

actual costs or target costs?

In the product cost by period component the WIP is calculated at target

costs.