Calculation of Production Order in SAP and Variance using Material Ledger

Manufacturing and Overhead Variance

In this blog, we will discuss the product costing process, Production Order calculation and its variance using the Material Ledger in SAP S/4 HANA Finance.

For Production orders, variance can happen in the consumption of components or materials, consumption of activity types, substitutions on the shop floor, output quantity and so on. My aim is to show how the system captures the production variances using Material Ledger in the SAP S/4HANA system.

SAP Production order and Preliminary Costing

When you create a production order in SAP, the system automatically creates a planned cost estimate for that order called preliminary costing. Further, the system calculates the preliminary cost in accordance with the customizing settings in the default values for the order types.

The above image displays both the planned debits for Materials and internal activity allocations. Likewise, it shows the planned credits for goods receipt /delivery. The goods receipt value is based on the calculation of the planned output quantity multiplied by the output material standard price.

Simultaneous Costing

Simultaneous costing is the process of capturing actual costs for cost objects, such as manufacturing orders.

Even though we call this process Actual Costs, it is important to distinguish between this term and the Material Ledger term actual cost. In simultaneous costing, actual costs represent the actual quantity consumption but we still evaluate them at the standard price (both material and activity types are standard prices).

On the other hand, the Material Ledger actual costs concept is a periodic calculation. It allocates all the variances of raw material prices, manufacturing process, and overhead cost allocation to stock and consumption.

In this way, we can say that actual costs in the Material Ledger represent the actual quantity consumption value at actual prices.

In the next subsection, we will see examples that illustrate the production order’s actual cost concept.

Production Order Confirmation

Now that the production order has been created and released, we can begin allocating costs to them. We will start allocating costs with the process called confirmation. The confirmation registers the processing status of production operations and determines the following.

1. The work center in which the operation is carried out
2. Who performed the operation
3. Quantities of yield and scrap produced
4. The activity type quantity performed on the production order

Also Read: Preliminary Costing in Product Costing

Goods Issue to the Production Order in SAP

In this step, we will enter the consumption of material components into the production order in the system.

What happens when you consume the material components to produce another material?

The system updates the values of those material components as actual costs in the production order. This happens in accordance with the price control of the material master data (S or V).

In my example, all materials have price control S all material movement values are based on the standard price.

In the above image, you can see the system automatically proposes the movement type “261” goods issue for order as well as all the material components based on the production order information. For each line, I changed the suggested consumption quantity based on the production order information for actual consumption quantities.

Update in Material Ledger Analysis

Goods Receipt from Production Order

In this step, we will receive the material produced from the production order. What happens when you post a goods receipt from the production order? Here the material value you receive from the production process is updated as credit in the production order actual costs. The credit value is based on the material price control S or V. Since all our materials have price control S. Thus, the goods receipt value is equal to the quantity of material confirmed multiplied by the standard price.

In the above image, the system automatically proposes the movement type “101”. I.e. Goods receipt into the warehouse as well as the material in the order header.

Also read:- Bills of Material in SAP S/4HANA

SAP Production Order Actual Cost

We can see that there was variance, which occurs due to the revaluation of activity price and overhead at period end. We can settle this variance with Profitability analysis, Material Ledger & GL (General Ledger) also.

Settlement of Production variance In Material Ledger

Settlement of Production variance in Finance (FI)

In Controlling Profitability Analysis (CO-PA)

Read:- SAP S/4HANA Finance 2020 Training Details

EndNote

Hence we learnt how the product costing process works, the working of Production Order calculation and its variance. All this happens by using the Material Ledger. The SAP HANA Finance consultant should be well versed in this whole process to strategically execute this process.

For doing this, you must have a good understanding of SAP Controlling, Product Costing and Material Ledger. So that you can do this work efficiently.

Watch Video on YouTube:- Production Order Cost Calculation in SAP Product Costing

You may want to read:- An Overview of SAP MM