Five Steps to Understand Product Costing in SAP

FICO

Mar 9, 2016
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In controlling module, product costing is used to value the internal cost of

materials and production for management accountability and accounting.
Many people avoid due its complexity, as an integration of high cost with
other modules.
The five steps in understanding product costing in SAP FICO are:

Now let learn each step of product costing in detail.

Step #1: Cost Center Planning

Cost center planning is the elementary step in understanding product
costing. The main objective of this phase is to plan total dollars and
quantities in each cost center plant.
Prerequisites:

Company codes and plants in organizational structure are planned.

Master data for profit centers, cost centers, primary and secondary
cost elements and activity types.
In transaction KP06, cost center dollars are scheduled by Activity type and
cost element. Fixed and variable dollars can be entered. A user can plan
costs in production cost centers which wind up through allocations. In
transaction KP26, the cost center quantities are planned by Activity type.
Based on the earlier years actual values, activity rate can be manually
entered. Planning activity quantities based on useful installed capacity
accounts for interruption is the best practice.
Step #2: Activity Rate Calculation
The main aim of this phase is to estimate the rates of each activity plan in
each cost center in a plant.
Pre-requisites:

Cost Center Plans are entered: Plan costs in KP06 and Plan activity
units in KP26
Once we plan our cost center dollars and quantities, its time to calculate
the activity rates which are implemented to value internal activities to
produce products. We can also use a blended approach and plan rates for

few cost centers and activities and to calculate other rates based on the
last activities.
Once we plan costs for all cost centers, we can avoid the next step of plan
allocations. Use plan assessments and distributions to allocate costs when
the planned costs acquired in overhead cost centers.
The key dissimilarity between assessments and distributions is that
distribution keeps the primary cost element (Identity) of the cost.
Assessments are secondary cost elements which act as a cost shipper to
move costs. We can use assessments, distributions or blended approach
of both. The plan assessments and distributions are created in
Transactions KSV7 and KSU7 and executed in KSUB and KSVB
transactions.
Once the costs are assigned, we must review the Cost center
Actual/Plan/Variance report.
Now, execute the cost center plan which rips cost when we have more
than one activity type. The cost has to be ripped based on the activity
quantity and other sources. Using Transaction KSPI, activity type rates are
calculated. If the cost is adverse, you can revise the cost plans and
recalculate the rates.
Step #3: Quantity Structure
This step helps you to estimate the components of manufactured goods,
the cost of sold goods based on the BOM and Routing.
Pre-requisites:

Master data is created:

Material Masters (including MRP, Accounting and Cost views)

Bill of Materials (BOM)

Work Centers (Cost Centers and Activity Types)

Routings (Product Planning) or

Master Recipes (Production Planning Process Industries)

Production Versions

Product Cost Collectors (Production Planning Repetitive

Manufacturing)
Quantity Structure is a key concept. It is a fundamental integration point
between Finance and Logistics modules. There are several components of
Quantity Structure namely:

In a product, a material master with a distinctive fit/form in a plant.

It contains many views such as Material Resource Planning (MRP) views,
accounting views and costing views. Procurement type and special
procurement are the two key fields in costing. The procurement field
refers to a material which is created internally, purchased or both.
Whereas special procurement refers to a material which is subcontracted, purchased from another plant.

Bill of Materials (BOM) is created for each internally produced

material. The BOM list contains the component materials and quantities
required to produce a semi-finished or finished well. Depending on the

price control with standard or a variable average price of the BOM

components, the material cost of the product is calculated.

A work center identifies a machine or work area where a production

process is performed. In addition to BOM, a routing is created to indicate
the processes necessary to produce a material. In production planning, a
routing has series of operations which also includes work centers and
activity quantities.

A master recipe is used for batch-oriented process manufacturing.

Rate routings and product cost collectors are used in repetitive
manufacturing. Product cost collectors are created for each production
version.
Production versions refer to a combination of a BOM and master recipe or
routing required for material production.

Step #4: Costing Run

A costing run is used to cost mass volumes of materials in a particular
company code. This allows a user to select materials, detonate quantity
structure, cost, analyze, mark and release.
Pre-requisites:

Material Masters (MRP, Accounting and costing views)

Quantity Structure (BOM, Master Recipe or Routing and

Production versions)

Condition types and production Information records

Configuration

CO Master Data

Materials are costed for the duration of the annual or monthly costing
process. To execute costing runs, analyze results, mark and release costs
transaction CK40N is used. This can be formed using controlling area,
costing version, costing variant, company code and transfer control.
Therefore, costing run can only be made for one company at a time. It has
also created for a specific range of date.
The costing run as 6 steps namely:

Selection

Structure Explosion

Costing

Analysis

Marking

Release
After executing each step, error log has to be reviewed and resolved.
Execute each and every step after resolving the errors. If in case the
results do not update after execution, press the refresh button.
Step #5: Actual Cost
This is determined by actual expenses, purchase price and conformed
production quantities. These costs are matched to the standard costs
through variance analysis to identify profitability and make decisions on
management.
Pre-requisites

Material Masters (MRP, Costing, and Accounting views)

Quantity Structure (Routers/Master Recipe, BOM, and

Production versions)

Configuration (WIP, Variance or settlement)

CO Master Data (Activity types, Actual and Primary and

secondary cost elements)
Assessment/Distribution Cycles, Actual Statistical Key Figures

The production confirmation includes product cost by order, actual

production yield, scrap, and activity quantities. The production costs are
composed of the production orders for review and settlement. In product
cost by period, product cost collectors are used to calculate WIP,
variances, and settlement instead of the planned orders.
In repetitive manufacturing, the quantities established based on the
target cost created on the valuation variant for WIP or scrap. In discrete
manufacturing, WIP is the dissimilarity between debit and credit of an
order.
The variance analysis of input and output side is offered by SAP Finance
training. Finally, we must settle our orders or product cost collectors.
Product Cost Collectors and orders are debited within actual costs during
production.