SAP Product Cost Planning – A Detailed Analysis

SAP Product Cost Planning

Product Cost Planning (CO-PC-PCP) is an area within Product Cost Controlling (CO-PC) where we can plan costs for materials without reference to orders. Here we can set prices for materials and other cost-accounting objects.

You can use Product Cost Planning to analyse the costs of your company’s 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 that it adds to a particular step in the production process?
• What is the proportion of the value you can attribute to a particular organizational unit?
• What is the cost of breakdown including primary costs or transfer prices?
• How high are the material, production and overhead costs?
• How can you improve production efficiency?
• Can you supply the product at a competitive price?

Organizational Structure

Materials are always vaulted at the valuation area level. You must perform Costing at the plant level. Consequently, you need to define the plant at the valuation level.

When you do this, the system creates a valuation area with the same name for each plant.

Client

A client is a self-contained unit in an SAP S4 HANA System with separate master records and its own set of tables.

Controlling Area

The Controlling Area represents a closed system used for cost accounting purposes. A controlling area may contain one or more company codes, which can operate in different currencies. All company codes within a controlling area must all use the same operational chart of accounts.

Company Code

It is the legal entity. It is the smallest organizational unit for which you can draw up a completely self-contained set of accounts for external reporting. This involves recording all relevant transactions and generating all supporting documents for financial statements such as balance sheets and profit and loss statements.

Valuation Area

You define the valuation level by specifying the level at which we evaluate the material stocks.

Plant

A plant is an organizational unit for dividing an enterprise according to production, procurement, maintenance and material planning.

Master Data in Product Cost Planning

Depending on the availability of master data from production planning (PP) SAP uses master data from the areas

• Controlling
• Cost Element
• Cost Center
• Statistical Key Figure
• Activity Types
• Material Master
• Production
• Bill of Material
• Work Center
• Routings
• Product Cost Collectors ( Repetitive Manufacturing)
• Purchase Order Info Records

Controlling- Cost Centres

Cost Centres collect costs for locations or departments with overhead costs. Overhead costs are costs which you can’t assign directly to the produced company output. (service or products) .

Controlling- Activity Types

Activity types describe the activity that a cost center produces and measures in units of time or quantity.

Controlling-Statistical Key Figures

Statistical key figures represent activities or statistics in a cost center, profit center or order. They are measured in units of time or quantity.

You create statistical key figures with maintenance transactions and post both plan and actual values to cost centers and orders. In CO, we use statistical key figures in assessment and distribution as allocation bases. These we use to calculate the debit on a receiver object. 

We may also use Statistical key figures for distributing, assessing or creating other statistical key figures. Unlike activity types, Statistical key figures that we cannot use to allocate internal activity. 

You may want to read: SAP Cost Object Controlling in Make-to-Stock Production

Material Master

Material master records contain all information needed for managing a material. The system arranges this data in views. Further, the views correspond to the user departments in the company where people use the material. For material costing, the costing, accounting and MRP views are particularly relevant.

The cost estimate access data in costing views of the material master record, in order to do the following:-

• Determine a price for externally-procured materials (in accordance with the valuation strategy for material valuation)
• Assign the material costs of a cost element using the valuation class.
• Find the currency and price unit of the cost estimate
• Establish parameters for the calculation of overhead for specific materials
• Determine a lot size for the cost estimate

The cost estimate accesses data in the MRP views of the material master record, in order to do the following

• Select parameters to determine BOM and routings ( material costing with quantity structure only) such as the BOM and routing or production version

Material costing provides the following information for the accounting view of the material master record 

• Standard prices for materials with standard price control
• Tax-based prices and commercial prices for inventory valuation 1,2,3
• Other planned prices 1,2,3

Costing-1 View

• The base unit of measure– The unit of measurement in which we manage the stocks of the material.
• Quantity structure indicator – It determines whether the material is usually costed using material costing either with or without a quantity structure.
• Whether the system searches for existing material cost estimates with or without quantity structure when the system transfers costing data.
• Material organ indicator– Determines whether the system updates the material number in addition to the cost element.
• No costing indicator
• Origin group– Used to separate material whose costs are updated under the same cost element for cost accounting purposes. If you enter origin groups in the relevant material master records, you can calculate overhead surcharges and production variances for each cost element/origin for example. You can’t analyse overhead surcharges at the origin group level in the unit cost estimate
• Overhead group– We use the overhead group while calculating overhead for a group of materials with the same conditions. Further, we assign the overhead group to an overhead key in Customising for Product Cost Planning. Also, we control the calculation of overhead via a costing sheet. When we create a costing sheet, we must ensure that it contains the corresponding overhead key.
• Variance Key- The variance key controls control parameters for the variance calculation. When you create an order for the production of the material, the system enters the variance key you specified here in the order master data.
• Plant-specific material status – It restricts the use of the material and determines the functions for which the system issues a warning or error message. You define whether the material status allows material costing in customizing for Logistics General or Product Cost Planning.

Costing view 2

In this view, you can find cost estimates and valuation information- similar to the accounting view. If you click on the Button Current you can access the standard cost estimate.

Accounting View -1

The accounting and costing views in the material master record contain price fields which you can access by costing to evaluate the materials and which you can update with the costing results.

Price Fields under SAP Product Cost Planning

Standard price

This information relates to future, current and previous standard cost estimates. We calculate the standard price by a standard cost estimate and write to the material master record when the system, releases the cost estimate. The standard price should not change during a planning period.

Further, when you create a costing view for the first time, you enter a provisional price. As soon as you mark the standard cost estimate, the system transfers the costing results to the material master as the future standard price.

Likewise, as soon as you release the standard cost estimate for the material this price becomes the current standard price, overwriting the current standard price.

Moving average price

The moving average price changes due to goods movements and invoice entries. The system calculates the price automatically by dividing the material value in the material stock account by the total of all warehouse stocks in a plant. Consequently, you cannot calculate the price via a material cost estimate.

Planned prices 1,2,3 with validity date from– You can either enter these prices manually or determine them using a material cost estimate and transfer the costing results as the other planned prices in the material master using the Price Update functions 

Tax-based and commercial prices 1,2,3- You can either enter these prices manually or determine them using a material cost estimate and transfer the costing results as tax-based and commercial prices in the material master using the Price Update functions

Valuation Class

Let’s say we have account determination in Customising for valuation and account assignment. So here the valuation class determines the G/L accounts to which the system has updated the costs with a valuation-relevant business transaction. Such as a goods issue.

For material costing, the valuation class controls the cost element to which the system assigns the planned costs for this material. Likewise, it also controls the cost element under which the system updates the actual costs when the material produced is delivered to stock.

Valuation category

The valuation category specifies the criterion according to which partial stocks are distinguished from one another. Valuation category B for example, differentiate the stock according to whether the material is an in-house production or procured externally.

Here, the system evaluates the In-house produced stocks differently from those procured externally. The value of the total stock equals the total of the stock values and stock quantities of the individual sub-stocks. With material costing a separate valuation of the stocks is possible only to a limited degree.

The stock of material with a split valuation

This type is carried out separately for each valuation type. They are consolidated in the valuation header record. The data calculated by the standard cost estimate is updated in this valuation header record and under the In-house valuation type if just one In-house valuation type was defined.

Price Control- The price control indicator specifies whether the system evaluates the stock of the material with the standard price or with a moving price. This is also applicable to every business transaction for material such as usage.

Price unit

Defines the number of units of measure to which the price in the material master record refers

Currency

Determined automatically from the company code.

Methods of Inventory Valuation in SAP Product Cost Planning

SAP offers two methods of inventory valuation and product costing:-

• Standard cost
• Moving average

Which method we have to use, we can identify at the material master level. Thus, different materials can use different methods within a plant. Although SAP does not restrict this choice, we typically use the moving average only on purchased materials. 

The decision to use a moving average for certain materials should reflect the approach used to analyse contribution margins and variances in manufacturing and purchasing. Using a moving average on purchased materials may be appropriate where the item is an easily obtained commodity with small fluctuations in cost. In such situations it minimizes the impact on margins, thus, reducing the need for formal variance analysis. 

From a practical point of view, here are some key differences and considerations that we see reflected in the system.

Demerits of Moving Average

• SAP has officially recommended not using moving averages for semi-finished and finished materials. The key point behind this recommendation is that the moving average may become distorted due to the timing of cost postings and settlements and the number of orders in progress for the same material.
• There is no variance calculation for materials carried at the moving average. Although this saves time during month-end, by definition this eliminates any analysis of price variances on raw materials and consequently on buyer performance.
• If we also carry (sub) assemblies at a moving average, it is extremely difficult to identify the source of fluctuating valuation since many materials in the BOM may contribute to it. Again, there is no variance calculation for analyzing manufacturing operations. Additionally, cost fluctuations will seriously impact margin analysis for items sold or transferred.
• In situations of rapid inventory turnover, the use of moving averages on assemblies may result in variance postings due to inadequate stock coverage to absorb settlement adjustments. Attempting to settle more often or automatically may not be feasible if we haven’t posted all costs.

Learn this subject in detail with: SAP FICO on S4 HANA Training