Last Updated on November 21, 2022 by Pradeep
What is SAP Product Costing?
Product Costing in SAP is a core module that relies on the correct setup of master data in logistics modules to create cost estimates. These cost estimates help plan and analyze costs and their different components.
(Article Updated: 25th May 2021)
What is for you in this article
Click on the link to directly jump over a specific topic.
- An Intro to the process of Product Costing
- Backbones of Product Costing
- Pre-requisites for Product Costing
- Product Costing Components
- Scenarios in Product Costing – EndNote
An Intro to Product Costing Process.
The result of using product costing is a standard price that you can release to the material master. Further, you can use this price for at least one period for the inventory valuation of those manufactured goods.
To use Product Costing in SAP and create cost estimates with quantity structure, you need to activate Material Management and Production Planning Modules.
Backbones of SAP Product Costing
- Product Cost Controlling
- Product Cost Planning
- Cost Object Controlling
- Master Data
- Unit Cost Estimate
- Costing Sheet
- Costing Variant
- Material Ledger
Prerequisites to use Product Costing in SAP
Apart from activating the MM and PP, there are some other requirements for applying Product Costing in SAP Controlling. These are as follows:
- Create the controlling area
- Then assign the company code to the controlling area
- Next, maintain the company code for Material Management
- Assign the Plant to the company code
- Also, create the valuation Classes in Material Management. These you need for the account determination of any material movement. You can assign these valuation classes in the automatic account determination process.
Also Read: Changes in Controlling in S/4HANA
Why do You need to Know SAP CO Product Costing?
Product Costing in SAP is the most important part of SAP Controlling. Thus, to know the controlling, you certainly need to know Product Costing. Moreover, if you wish to make a career in SAP Management Accounting, or if you want to upgrade your S/4HANA Finance profile with controlling knowledge, you must gain expertise on product costing in SAP.
Now, let’s go ahead and learn the components.
Learn: SAP S/4HANA Finance 2020 with Product Costing
Components of SAP Product Costing
- Master Data
- Cost Component Structure
- Special Procurement Key
- Costing Variant
- Costing Sheet
- Cost Estimate
Master Data in SAP
Master Data in SAP plays a very important role in the creation of cost estimates. Cost Estimates with Quantity structure rely on the correct setup of master data. When creating a cost estimate, the system checks the correctness of master data and indicates any error.
To calculate cost estimate through “product cost calculation with quantity structure”, we need to create some master data in SAP. These are as follows:
(a) Material Master
The Material Master in SAP contains several characteristics that have an impact on Product Costing. Those characteristics are stored in the Costing 1 view and Costing 2 view. To display the Costing 1 and Costing 2 tabs, go to Transaction MM03.
Related: SAP FI MM Integration
Characteristics of Material Master in SAP Product Costing
1. Do Not Cost
If the “Do Not Cost checkbox” is set, you cannot create any cost estimate (cost component split). Likewise, if the material is part of another cost estimate, you can evaluate the material with the price according to the valuation variant in the costing variant. Hence, no bill of material (BOM) or routing will be exploded.
I recommend that you select this checkbox due to performance reasons for trading goods and raw materials.
2. With Quantity Structure
The system will search for a cost estimate with a quantity structure. (Quantity structure means that a BOM, a routing, or a recipe exists during the costing/costing run). Noteworthy, if you’re working exclusively with cost estimates with quantity structure, you should select this checkbox to improve the performance.
3. Overhead Group
You can define the overhead group in the configuration. Further, you can define the overhead keys for overhead groups and can apply them in detailing the overhead rates.
4. Variance Key
The variance key allows the variance calculation. For all finished products (also semi-finished products) that are produced, you need to maintain a variance key. Surely, you can set the variance key as default in the production/process order, and you can overwrite it there.
5. BOM Usage
You need to maintain the BOM usage together with the alternative BOM. This is so if you need to overwrite the quantity structure control in the costing variant with the entries which you have maintained in the material master.
6. SAP Costing Lot Size in Material Master
The costing lot size corresponds to the quantity you want to create the cost estimate. To avoid rounding differences in the conversion of the standard price, the costing lot size should match the price unit.
Please note, that this Price unit is in the Accounting-1 tab in the material master in SAP.
7. Production Version
If you’re using multiple production versions in production, you can determine with which production version you can create the cost estimate. On the other hand, if you don’t maintain a production version in this field, the system would determine it with the help of the alternative selection in the MRP4 view in the material master.
8. Future/Current/Previous
The system saves the current (actual valid) cost estimate, the previous (last valid), and the future (next valid) cost estimate in those fields.
(b) Bills of Material in Product Costing in SAP
BOM contains the materials that you require for the production and their respective quantities. You can display BOMs with Transaction CS03.
Next, you can maintain the BOMs on the material level and plant levels. Additionally, you can maintain the BOM by its type. This BOM type defines the usage of the BOM.
Furthermore, the BOM has a header that you can see by clicking the top hat icon. In the header, you can see the base quantity of the product for which you created the BOM is created.
Finally, in the BOM, you see different items that represent the materials required for the production of the header material and their quantities. You can double-click on each item to see the item details of the material. For example, you can check whether component scrap is maintained. Component scrap increases material consumption in the cost estimate.
Related: SAP Product Costing Interview Questions
(c) Activity Type
The activity type is used to assess activities in production such as personnel hours or machine hours.
We plan the price of the activity type on the cost centre and activity type levels. In SAP Product Costing, we maintain the activity types in the routing/recipe and the cost center to the work center/resource.
You will learn about routings, recipes, and work centers/resources in the following sections.
You need to coordinate with production to know the units they use for the activities. I recommend that to avoid rounding differences, you should keep the units the same for production and Controlling (Activity Unit = H). It’s also easier for the analysis if you don’t have to convert the confirmed times. Surely, the cost center category (CCtr categories F) is important for the assignment of the cost center.
(d) Work Center
The work center in Production Planning or the Process Industry module represents the place where you do the work. You can display the work center with Transaction CR03. Additionally, both the work center and the resource display have a Costing tab.
(d.1) Cost Center
The cost center represents the place or department that is responsible for the production cost. Thus, if you create the Costing tab in the work center or routing, then the assignment of a cost center is mandatory. Please note that its various forms depend on the size of your organization. For example, production line 1, machine 1, and so on.
(d.2) Activity Overview Section
In the Activities Overview section, you need to assign activity types to the activities that the system maintains in the configuration for the work center.
Firstly, the system assigns every line to an activity type. Secondly, the system also checks whether there is a price plan for the combination of cost center (assigned to the work center/resource). Likewise, it also checks whether the activity type is maintained in the Activities Overview.
Importantly, if you will not assign any activity type to the single lines in costing, then you cannot calculate any cost for the single activity.
In addition to the activity type, you need to assign every activity to a formula. Now, this formula determines how the system calculates the value at the work center/resource with the routing times.
(e) Routing
The routing contains the activities that you need to perform to produce the product. You work with routings if you use the classic Production Planning module. To display a routing, you need to go to Transaction CA03.
The routing has different operations per activity. Noteworthy, every activity is linked to a work center.
Watch Slide to Know what’s new in Controlling in S/4HANA Finance 2020
Cost Component Structure
Cost component splits break down the cost of a material, process, or activity type. Consequently, the cost component structure determines which costs you should consider in the cost component split. We use the cost components for the analysis of the product cost in Product Costing and Profitability Analysis. Noteworthy, there’s a little strategy involved here. Before creating the cost component structure, you have to think about how you want to structure your cost of goods manufactured (COGM) in the best manner.
Every cost component has a detailed view that you can open by clicking the magnifying glass icon.
Also Read: Updates in SAP Profitability Analysis 2020
The details view defines in section control where only variable costs or fixed and variable costs are shown in the cost estimate. The usage of fixed and variable costs is optional. Further, the variable costs depend on the activity type. Likewise, its decrease or increase is dependent on the activities in the manufacturing process.
Also Read: WIP Configuration requirement in SAP
Special Procurement Key
The system maintains the special procurement key in the material master in the Costing 1 view. You can use the special procurement key to access cost estimates in another plant. For example, if you produce materials in Plant A but sell them from Plant B, you can display the costing in Plant B with the special procurement key. That too without creating all the master data that is required for the costing in Plant B.
Costing Variant
To create a cost estimate, you need to first create a costing variant. Though you can create different costing variants for different purposes. For example, to calculate standard prices, you should calculate commercial prices.
The costing variant determines the following main things:
- How we can evaluate the cost estimate
- Which master data do we need to evaluate (e.g., which BOM usage)
- Where we can release the price (e.g., standard price, plan price, etc.)
The costing variant is structured in different pieces:
- Costing type in SAP
- Valuation variant
- Date control
- Quantity structure control
- Transfer control
- Reference variant
Do Check: Preliminary Costing in Product Costing
Costing Sheet in SAP
To apply overhead rates such as overhead costs in the costing, you need to create a costing sheet in the SAP application. The costing sheet contains three components: calculation base, overhead rates, and credits.
Let’s examine each now and discuss how you can create them.
(a) Calculation base
The calculation base defines the cost base on which we apply the overhead rates. Likewise, the cost base is defined by cost elements, a cost element interval, or a cost element group. It is one of the main components of the Costing sheet in SAP.
(b) Percentage Overhead Rate
Overhead rates are created based on dependencies. These determine the characteristics that we can use to maintain the overhead rate. Subsequently, the different ways in which you can maintain overhead rates depend on your organizational structure and your cost component structure.
The Overhead Type defines the cost type (e.g., actual or plan) you want to apply the surcharge. Like Actual Overhead Rate, plan Over Head Rate & Commitment Overhead Rate.
(c) Credit
Credits define cost objects that get credited when the cost estimate gets debited with the overhead surcharges. Here, for the credit, you can maintain a cost center, internal order, or business process.
(d) Costing Sheet Rows
The costing sheet in SAP is arranged in costing sheet rows. The calculation base is on top of the costing sheet, and the surcharges refer to the basis by having an entry in the From and To Row columns.
You may be interested in: SAP Controlling Interview Questions
Cost Estimate in SAP Product Costing
It is the final result of the cost of a product which includes Material Cost, Different Activities Cost, and surcharge /Overhead Cost.
Refer to the image below.
Now that you’ve configured Product Costing in IMG settings, thus, now see how to run cost estimates. Noteworthy, it is an End User Activity.
Next, Use Tcode – CK11N.
(This Transaction Code CK11N user manual in SAP Application helps to create the Material Cost Estimate in SAP, and also prompts SAPLCKDI to run in the background which is a standard SAP Program. Please note, that this Tcode CK11N is part of the CK Package which is based on the R/3 Application for Product Costing).
Finally, Execute.
You may be interested in List of Imp. SAP FICO Tcodes and their use
You may be interested in: SAP CO Interview Questions & Answers
The list of components of SAP Product Costing is so big. It also involves a deep technical aspect. This is to say, to learn it entirely, you need to learn the subject thoroughly.
In the same way, to work on it in real time, you need to practice it practically. Thus, along with learning the basics, you should also focus on learning it practically. For this, you need a lot of practice and work. I am sure if you have a real interest in this subject, you sure can achieve your goal.
Product Costing Scenarios in SAP
This whole process of Product Cost calculation that I have explained is the scenario of Product Costing in SAP Controlling. It involves the calculation of the cost of production by using the production order (manufacturing order). If the production order is converted into complete status then we can calculate the variance. If it is there in the pending status, then in that current period we will calculate WIP.
Hence those who look for SAP product Costing Scenarios must understand that it’s the calculation that they need to learn here.
Read More: SAP FICO scenarios defining real-time issues
Related Video: Practical Overview of SAP Product Costing
