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product costing

This question has been Answered.

Prashanth Reddy
Aug 26, 2013 2:17 PM

Please Brefliy Explain the Product costing in sap.....

Correct Answer by krish S on Sep 5, 2013 12:59 PM

Dear Prashanth Reddy,


Please go through below subject about Product cost. and also refer below
links......!
. Product cost controlling (COPC)
a. Product cost planning
b. Cost object controlling
c. Actual costing / Material ledger
2. a. Product cost controlling (COPC)
Product Cost Controlling is concerned with all aspects of planning the cost of
producing products or services, as well as tracking and analyzing the actual
costs that are incurred in the production process. Product Cost Controlling
consists of the following components:
Product Cost Planning is used for preliminary costing and can answer the
following questions:
What will be the cost of producing a certain product or service?
Is external procurement less expensive than in-house production?
What are the costs of production, if we assume an ideal situation?
This estimate could then be used as a baseline against which we can
compare other "real world" production scenarios.
b. Cost Object Controlling focuses on tracking the actual direct costs of
production and the period end closing process.
Actual production costs are accumulated as raw materials are issued
and labor is performed. This information allows detailed comparisons
between the planned cost and the actual cost of any given production phase.
Period end closing procedures include the application of overhead
costs, calculation and posting of the value of goods still in production (work
in process), calculation of variances between standard and actual costs, and
settlement of variances to the CO-PA, EC-PCA and FI modules.
c. Actual Costing / Material Ledger is used to calculate actual costs for
each material at the end of the period. Materials and their movements are
valued with a standard price during the period. Any variances from this
standard are collected in the material ledger when invoices are received or
orders settled. During period end closing these variances are used to
1.

calculate an actual price for the material in the closed period. Postings can
be made in FI to reflect this price.
a. Product Cost Planning refers to the creation of cost estimates for the
production of goods or services. If a quantity structure (Bill of Material and
routing) is available in the PP (Production Planning) module of the R/3
system, you can create a cost estimate automatically using the PP data. If no
quantity structure is available in R/3, the cost items can be entered manually
by means of unit costing, or can be transferred automatically from a non-SAP
system using batch input.
A Bill Of Material (BOM) is a complete, formally structured list of the
components that make up a product or assembly. The list contains the
material number of each component, together with the quantity and unit of
measure. The components are known as BOM items. A BOM can include
materials that have their own BOMs.
The work center is the physical location at which an operation is carried
out. When the master record for a work center is created in PP, it is linked to
a cost center, and also the various activity types produced by the cost
center. This link allows access to the activity type unit prices, which are used
in valuing labor (or machine time) supplied by the cost centers in a
production process.
The Routing lists the specific steps required to manufacture a product.
These "steps" are called operations. The routing specifies the following for
each operation:
the work center which carries out the operation
the default values used for calculating dates, capacities and production
costs
whether the costs of an operation are taken into account for costing
The material components needed to carry out an operation.
a. b. In Cost Object Controlling, the costs incurred in the production of

a product or service are collected on a cost object (such as a


production order). Various types of cost objects can be used,
depending on your controlling requirements. These include production
orders, sales orders, process orders or product cost collectors. Cost
Object Controlling also provides tools for calculating Work In Process,
scrap costs, and variances at period end close.
Cost Object Controlling includes three principal steps:
1.
Preliminary costing of the cost object,
2. Simultaneous costing, and
3.
Period-end closing.
1. 1.Preliminary costing refers to the calculation of planned costs for a
cost object, such as a production order. Planning variances can be
determined by comparing the results of preliminary order costing with

the standard cost estimate for the quantity of material to be produced


with the order.
1. 2. In Cost Object Controlling, as quantities of raw materials are issued
for use in a production scenario, either from inventory or from external
purchase, their value is accumulated on the appropriate cost object
(such as a production order). Similarly, as an activity type is
performed in the production scenario (such as hours of direct labor),
the cost of that activity is also accumulated on the cost object. This
process is termed simultaneous costing. It refers to the posting of cost
to a cost object by the same transaction that documents the material
issue or activity completion. (The transaction that is used to document
the completion of units of an activity is called a confirmation.) The
simultaneous costing concept may sometimes be referred to as
valuation of quantity flows to a cost object.
1. 3.Period-end closing refers to a series of tasks performed at the end of
each accounting period. This includes calculating applicable overhead
costs, calculation of work in process (WIP), calculation of variances,
and settlement (which passes information to Financial Accounting,
Profit Center Accounting, and Profitability Analysis).
Various standard reports are provided to analyze the costs posted to
cost objects. n
c. Actual Costing is used to calculate actual product costs at period
end close. The result may be transferred to the material master as a
weighted average price for the closed period. The values connected
with material movements are collected in the Material Ledger. Both
single-level settlement and multi-level settlement functions are
available to calculate the actual material costs at period end close.
Actual Costing uses the Material Ledger to store material prices in up
to three currencies and according to three valuation strategies (group, legal
and profit center).
Actual Costing aims to provide the actual costs for each material at
period close. Each material movement is recorded in the Material Ledger
together with the preliminary valuation and any variance (from invoice or
order settlement). Material settlement is used to integrate this variance into
the material price at period close.
Both single -level and multi-level material settlement are available.
Multi-level settlement is used to reconstruct the quantity structure based on
the material movements for the period, and assign variances for the raw
materials to the finished and semi-finished products as follow-up costs.
The actual price for each material can be updated to the material
master for the closed period.
Profitability management
o
Profitability analysis (COPA)
a.

Profit center accounting

Profitability Reporting:
Profitability Analysis (CO-PA) lets you analyze the profitability of
segments of your external market. These segments can be defined according
to products, customers, geographic areas, and numerous other
characteristics, as well as your internal organizational units such as company
codes or business areas. The aim is to provide your executive management,
sales, marketing, planning, and other groups in your organization with
decision-support from a market-oriented viewpoint.
Profitability Analysis (CO-PA) enables you to analyze profits and
contribution margins for market segments of your company. The objective of
CO-PA is to support sales, product management, and corporate-wide
planning and decision-making, using an external view from a marketoriented perspective.
Responsibility Reporting:
Profit Center accounting (EC-PCA) lets you analyze internal profit and loss for
profit centers. This makes it possible for you to evaluate different areas or
units within your company. You can structure profit centers according to
region (branch offices, plants), function (production, sales), or product
(product groups, divisions). Profit Center Accounting is a component of the
"Enterprise Controlling" module.
A profit center is a management-oriented organizational unit used for
internal controlling purposes. Dividing your company up into profit
centers allows you to analyze areas of responsibility and to delegate
responsibility to decentralized units, thus treating them as "companies
within the company". EC-PCA lets you set up your profit centers
according to product (product lines, divisions), geographical areas
(regions, offices or production sites) or function (production, sales).
Profit
The Information System provides a tool for evaluating plan and actual
data. Numerous standard reports are provided, and you can create
your own custom reports as well. Reports can be executed for Profit
Centers or Profit Center groups. Profit Center Accounting can report on
selected balance sheet items, such as Assets, AR/AP, Material
Inventory, and Work in Process. This permits the calculation of certain
financial key ratios such as ROI (Return on Investment). Other
reporting capabilities include detailed information on the source
objects (e.g. cost centers, internal orders) that contributed costs
posted to profit centers.
Methods of Profitability Management Two accounting methods can be
used for generating profitability statements:
The cost-of-sales method and the period accounting method.
Applying either method to a given set of business transactions under a
given set of accounting standards should yield the same bottom-line

result (profit), in concept. The difference is in how the overall profit


and loss picture is presented.
Companies must choose one of these methods for generating their
external income statements. The choice is often determined by
country-specific legal requirements. However, the methods facilitate
two different types of analyses, both of which a company may find
useful. So it may be worthwhile to track information in both ways for
internal profit reporting.
Cost-of-sales accounting: With this method, the emphasis is on
matching the revenues for goods and/or services provided (the value
that a company receives as a result of sales) against the related
costs/expenses for those items (the value that is lost when products
are transferred out of the company). This accounting method provides
profit and loss information in a manner that is particularly effective for
various margin analyses. Consequently, it is especially useful for the
sales, marketing, and product management areas.
Period accounting: With this method, the emphasis is on
summarizing productive activity through changes in the value of
certain asset categories over the course of a period, for a given
organizational unit. This accounting method presents the revenues
that have been recognized for the period, and also the various period
costs/expenses (such as personnel costs, depreciation, etc.). But it
also includes the changes for the period in inventory value, work-inprocess, and fixed assets. As such, it is useful as a measure of
productivity for profit centers.
LInks:
http://help.sap.com/printdocu/core/print46c/en/data/pdf/COPCIS/COPCIS.pdf
http://help.sap.com/printdocu/core/Print46c/en/data/pdf/COPCPCP/COPCPCP.p
df
http://help.sap.com/printdocu/core/print46c/en/data/pdf/ides/idescopc/idesco
pc.pdf
Best Regards,
Krish.
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Re: product costing

Srinivas Salpala Aug 27, 2013 11:04 AM (in response to Prashanth Reddy)

Hi Prasanth,
Its very basic query and you can find lots of information by googling.
Go through the below thread, where I have given some basic points on Product costing.
http://scn.sap.com/message/14097664
Also, refer the below blog for better understanding:
http://scn.sap.com/community/erp/financials/controlling/blog/2013/01/02/5-steps-to-understandingproduct-costing-part-1-cost-center-planning
In the above link, you can find the other continuous links for other areas of product costing.
BR, Srinivas Salpala

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Re: product costing

ABAYOMI FOLARIN Aug 27, 2013 6:55 PM (in response to Srinivas Salpala)
hello Guys,
I really do need an assistance on budget cockpit for my costing analysis.
regards.

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Re: product costing

Prashanth Reddy Sep 8, 2013 2:17 PM (in response to Srinivas Salpala)


Thunks for the information

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Re: product costing

vinod siricilla Sep 4, 2013 3:58 PM (in response to Prashanth Reddy)


Hi Prashanth,
In SAP Controlling module, there are 2 important and vast sub modules are there:
1) Product Costing (COPC)
2) Profitability Analysis (COPA)
Product Costing :where you can plan costs for materials without reference to orders and set prices for materials and
other cost accounting objects.
You can use Product Cost Planning to analyze the costs of your companys products such as:

Manufactured materials
Services
Other intangible goods

You can analyze costs to help provide answers to questions such as:
What is the value added of a particular step in the production process?

What proportion of the value added can be attributed to a particular


organizational unit?

o
o

What is the cost breakdown including primary costs or transfer prices?

How high are the material, production, and overhead costs?

How can production efficiency be improved?

Can the product be supplied at a competitive price?

This is the overview about Product costing, let me know if you need any specific information on the
same.
Regards,
Vinod

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Re: product costing

Trinath Gujari Sep 5, 2013 6:24 AM (in response to Prashanth Reddy)


Dear Prashanth,
Product costing means costing done for product at process order which include BOM and routing
it is an integration with FI-MM-SD-PP start product costing following thing are required
1) MM : Material Master
Create one Finished Material
Create one Semi finish material
Create two Raw Materials
note that FMG & SFMG should be Standard Price for costing where as
Raw material should be variable Price all above material should be costing 1 & 2
should be activated all material
2) CO:
1) Create one Secondary Cost Element for example :"Machine"
with cost element category as "43 - internal activity allocation "
2) Create Activity type for Machine
1) setup
2) Labour etc.
3) Create one Production Cost Center and two more cost center for allocation
3) PP:
1) Create Work Center attached cost center along with Activity type as mentioned above
2) Create BOM for Finished material which include Sfm & two Raw material
3) Create Routing for Finished material and mentioned work center in operation
4) Co:
1) Run Cost Estimate through CK11N / CK40N
2) Marked and release the cost estimate

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5) PP: Create one Process Order with Qty and activity unit
Confirm the Process order with goods movement 261 with accounting entry
(consumption a/c Dr to Stock Cr )
6) MM : kindly Create Goods receipt through movement type (101) through Migo
Hope this may help you to under stand the process
Thanks
Trinath

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Correct AnswerRe: product costing

krish S Sep 5, 2013 12:59 PM (in response to Prashanth Reddy)

Dear Prashanth Reddy,


Please go through below subject about Product cost. and also refer below
links......!
. Product cost controlling (COPC)
a. Product cost planning
b. Cost object controlling
c. Actual costing / Material ledger
2.
a. Product cost controlling (COPC)
Product Cost Controlling is concerned with all aspects of planning the cost of
producing products or services, as well as tracking and analyzing the actual
costs that are incurred in the production process. Product Cost Controlling
consists of the following components:
Product Cost Planning is used for preliminary costing and can answer the
following questions:
What will be the cost of producing a certain product or service?
Is external procurement less expensive than in-house production?
What are the costs of production, if we assume an ideal situation?
This estimate could then be used as a baseline against which we can
compare other "real world" production scenarios.
b. Cost Object Controlling focuses on tracking the actual direct costs of
production and the period end closing process.
Actual production costs are accumulated as raw materials are issued
and labor is performed. This information allows detailed comparisons
between the planned cost and the actual cost of any given production phase.
Period end closing procedures include the application of overhead
costs, calculation and posting of the value of goods still in production (work
in process), calculation of variances between standard and actual costs, and
settlement of variances to the CO-PA, EC-PCA and FI modules.
c. Actual Costing / Material Ledger is used to calculate actual costs for
each material at the end of the period. Materials and their movements are
1.

valued with a standard price during the period. Any variances from this
standard are collected in the material ledger when invoices are received or
orders settled. During period end closing these variances are used to
calculate an actual price for the material in the closed period. Postings can
be made in FI to reflect this price.
a. Product Cost Planning refers to the creation of cost estimates for the
production of goods or services. If a quantity structure (Bill of Material and
routing) is available in the PP (Production Planning) module of the R/3
system, you can create a cost estimate automatically using the PP data. If no
quantity structure is available in R/3, the cost items can be entered manually
by means of unit costing, or can be transferred automatically from a non-SAP
system using batch input.
A Bill Of Material (BOM) is a complete, formally structured list of the
components that make up a product or assembly. The list contains the
material number of each component, together with the quantity and unit of
measure. The components are known as BOM items. A BOM can include
materials that have their own BOMs.
The work center is the physical location at which an operation is carried
out. When the master record for a work center is created in PP, it is linked to
a cost center, and also the various activity types produced by the cost
center. This link allows access to the activity type unit prices, which are used
in valuing labor (or machine time) supplied by the cost centers in a
production process.
The Routing lists the specific steps required to manufacture a product.
These "steps" are called operations. The routing specifies the following for
each operation:

the work center which carries out the operation

the default values used for calculating dates, capacities and


production costs

whether the costs of an operation are taken into account for


costing

The material components needed to carry out an operation.


a.

b. In Cost Object Controlling, the costs incurred in the


production of a product or service are collected on a cost object (such
as a production order). Various types of cost objects can be used,
depending on your controlling requirements. These include production
orders, sales orders, process orders or product cost collectors. Cost
Object Controlling also provides tools for calculating Work In Process,
scrap costs, and variances at period end close.

Cost Object Controlling includes three principal steps:


1.
Preliminary costing of the cost object,
2. Simultaneous costing, and
3.
Period-end closing.

1.

1.Preliminary costing refers to the calculation of planned costs


for a cost object, such as a production order. Planning variances can
be determined by comparing the results of preliminary order costing
with the standard cost estimate for the quantity of material to be
produced with the order.

2.

2. In Cost Object Controlling, as quantities of raw materials are


issued for use in a production scenario, either from inventory or from
external purchase, their value is accumulated on the appropriate cost
object (such as a production order). Similarly, as an activity type is
performed in the production scenario (such as hours of direct labor),
the cost of that activity is also accumulated on the cost object. This
process is termed simultaneous costing. It refers to the posting of cost
to a cost object by the same transaction that documents the material
issue or activity completion. (The transaction that is used to document
the completion of units of an activity is called a confirmation.) The
simultaneous costing concept may sometimes be referred to as
valuation of quantity flows to a cost object.

3.

3.Period-end closing refers to a series of tasks performed at the


end of each accounting period. This includes calculating applicable
overhead costs, calculation of work in process (WIP), calculation of
variances, and settlement (which passes information to Financial
Accounting, Profit Center Accounting, and Profitability Analysis).

Various standard reports are provided to analyze the costs posted to


cost objects. n
c. Actual Costing is used to calculate actual product costs at
period end close. The result may be transferred to the material master
as a weighted average price for the closed period. The values
connected with material movements are collected in the Material
Ledger. Both single-level settlement and multi-level settlement
functions are available to calculate the actual material costs at period
end close.
Actual Costing uses the Material Ledger to store material prices in up
to three currencies and according to three valuation strategies (group, legal
and profit center).
Actual Costing aims to provide the actual costs for each material at
period close. Each material movement is recorded in the Material Ledger
together with the preliminary valuation and any variance (from invoice or
order settlement). Material settlement is used to integrate this variance into
the material price at period close.
Both single -level and multi-level material settlement are available.
Multi-level settlement is used to reconstruct the quantity structure based on
the material movements for the period, and assign variances for the raw
materials to the finished and semi-finished products as follow-up costs.
a.

The actual price for each material can be updated to the material
master for the closed period.
Profitability management
o
Profitability analysis (COPA)
o
Profit center accounting
Profitability Reporting:
Profitability Analysis (CO-PA) lets you analyze the profitability of
segments of your external market. These segments can be defined according
to products, customers, geographic areas, and numerous other
characteristics, as well as your internal organizational units such as company
codes or business areas. The aim is to provide your executive management,
sales, marketing, planning, and other groups in your organization with
decision-support from a market-oriented viewpoint.
Profitability Analysis (CO-PA) enables you to analyze profits and
contribution margins for market segments of your company. The objective of
CO-PA is to support sales, product management, and corporate-wide
planning and decision-making, using an external view from a marketoriented perspective.
Responsibility Reporting:
Profit Center accounting (EC-PCA) lets you analyze internal profit and loss for
profit centers. This makes it possible for you to evaluate different areas or
units within your company. You can structure profit centers according to
region (branch offices, plants), function (production, sales), or product
(product groups, divisions). Profit Center Accounting is a component of the
"Enterprise Controlling" module.

A profit center is a management-oriented organizational unit


used for internal controlling purposes. Dividing your company up into
profit centers allows you to analyze areas of responsibility and to
delegate responsibility to decentralized units, thus treating them as
"companies within the company". EC-PCA lets you set up your profit
centers according to product (product lines, divisions), geographical
areas (regions, offices or production sites) or function (production,
sales).

Profit

The Information System provides a tool for evaluating plan and


actual data. Numerous standard reports are provided, and you can
create your own custom reports as well. Reports can be executed for
Profit Centers or Profit Center groups. Profit Center Accounting can
report on selected balance sheet items, such as Assets, AR/AP,
Material Inventory, and Work in Process. This permits the calculation of
certain financial key ratios such as ROI (Return on Investment). Other
reporting capabilities include detailed information on the source
objects (e.g. cost centers, internal orders) that contributed costs
posted to profit centers.

Methods of Profitability Management Two accounting methods can be


used for generating profitability statements:
The cost-of-sales method and the period accounting method.
Applying either method to a given set of business transactions under a
given set of accounting standards should yield the same bottom-line
result (profit), in concept. The difference is in how the overall profit
and loss picture is presented.
Companies must choose one of these methods for generating their
external income statements. The choice is often determined by
country-specific legal requirements. However, the methods facilitate
two different types of analyses, both of which a company may find
useful. So it may be worthwhile to track information in both ways for
internal profit reporting.
Cost-of-sales accounting: With this method, the emphasis is on
matching the revenues for goods and/or services provided (the value
that a company receives as a result of sales) against the related
costs/expenses for those items (the value that is lost when products
are transferred out of the company). This accounting method provides
profit and loss information in a manner that is particularly effective for
various margin analyses. Consequently, it is especially useful for the
sales, marketing, and product management areas.
Period accounting: With this method, the emphasis is on
summarizing productive activity through changes in the value of
certain asset categories over the course of a period, for a given
organizational unit. This accounting method presents the revenues
that have been recognized for the period, and also the various period
costs/expenses (such as personnel costs, depreciation, etc.). But it
also includes the changes for the period in inventory value, work-inprocess, and fixed assets. As such, it is useful as a measure of
productivity for profit centers.
LInks:
http://help.sap.com/printdocu/core/print46c/en/data/pdf/COPCIS/COPCIS.pdf
http://help.sap.com/printdocu/core/Print46c/en/data/pdf/COPCPCP/COPCPCP.p
df
http://help.sap.com/printdocu/core/print46c/en/data/pdf/ides/idescopc/idesco
pc.pdf
Best Regards,
Krish.

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Re: product costing

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Praveen Chirakkel Sep 5, 2013 7:52 AM (in response to Prashanth Reddy)


Hi
Product Costing, part of the Controlling module, is used to value the internal cost of materials and
production for profitability .
For simple understanding of Product Costing you can go through below link.
http://scn.sap.com/community/erp/financials/controlling/blog/2013/01/04/5-steps-to-understandingproduct-costing-part-5-actual-costs
http://www.slideshare.net/rshanbhag/product-costing-in-sap-a-primer
Regards
Praveen