1. Costs that are identified with the period in which they are incurred.
The Meaning of “Cost”?
The sacrifice made, usually measured by the resources given up, to achieve a particular purpose.
Product Costs
The cost assigned to goods that were either purchased or manufactured for resale.
Period Costs
Costs that are identified with the period in which they are incurred.

2. Manufacturing Companies
There are 3 major categories of manufacturing costs:
Direct Materials
resources that can be feasibly observed being used to make a specific product.
Direct Labor
The cost of paying employees who convert direct materials into finished product.
Manufacturing Overhead
Indirect material
Indirect labor
Other overhead

3. Manufacturing Companies
Prime Costs include:
Direct Materials
Direct Labor
Manufacturing Overhead

4. Manufacturing Companies
Conversion Costs include:
Direct Materials
Direct Labor
Manufacturing Overhead
Nonmanufacturing Costs are all the costs not used to produce products.

5. PRODUCT COSTING –SAP R/3

6. © 2008 by SAP AG. All rights reserved.
SAP R/3 Enterprise
SAP can use a number of
database programs to actually store the data.
DB2
MSSQL
Oracle
© 2008 by SAP AG. All rights reserved.

7. Organization structure required

8. SAP PRODUCT COSTING

9. Product Costing Overview
Acquire an overall perspective of Product Cost Planning within R/3.
Observe a product life cycle from the perspective of Product Cost Planning.
Acquire an overall perspective of product cost object controlling within R/3.
Understand the period oriented product cost controlling.
Obtain an understanding of the functions in the material ledger.
Analysis of product costs.

10. Material Ledger Overview
Obtain an understanding of the actual costing function in the material ledger.
Know how to revaluate inventories of semi finished products, and finished products with calculated actual costs or accrue variances.
Analysis of actual product costs.

11. Why utilize Product Costing?
Product Costing is the backbone of a strong standard cost system. This is the process by which production activities are recorded at standard values and variances from actual costs are isolated.
For planning purposes, the corporation wants a preliminary target of what they think it will cost to produce X units of a product.
To set attainable standards by which efficiencies within the production operations can be measured.
To provide feedback to management on the actual performance of the production process in relation to those targets. Identified variances may indicate inefficiencies that have to be investigated. Corrective action may have to be taken.

12. Costing Methodology Material Master Price Control
Moving average price (V- Price)
- Adjusted with every receipt
- If at all, only to be used for raw materials and materials procured externally
Standard Price
(S-Price)
- Constant
- Recommended for all material types

13. Costing Methodology Moving Average Actual Standard
The method of valuing inventory of a material is determined when extending/creating the material master.
Price that changes in consequence of usage and entry of invoices. Calculated by dividing the value of material by the quantity in stock. Automatically recalculated based on activity.
Constant price without considering usage or invoices. Material stock valued at the same price over an extended period. Price variances are posted to price difference accounts; not affecting the standard price.

14. Characteristics of Price Control V
Moving average price
The stock value is adjusted each time goods are received
Real-time price fluctations are posted to stock
Price difference postings only take place in exceptional cases
Price fluctuations cannot be adjusted to the finished products of higher levels (S price)
Only recommended for raw materials or goods procured externally (real-time price for goods receipt known)
False entries with severe consequences (compounded errors)
Danger of incorrect valuations with delayed invoice receipt
The illustrated situation demonstrates how the decision to use the Moving average price (V) in order to have your material stock values and material prices reflect the most up-to-date data can be a mistaken one.
For this reason, SAP recommends only using the Moving average price (V) for material valuation with raw materials and trading goods, because the delivered prices for these are usually known close to the time of the goods receipt.
For materials produced in-house, such as semi-finished and finished products, there is a great risk that, at period-end closing, a large number of variances from order settlements (follow-up costs) are posted to a relatively small stock which can lead to either price variances or faulty valuations.
A further disadvantage of the Moving average price (V) is that incorrect entries (i.e. typing errors during posting) that are only first recognized later can lead to an unrealistic stock value. Subsequent goods issues would then be valuated with these incorrect prices (error compoundment).

15. Costing Methodology Valuation Method by Material:
Finished Goods Standard w/ ML
Intermediates Standard w/ ML
Raw Material Moving Average Actual
Packaging Moving Average Actual

16. Valuation Area
Organizational unit dividing up a company for the purpose of valuating stocks in a standardized and consistent manner.
Level at which material value is managed.
The valuation area may is defined:
- by plant

17. Product Cost Flow Cost Object CO- CCA PA PC MAT Manufacturing Cost
Center X
Center 1
Center2
F. Goods
Inventory
BOM
Routing
Production
orders
CO-
CCA PA PC
MAT
Manufacturing Cost
MM: RM
Act1
Center Y
Center 3
Cost Center
VAR.
VAR...
Act2

18. Product Cost Flow Mfg. Cost Center Routing Process Order Utilities
Plant Cost View
Sales & Mktg. View
Mfg. Cost Center
(Activity Types)
Utilities
Salaries
Supplies
Maintenance
Depreciation
Training
Direct Conversion
Insur. & Taxes
Laboratory/QC
Waste Treatment
Shops & Stores
General Services
Indirect Conversion
Total Product Cost
Mach. Hrs. or
lbs.
Produced
Lab tests
Setup Hrs.
P A
(Profitability Analysis)
Raw Mat’l 1 & 2 Costs
Pkg. Mat’l Costs
Costs to Produce
Product testing costs
Change Over costs
(setup costs)
Routing
Product Unit Cost
Cost of Goods Mfg.
Raw Mat’l 1 Costs
Raw Mat’l 2 Costs
Pkg. Mat’l Costs
Mach. Hr. Costs
Lab Tests Costs
Mach. Setup Costs
Process Order
Raw Mat’l 1
Raw Mat’l 2
Pkg Mat’l
BOM
(Cost Component View)
(SAP Value Fields)
Three Views Available:
1. Cost Component
2. Cost Element
3. Cost Itemization
Cost of Goods Sold
Fixed & Variable Cost

19. Product Costing At A Grp

20. Product Costing At A Grp

21. Product Costing At A Grp

22. Product Costing At A Grp

23. Product Cost Planning: Overview
Functions of Product Cost Planning:
Product Cost Planning with reference to cost object
Product cost planning with quantity structure – with structures provided by PP (Production Planning) module
Determination of the cost of goods manufactured
Product Cost Planning supplies information for other modules:
Update of prices in a material master
Update of the cost of good sold with the detailed structure of cost component (grouped cost elements)
Standard (material) cost estimate as the base for calculation of production variances
Overview
As a vital element of Product Cost Controlling, Product Cost Planning is gaining in importance. The material cost estimate can be used as a tool for cost planning and the pricing of materials in order to determine the cost of goods manufactured or the cost of goods sold.

24. Product Costing: Overview
Standard Cost Estimate
(once a year)
Release cost estimate with quantity structure
Mark cost estimate with quantity structure
Create Cost estimate with quantity structure
Prepare Product Cost Collector
Preliminary Costing
Create Cost Object
Post Materials Costs
Debit Secondary cost
Production Costs
Credit Production Output
Receive Finished Stocks
WIP Calculation
Variance Calculation
Settlement
Month End Closing

25. Product Costing: Overview
Standard Cost Estimate
(once a year)
Create Cost estimate with quantity structure
Mark cost estimate with quantity structure
Release cost estimate with quantity structure

26. Material cost estimates with q. s.
Quantity Structure
Valuation
Purchase price
Activity Type Price
Overhead
BOM
Routing
Costing
Costing Results
Standard Cost Estimate
Stock Valuation
Profit & Loss Statement
Cost Elements
Items
Values
Standard cost estimate with quantity structure:
Created during costing run for each finished good and semi-finished product
Provides split and balanced information of cost items, quantities and prices that are planned to occur during production a product
Variable and fixed costs coming from BOM and routing
The ‘special’ procedure of save/ mark/ release
Result saved as standard price in material master record
Base for quantity, price and resource variance analysis
May be changed once a period (month) before any material posting;
Only one quantity structure (mixed quantity structure) assigned is valid over the period
Changes in quantity structure do not influence cost estimate released
M Material
E Activity E Activity
G Overhead :
Raw materials
Production hours UT: Cooling Var. …
USD
USD USD
… USD

27. Product Costing: Overview
Standard Cost Estimate
(once a year)
Create Cost estimate with quantity structure
Mark cost estimate with quantity structure
Release cost estimate with quantity structure

28. Cost Object Controlling: Overview
Functions of Cost Object Controlling:
Supporting make-or-buy decisions
Determining price floors
Performing complex cost analysis
Determining inventory values
Overview
As a vital element of Product Cost Controlling, Cost Object Controlling is gaining in importance.
The Cost Object Controlling component is designed to answer the question: "What costs have been incurred for which objects?" To answer this question, the component assigns the costs incurred in the company to the company’s output. The output of a company can consist of materials manufactured in-house, individual orders, or intangible goods.
This component offers real-time cost management functions that determine the cost of goods manufactured in all plants.
The Cost Object Controlling component enables you to determine the cost of goods manufactured or the cost of goods sold for the manufacturing or service output of the company.

29. Cost Object Controlling: Overview
Cost Object Controlling Scenarios:
Product Cost by Period
Product Cost by Period is used for recurring periodic cost control of products that are manufactured in the same way over a longer period of time.
Product Cost by Order
Product Cost by Order is mainly used to control the costs of individual production lots.
In Product Cost by Order, the manufacturing orders themselves are the cost objects. Costs charged to manufacturing orders are usually analyzed and settled by lot. This means that variances can only be analyzed after the entire planned production quantity has been put into inventory.
In contrast to Product Cost by Order in which you analyze costs by lot, in Product Cost by Period you analyze costs by period. This means that you collect the costs on a cost object over an extended period of time, and analyze the debits and credits in each period.
You can also combine both approaches: costs by manufacturing orders and costs by period. In such an approach you will assign production or process orders to product cost collectors and deal with incurred costs as in Product Cost by Period.

30. Cost Object Controlling: Overview
Product Cost by Order or by Period
Full settlement (by Order)
Periodic settlement ( by Period)
Actual costs - Goods receipts = Work in process
Actual costs - Goods receipts = Variances
Actual costs = Work in process
Time
Releasing an order
Partial delivery
Delivered / Technically completed
Actual costs - Goods receipts = Work in process + Variances
Actual costs - Goods receipts = Work in process + Variances
Actual costs - Goods receipts = Work in process + Variances
As you use Product Cost by Order the Full settlement rule is used for production orders.
As you use Product Cost by Period the Periodic settlement rule is used for product cost collectors.
Time
Period 1
Period 2
Period 3

31. Cost Object Controlling: Overview
Functions of Product Costs by Period:
Create product cost collectors.
Create a preliminary cost estimate for product cost collectors.
Calculate and analyze target costs and actual costs for product cost collectors.
Calculate or update the work-in-process inventory and the finished goods inventory.
Calculate and analyze variances for each period.
Transfer data to: Financial Accounting, Profitability Analysis, Profit Center Accounting and Material Ledger.
A preliminary cost estimate for a product cost collector can calculate the costs for the production process (that is, on the basis of a particular production version or for a particular combination of BOM and routing). In repetitive manufacturing, you can therefore create cost estimates for specific production versions.
During the period, all transactions involving products produced in-house in the Logistics module are valuated using the results of the standard cost estimate. If a material with standard price control is delivered to stock, for example, inventories of this material are valuated with the standard price determined by the standard cost estimate.
The results of the standard cost estimate can also be used to determine the following data for each production order or product cost collector at the end of the accounting period: variances, scrap and work in process.

32. Actual costs Production Order
Step 1 – Created and release - Maintenance of Master Data Status - RELEASED
STATUS- CREATED
STATUS - RELEASED This status allows for actual postings

33. Actual costs Production Order
Step 2 – Goods Issue to Order - Actual Postings Status – GOODS MOVEMENT POSTED
Raw Materials Consumed
Order FI
1.100,-
100 * 11 = 1.100,- quantity * price = cost
Inventory Raw Materials
119400
1.100,-

34. Actual costs Production Order
Step 3 – Direct activity allocation - Actual Postings Status - RELEASED
Order
Cost Center / Activity
150 * 50 = 7.500
quantity * price = cost ,-

35. Actual costs Production Order
Step 4 – Goods Receipt from Order into Warehouse - Actual Postings Status – PARTIALLY DELIVERED
Order
Production Output FI
5.000,-
Finished Products
5.000,-
100 * 50 = 5.000,- quantity * price = value of the goods receipts from order

36. Actual costs - Summary
The results from the output receipts, plus material & resource consumptions, update the stock records and provide valuation of production according to standard cost approach.

37. Product Costing: Overview
Month End Closing
WIP Calculation
Variance Calculation
Settlement

38. Period and year-end closing
Production Order
Step 5 – Work-in-Process Calculation - Period-end closing Status – RESULTS ANALYSIS CARRIED OUT
Order ,-
WIP Report: Work-in-Process = 3.600

39. Period and year-end closing
Production Order
Step 6 – Settlement of - Period-end closing Status – RESULTS ANALYSIS CARRIED OUT
Work In Progress (WIP)
Order FI ,-
3.600
Work In Progress (WIP)
WIP is being updated on the order as statistical value for information purposes.
3.600

40. Period and year-end closing
Production Order – new period
Step 9 – Repetition of the steps from 3 to 7 - Actual Postings Status – PARTIALLY DELIVERED
Order ,- ,- ,-
As a result of the actual postings in the new period there is a new balance on the order.

41. Period and year-end closing
Period-end closing
Process costs
Periodic
costs
Revaluation
Overheads
Calculations and analysis
Work-in-Process
Scrap
Variances
Postings FI/CO
Settlement

42. What is SAP Product Costing
To identify accurate cost of production.
It’s a production portfolio
Help to understand for calculation of COGM and COGS.
Analysis of value addition in each process of production
What is cost breakdown including primary cost and transfer price.

43. How to control the excess overhead involve in Production.
To know the breakup of each cost involve in production process and like material,labour,overhead-analysis and control on the cost.
Can we supply the product at competitive price in market.

44. Product cost Planning Help for Product cost planning,
Show the production efficiency
Calculate COGM and COGS
Report at each level of components in process,