Understanding the concept of product

costing and how it’s done in SAP?

What is Product costing?

Estimating the cost of a product is referred as product costing. Now in order to estimate cost of any product, below
information is needed

 What materials and in how much quantity are consumed in producing finished good? List of all the materials
which are consumed is referred as Bill of Materials (BOM).
 How much is the making cost in producing finished product? Making cost comes from activities that are being
performed on materials to produce finished product. Each and every activity which is performed has cost
associated with it. Hence if we calculate cost of each activity and add it up, we will arrive at making cost of
finished product.

Each activity might have different cost associated with it. Hence making cost of finished product depends upon which
activity is performed in how much quantity in producing finished product. Hence, adding up the cost of various
activities in order to arrive at making cost of finished product is referred as Activity Based Costing.

Maintaining the list of all the activities and their respective quantities which are performed in producing finished
product is referred as Routing.

 How much is the overhead cost in producing finished product. Overhead cost is the indirect

cost which is involved in producing finished product. Example of overhead cost Electricity, Wifi, cleaning cost,
telephone bills etc.

Let’s say that over the years of experience, business has learned that overhead cost is normally 1% of material cost
and .5% of making cost. Hence overhead cost is calculated by applying certain % on material cost and similarly on
making cost.

Hence for calculating overhead cost, we can use a formula which will calculate overhead by applying certain % on
material cost and certain % on making cost. This kind of formula is referred as Costing Sheet.

Hence to estimate cost of a finished product, we need to create BOM, Routing and Costing sheet.

Material is created by SAP MM team.

BOM and Routing is created by SAP PP team

Costing sheet is created by finance team.

Let’s say Bom, Routing & Costing sheet is created. Then in order to estimate the cost of finished product, we need to
execute cost estimate run. The estimate run picks up the list of materials consumed from BOM, picks up the list of
activities from Routing and calculates overhead cost using Costing sheet.

Output of cost estimate run is, estimate cost of finished product divided at lower level. Total cost of finished product
is broken down at lower level for analysis purpose. These broken down lower level of Cost is referred as Cost
Component.

In our example, total cost can be broken down into lower levels (cost components) like Material cost, Making cost &
overhead cost. These cost components add up to make cost of finished product.

Defining the cost components into which total cost estimate is to be broken down is referred as Cost Component
Structure.

Let’s understand the above concepts along with example:

Let’s try to do cost estimate for finished product “CARROT Halva”.

Suppose for producing 1kg of Carrot Halva, estimated material consumption is Milk (1 liter), Sugar (.5 kg), Carrot
(1kg), Ghee (.2kg) and Dry fruits(.2 kg).

Activities involved for producing 1 kg of Carrot Halva are Cutting (crushing the carrot) and then heating the material
for cooking.

Overhead is 2% on raw material cost.

Above picture shown BOM for 1 kg of finished project “Carrot Halva”.
 Above is routing

Above is the costing sheet showing material overhead is 2%

How costing sheet is defined and used will be covered in detail in later articles. As of now let’s just say that material
overhead is 2% on raw material cost.

Below screenshot showing cost component structure

Above cost component structure ‘GH’ showing total cost is to be broken down into three components namely Raw
material, Making cost and Material overhead

Below is the output of cost estimate run:

Above screen showing, total estimated cost of producing 1 kg of carrot halva is 457.6 INR.

Cost of items involved is as shown below:

 product costing overview

Let’s focus on work of SAP FICO consultant

in product costing.
As discussed above, cost component structure is created by finance team.
As shown above, different cost accounts need to be mapped to respective cost components. As a result when cost
estimate is run, cost is clubbed in respective cost components as specified in cost component structure.

As discussed above, costing variant is maintained by FICO consultant. Let’s understand what is the use of costing
variant? Costing variant provides answer to below questions:

What is the purpose of cost estimate run?

How values will be arrived for material, activities, subcontracting and external processing?

Which costing sheet is going to be used for overhead calculation?

Which dates to be defaulted when running cost estimate run? E.g. Costing from date, costing to date etc.

There can be multiple BOM and multiple Routing. Which BOM and Routing to use when running cost estimate run?

How cost estimate is updated in

material master as standard cost?
Below steps to be executed to update cost estimate in material master:

1. Cost estimate run:

Run estimate run is executed so that cost estimate is calculated using costing variant. If cost estimate is calculate
correctly (without any error), calculated cost estimate is saved.
 2. Marking:

Marking refers to updating calculated cost estimate in material master as future standard cost.

As shown in above picture, as a result of marking future cost is updated in material master.

3. Release:

Release refers to making future cost as current cost estimate and current cost become previous cost.

What happens when estimated cost is updated in

material master as standard cost?
When new standard cost is updated in material master, existing inventory is revalued at new standard cost. The
difference arising out of revaluation is posted (finance document) in account books.
Existing quantity of material 1476 is 7000

Previous standard cost was 557.6

Hence, inventory value = Quantity (7000) X Standard cost (557.6) = 3,90,3200

When release happen, future price is updated as current standard cost.

New standard cost is 457.6

New inventory value = Quantity (7000) X Standard cost (457.6) = 3,20,3200

Hence value of inventory is reduced by 7,00,000

As a result of revaluation, below document is posted automatically:

Since above document is posted automatically, hence system needs to be provided with GL accounts to be picked for
posting. This account determination is done in T code: OBY6

What is the use of standard cost which

is updated in material master?
Use of standard cost in purchase order:
When good receipt (GR) is done, then below document gets posted.
As you can see, any difference between purchase price and standard price is posted to price difference account.
(Assuming material is maintained at standard price and not at moving average price)

If price difference account is posted with big value then it reflects that purchase department has procured material at
significantly high price than it should have done. Hence, price difference account balance reflects efficiency of purchase
department.

Finance controller runs report of price difference account every month and check if purchases are being made at
reasonable prices.

This way standard cost is helping in cost controlling.

Use of standard cost in sales order:

You can see above, material as well as Cost of goods sold (COGS) is valued at current standard cost.

Later on customer invoice is posted as below:

Revenue is booked 1000

COGS booked is 457.6

These help in arriving at profit margin (Revenue – Expenses)

Use of standard cost in production order:

During manufacturing, cost is accumulated in production order and compared with target cost to check the efficiency
of production. High production variance means cost of production is too high as compared to target cost. Production
variance is important for cost control purpose. Production variance is getting calculated by using standard cost.

Best practices followed in product

costing?

Standard cost is updated at start of the year for the whole

year.
For all the materials which are maintained at price control “s”, standard cost is updated at the start of year and is valid
for the entire year.

Cost valid from date: First day of the fiscal year

Cost valid to date: Last day of fiscal year

Only in case of fast moving consumer goods (where prices keep changing frequently), there is need to updated
standard cost of material every month. (Valid from 1st day of month to last day of month)

Cost estimate run, Marking, Release is performed at

different dates.
Let’s say new standard cost is to be updated from 1st day of the new fiscal year.

Consider a finished good which might be composed of hundreds of raw material. For finished good costing to happen,
all the involved raw materials should have standard cost. Hence before we do standard costing of finished good, we
should have completed standard costing of all the raw materials involved.
SAP CONTROLLING – PRODUCT
COSTING PART-1
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PRODUCT COST PLANNING

In General,

Material cost comprises:

1. Material Cost.
2. Direct OH (Conversion cost)

The resources which are directly involved in the production to convert raw material into finished product.

3. Indirect OH.

It is nothing but Service department Cost.

PROCESS OF COST DETERMINATION:

1. Production dept. gives the Bill of Material and Process sheet.

 BOM contains the list of components of raw materials with quantities required to produce the product.
 Process sheet contains the process steps which is nothing but
The production department designs all the above process steps and the finance dept. prepare budget or resource
rate for the specific activity.

Material cost is arrived through bill of material (Qty’s * Price).The price is taken from the purchasing department.

Conversion cost is the cost of all the activities directly involved in the production which is specified in the above
Routing.

OBJECTIVES OF PRODUCT COSTING:

 To determine cost of a product or service.

 To determine detailed cost of a Product.
 Managerial decision making.
 Valuation of Inventory and WIP.etc.

COMPONENTS OF PRODUCT COSTING:

Overview:

1. Product Cost Planning:

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

 To determine cost estimate of the product.(Standard price)

We can use this price for valuation of Inventory.

Configuration Required;

1. Cost component Structure. (OKTZ)

 It gives the breakup of cost of the product.
2. Costing Sheet. (KZS2)
 To Calculate the Indirect Overhead.
3. Costing Variant for standard cost estimate. (OKKN)

Control parameters:

 Costing type
 Valuation Variant.
 Date control.
 Quantity structure Control.
 Transfer control.
 Reference variant.
2. Cost Object Controlling:

It comprises:

1. Calculation of plan cost and Actual cost for Order.

Config. required:
  Costing variant for plans.(costing type 06)
 Costing variant for Actuals.(costing type 07)
2. Period end Process.

It contains the following Activities.

 Revaluation of Activities.
 Actual overhead calculation.
 CO Production settlement(Distribution of costs between main product and Byproduct)
 WIP calculation.
 Variance Calculation.

Cost Object Controlling (Scenarios):

1. Product cost by order.

 Production order.
 Process order.
 Controlling production order.
2. Product cost by period. (Product cost collector)
3. Product cost by Sales order.

INTEGRATION OF PRODUCT COSTING WITH LOGISTIC MODULES:

With Production planning:

Integration points are:

 In PP, Order type will be assigned to Settlement profile.

 Result Analysis key.
 Costing variant for plan and actuals.
 In case of PP master data point of view. Work center comprises cost centers and activity types.

Work center: (CR01)

It refers to a place where tasks or Activities are performed. It represents the place, or machines, or group of machines
or combination of any of them etc.

Routing:

It contains sequence of operations. And for each operation, it specifies on which work center to be performed and on
what activities to be performed and planned execution time for them.

 Routing is defined at material and plant combination.

Product Cost Planning

Elements:

 Quantity structure Control.

It specifies the priority of sequence of which BOM and Routing to be used in the cost estimate of the product. The
quantity structure control can apply to either a specific plant or to all plants. You enter the quantity structure control in
the costing variant. When the cost estimate is created, the system selects the quantity structure control ID through
the costing variant.

When you create a cost estimate for a material, you always use a costing variant. This variant is the link between the
cost estimate and the quantity structure control.

When determining the BOM and routing, the system also checks the following:

 Whether the BOM and the routing are valid on the quantity structure date
 Whether the lot size in the BOM and in the routing are the same as the costing lot size

If, for example, the system finds a BOM according to the parameters in the quantity structure control, but this BOM
has a lot size or validity period that does not correspond to the cost estimate, the BOM is ignored. The system
continues searching for a BOM using the next selection criteria until it finds one that is valid.

A material can be represented in various alternative BOMs. You can specify that a particular BOM alternative be used
for the cost estimate at a certain date.

Bill of material:

The priority is defined based on the usage of the Bill of material.

Usage: Specifies the application areas for which the BOM is used. When creating the BOM, we will specify the
usage.
  If we have multiple BOM’S in the same application area or with same usage number, then system picks the
first BOM.
 In case you want to pick a specific BOM, then you need to specify that BOM in the alternative selection of
Multiple BOM’S.

Routing:

The priority is defined with the combination of Task list type, Usage and status.

Task list type: It specifies the type of Routing.

Status: Released etc.

1. Date Control:

It specifies

 Validity of the cost estimate.ie.The cost estimate is valid from which date to which date.
 Which date BOM and Routing to be used in the cost estimate of the product.
 Which date price to be used in the cost estimate of the product.
Costing date from:

It could be either 1.Past Date

2. Future Date
3. Current Date.
1. Past date: If it is past date, we can generate the cost estimate but not possible to save the cost estimate. It
is not possible to mark and release the cost estimate.
2. Future date: It is possible to generate, save and mark the cost estimate. It updates material master costing 2
tab future price. It is not possible to release the cost estimate. It is possible to release the estimate once it
reached to the future date.
3. Current date: It is possible to Generate, save, mark and release the cost estimate.

Quantity structure Date: It specifies which date BOM and Routing to be used.

Valuation Date: It specifies which date price to be used.

Determines the validity of the cost estimate and for costing date to, minimum date should be until the end of the fiscal
year and max is unlimited. This is because system requires for the calculation of the variance.

Note:

1. Qty. structure date should be always to be dependent on Costing Date from date.
2. Valuation date should be always to be dependent on Costing Date from date.
 3. If you select manual entry, you can overwrite the date control values in frontend CK11N while executing the
cost estimate.

Marking Standard Cost

Estimates
To transfer the results of a standard cost estimate as the standard price in the material master, you must mark and
release the standard cost estimate.

You can mark the following:

 One or more standard cost estimates

 More than one standard cost estimate within one costing run

When you mark a standard cost estimate, the costing results are written to the costing view of the material master as
the future planned price.

Prerequisites:
 Marking the standard cost estimate has been allowed. The marking allowance specifies the company code
and period in which you can mark a standard cost estimate with a given valuation variant and costing
version. You cannot mark cost estimates/costing versions with different valuation variants in this period.
 You mark the cost estimate and transfer the costing results into the material master as the future standard
price.
 You can mark the cost estimate more than once at any time (until you release it).
 You can cancel the allowance for marking and thus the marking of standard cost estimates
 If you want to work with multiple valuation views, you can mark all of the views (legal valuation, group and
profit center).
It specifies which costing variant and costing version cost estimate allowed to be permitted for the specific period to
the specific company code.
Note: It is not possible to use multiple costing variants and versions to allow to use in same period and company code
to mark and release the estimate.

VALUATION VARIANT

 Valuation variant is a Key that controls which prices the system selects to valuate the quantity structure of a
material cost estimate or order, or to valuate the costing items of a unit cost estimate.
 The valuation variant controls how the materials and activities in the cost estimate are valuated. The
valuation variant specifies the following parameters:
 Which price in the material master (such as the standard price) or in the purchasing info record (such as the
net order price) is used to cost a material in the BOM
 Which planned or actual price is used to valuate the internal activities
 Which version in Cost Center Accounting is used to valuate internal activities
 Which costing sheet is used to calculate overhead
 Whether and to what extent a BOM item or an operation in the routing is relevant to costing
 The different valuation strategies for materials, internal activities, external activities, and subcontracting are
stored as strategy sequences.
 A global valuation variant is valid for all plants. A local valuation variant is valid only for a specific plant. You
define valuation variants in Customizing for Product Cost Controlling.
Cost Object Controlling:

 In Cost Object Controlling there is a valuation variant that can be used for the valuation of work in process at
target costs and for the valuation of scrap variances.
 In this valuation variant, you specify which cost estimate is used to calculate the target costs.

Valuation variant contains the strategy i.e. which priority of sequence of source of price to be used while valuating
materials, Activities ,Sub contracting, External processing, and also it specifies which costing sheet to be used to
calculate the indirect overheads.

 We can maintain different valuation strategies for the same valuation variant depends on the plant wise.
System follows the first priority plant dependent then it follows the global definitions.

Valuation Strategies:

 Material valuation

Here you define the sequence in which the system searches for prices from the accounting view or costing view of
the material master record to valuate materials. You can also access prices from purchasing info records and
condition types.

For material cost estimates, you also specify whether additive costs can be added to the selected price.

Note:

Sub strategy will appear only if you have selected the price from purchase info record in main strategy.

Additive Costs: Any costs you want to add manually as a part of Indirect Overhead.eg.Storage.

Raw mat X–.100 RS +20% Additive cost.

Include additive costs means the valuation variant specifies whether to consider or not to consider the additive cost in
the cost estimate of the product. If not activated, additive cost is not considered.

Purchasing: Assignment of Conditions to Cost Comps:

Purpose: To get the delivery and freight charges separately in the cost estimate of the products & also to display the
delivery and freight charges separately in the cost estimate of the product. We need to assign the origin group the
MM condition type’s .Then, we need to assign the origin group to the cost component in cost component structure.

 Activity Types / Processes

 Here you define the sequence in which the system searches for prices in activity type planning or actual
activity price calculation in Cost Center Accounting or Activity-Based Costing to valuate the utilized activity
types and business processes.
 Plan/actual version

It specifies which version price to be applied in the cost estimate of the product.

You also specify which plan/actual version is used.

 Subcontracting
 Here you define the sequence in which the system searches for prices in the purchasing info record. In
purchasing, the quota arrangementsare used to create a mixed price for materials that are manufactured
with external vendors with parts provided by the customer.
 You can specify whether the quota of the individual vendors that are entered in the list for the material to be
processed should be determined through the planned quota arrangement or the actual quota arrangement.
  External processing

Here you define the sequence in which the system searches for prices in the purchasing info record or routing
operation for valuation of the external activities.
  External processing is also another form of sub-contracting type. It is nothing but outsourcing of a particular
activity eg.cleaning, painting Activity etc.
 The val. Variant ext. processing strategy tab specifies which pricing strategy to be used to valuate the out
sourcing activity.

GROSS PRICE: price before deducting Rebate and Discount.

NET PRICE: Gross price – Rebate- Discount.

Condition Table: we can assess or read the price from the pricing condition records.eg.freight and insurance.

Overhead costs

 You can link the valuation variant for definition of overhead to a costing sheet. You can also enter a costing
sheet for the allocation of overhead to raw materials, if you want to use specific overhead conditions for raw
materials.
 If you want to differentiate overhead application according to material groups, you must have groups and
made the necessary settings for the costing sheet in the step Define costing sheet.
 You can also specify whether overhead is calculated for subcontracted materials in material costing
Price Factors

It specifies whether to consider the total price or part of the price to be considered in the cost estimate of the product.
Standard Settings

The standard system provides a number of predefined price strategies.

 For material valuation, you can choose up to five (5) strategies for each valuation variant.
 For activity types/processes, you can choose up to three (3) activity prices for each valuation variant.
 For subcontracting, you can choose up to three (3) strategies for each valuation variant.
 For external processing, you can choose up to three (3) strategies for each valuation variant.

You can modify these valuation variants to suit your requirements by changing the standard strategy sequences as
necessary.

Activities
1. Enter an alphanumerical key and a name for the new valuation variant.
2. Define a strategy sequence for the valuation of material components.
3. a) To do so, select a price from the material master.

If you access prices from purchasing info records and condition types, you can enter up to three sub-strategies. If you
take prices from condition types, you must assign these condition types to origin groups in Customizing. (See Raw)

1. b) For each material valuation strategy, you can specify whether additive costs are to be included in the
valuation of the material component.
2. Define a valuation strategy for activity types and processes and assign a plan/actual version from cost
center planning.
3. Define a strategy sequence for subcontracting and choose a quota arrangement for subcontracting.
4. Define a valuation strategy for external processing.
5. Assign a costing sheet under Overhead applied to semi-finished finished materials to the valuation variant.
6. Specify whether overhead rates should be calculated for subcontracted materials.

You can enter a costing sheet for the application of overhead to raw materials under Overhead on material
components.

If overhead should be calculated for subcontracted materials, you can specify this here.

8. Save your entries.

9. Assign the valuation variant to a Costing variant.
Note
If you want to use different valuation strategies or different overhead rates in plants that belong to the same company
code, you can define plant-specific valuation variants by assigning a valuation variant to a plant. Choose the push
button Valuation variant/plant. If you don’t do this, the valuation variants apply to all your plants.

Note
 Materials valuated separately with the material ledger
 The standard price is not included in the material ledger data, but rather the current planned price which, as
a rule, does not vary from the standard price. In the valuation variant, specify that the system should also
look for the current planned price for the valuation of materials. This ascertains that, even in the case of
separate valuation, a price is found for the valuation of materials.

COSTING VARIANT:

 It contains the control parameters or it groups the costing parameters like costing type, valuation variant,
Date control, Qty. structure control, and transfer control. These parameters are required to generate the cost
estimate.
 Costing variants form the link between the application and Customizing, since all cost estimates are carried
out and saved with reference to a costing variant.
 We can define multiple costing variants for std. cost estimate purpose but we can use maximum one costing
variant per company code for the specified period.

Control Parameters in the Costing Variant

The costing variant contains all the control parameters for costing.

The costing variant for a material cost estimate contains the following control parameters:

 Costing type
 Valuation variant
 Date control
 Quantity structure control
 (only relevant for cost estimates with quantity structure)
 Transfer control (optional)
 Reference variant (optional)

NOte

 Although it is technically possible to have two costing variants with the same costing type and valuation
variant, this should be avoided to prevent data from being overwritten.
 The reason for this is that the key structure for the costing results in the database uses the costing type and
the valuation variant, rather than the costing variant.

Note

 Since this costing variant can be used for cost estimates both with and without quantity structure, you must
also make the settings that are only relevant for cost estimates with quantity structure even if you are only
executing a cost estimate without quantity structure.
In Quantity structure you determine the following:

 How the costing lot size is handled

 Whether cost estimates without quantity structure are included Whether transfer control can be changed
when calling the cost estimate Whether an active standard cost estimate can be transferred if the cost
estimate for a material contains errors
Pass on lot size:

This field determines whether costing lot size of all the components is based on the higher level material or costing lot
size of the components to be considered in the cost estimate of higher level products. There are 3 options:

1. No
2. Only with individual requirement.
3. Always.

Pass on lot size: No:

In this case, the components are costed according to the component lot size which is specified in the costing 1 view
of the material master.e.g. A finished product’s costing lot size is 10 pc. Where the component Sfg.X having lot size
100 pc.In this case, the cost estimates creates for the SFGx based on the lot size of the 100 pc.Then the cost
estimate for the finished goods will be created on the costing lot size of 10 pc.That means, it takes component cost
estimate price based on the costing lot size of 100 pc. In the cost estimate of finished goods.

e.g.

For 10pc of Fin. Goods X, 10 pc of Sfg, x is req.

Fin. Good X lot size is 10 pc.

Sfg x lot size is 100 pc.

For SFG X., 100 PC

Raw mat. -100kg*100 =10000

Cleaning -10hrs *2000 = 20000

Machine hrs. -100hrs *300=30000

TOTAL: 60000

Per unit cost; 60000/100= 600

Sfg x price 600

Pass on Lot Size: Only with individual requirements:

In this case, the cost estimate generates the cost estimate of the component based on the lot size of higher level
material and it ignores the costing lot size of the components.

Pass on Lot Size: Always:

In this case, all the materials in the multilevel BOM, It is costed based on lot size of the final components (higher level
component).This option is normally used in the sales order cost estimate.

E.g. Applicable for above both

For 10pc of Fin. Goods X, 10 pc of Sfg x is req.
Fin. Good X lot size is 10 pc.
Sfg x lot size is 100 pc.

SFGX: 10 pc

Raw mat: 10*100 = 1000

Cleaning: 10 hrs. *2000 = 20000 (fixed cost)

Machine: 10hrs*300 = 3000

TOTAL: 24000

Value of SFGX WILL BE 24000

Ignore prod cost EST without Qty Structure:

This indicator determines whether a cost estimate with Qty structure can access the data which is generated by the
cost estimate without qty. structure. By selecting this indicator, we can save the time i.e. unnecessary searching for
the data which is produced by cost estimate without qty. structure.

Transfer control can be changed;

This indicator controls whether allowed to change or not allowed to change the default transfer control during the
execution of the cost estimate.

Transfer Active std. cost est. if mat costed w/ Errors.

 If this indicator is not activated, then system won’t allow to release of cost estimate of higher level products
unless rectifying the cost estimate of lower level products.
 If this indicator is activated, we can release the cost estimate even though the lower components are having
errors and it uses the alternative cost estimate if any available. If there is no alternative cost estimate, then
system throws the error message.
In Additive Costs you determine the following:

 Whether you can transfer the cost components that were entered in the form of an additive cost estimate
 Whether the additive costs for materials with the special procurement types stock transfer or production are
included in another plant.
 We can add the additive cost manually like freight, OH, insurance in the additive cost estimate of the product
or material.
 This field controls whether the cost estimated created with this costing variant can allowed to include or
enter manual cost in the form of additive cost estimate.
 Option 1: Ignore additive cost.

It won’t allow to add the additive cost.

 Option 2: Include

It allows to add the additive cost.

Option 3: Include the OH cost and apply the OH:

In this case, we can include the additive cost and also we can calculate the OH on the additive cost.

Include additive cost with stock transfers:

The system will allow to include the additive cost for stock transfer between the plants.

E.g. we can include the additive cost i.e. transportation cost for stock transfer between the plants.

In Update you determine the following:

 Whether the costing results can be saved and what values are updated

The cost component split is always updated. You must specify whether the following values are also updated:
  Itemization
 Whether the user can change the update parameters and the parameters for transfer control.
 Which reference variant you want to use for group costing.

Saving allowed:

This indicator allows to save the cost estimate. We need to select this indicator if we want to update the price to the
material master also we need to select this indicator for using this cost estimate for below scenarios:

1. for variance calculation.

2. Variance calculation.
3. Result analysis.

Save error log:

We can save error log for reference purpose.

Defaults can be changed by the user:

If this indicator is activated, then we have the option during the cost estimate to change the default settings for saving
message log and also itemization. Normally, itemization and log update are required for every cost estimate for
analysis purpose. Giving the option i.e. to change the parameters to the user not required. Hence, don’t select this
indicator. If this indicator is not selected and by default it update the log and also itemization and it won’t give any
option to the user to change itemization log message.

Itemization:

It provides the cost details at individual line item level of material, activities, and Indirect OH. Itemization is a useful
information when analyzing and reviewing the cost at detailed level whereas cost component provides the
summarization level. Further grouping of cost component can be called as cost component group.

In Assignments you determine the following:

  Which cost component structure is used for the cost estimate.
 Which costing version is used.
 Whether the cost component split can be saved in the controlling area currency in addition to the company
code currency
 Whether you can cost across company codes with this costing variant

In the note Miscellaneous you determine the following:

 Whether a log is created to collect the system messages.

In this, we need to specify how the error log to be recorded and handled.

Transfer control & Reference variant:

  The transfer control specifies or controls how the existing cost estimate is to be used in the cost estimate of
the other product.

Business case (purpose):

Usually we will perform the cost estimate yearly once for all the existing products. During the year, if any new
products created, we will run the cost estimate for the new products.

Eg1: The new product contains all the new components .In this case, we will run the cost estimate for all the
components which are new products.

Eg2: The new product contains few components as old and some new components. In this case, how the system
should reuse the cost estimate of the existing product in the cost estimate of other products.

If we regenerate the new cost estimate for existing products, then stem generates the variant for all the existing
products which is using the existing component.

Note:

Through the transfer control, we can specify to use the existing cost estimate or not in the cost estimate of the other
products.

Transfer only with collective requirements material (field):

 This indicator specifies how the existing cost estimate to be used in the sales order cost estimate. If this
indicator is activated, then system ignores the existing cost estimate and rerun new cost estimate of the
existing product in the sales order cost estimate.
 If this indicator is not activated, then system considers the existing cost estimate for both individual
requirements as well as the collective requirement(The existing cost estimate can be reused in the sales
order cost estimate)
Fiscal Year:

This indicator refers the current year.

Period:

 In the period, if you keep blank, then it refers only the current period.i.e. System searches for existing cost
estimate in the current period only.
 In current and previous cost estimate, the period refers the number of periods in the past. I.e. before the
date of the cost estimate.
 In case of future cost estimate, the period refers the number of periods in the future i.e. after the start date of
the cost estimate. And in the past (before the start date)
 You define transfer control in Customizing for Product Cost Controlling. You use transfer control to specify
how the system is to search for available cost estimates in order to transfer existing costing data into
another cost estimate.
 You define a reference variant in Customizing for Product Cost Planning and enter it in the costing variant.
The reference variant contains a transfer control ID, which finds the cost estimate to be copied.

Costing type

It is a Parameter that establishes the technical attributes of a cost estimate. It specifies the purpose and usage of the
cost estimate. It specifies whether allowed to update the estimate to the material master or not and also it specifies
which price field to be updated in the material master. It also specifies which valuation views to be costed.

 Each costing type allows only one valuation view.

For a material cost estimate, the costing type controls the following:

 How the cost estimate is used, and which field in the material master is updated with the cost calculated in
the cost estimate (such as the standard price, commercial price, or tax valuation price)
 Which costs are used as the basis for allocating overhead
 Which valuation view (legal, group, or profit center) is costed

For a base planning object, the costing type determines which valuation view is costed.
  In the following image, we can see the three tabs available under Costing Type.This bifurcation in Costing
Type is done by SAP to provide further flexibility at the most granular level possible.

Price Update

Under this tab we define where the price calculated during the cost estimate should be updated by the system. In the
above image, we can see that the standard Costing Type updates Standard price. This in other words mean, when a
material cost estimate is released, it will update standard price in material master.

Following options are made available by SAP for updating the results

 Standard Price
 Tax-Based Price
 Commercial Price
 Prices other than standard price
 No Update

Note: We also need to keep in our mind that standard system contains costing types that write to the material
(standard price), and hence the system does not allow to create our own costing types to do this i.e. updating
standard price.

Save Parameters.
This tab contains configuration related to updating dates when the cost estimate is saved and is divided into following
two parts:

Cost Estimate with Quantity Structure

Here we have to select whether the date will be saved in standard cost estimate and following options are available
for us to opt from:

 Without Date

In this, the standard cost estimate cannot be saved and hence cannot be used for future analysis purpose. It is not
possible to generate the std. cost estimate.

 With date

The with date option can be used in the plan cost and also in the preliminary cost estimate and we cannot use in the
std. cost estimate.

 With Start of Period

Always the std. cost estimate, it saves with the start of period (from the beginning date of the period). E.g. we are
running cost estimate on 6th august and system will always saves the cost estimate in the back end from the
beginning of august i.e. 1st august.

 This part becomes very important in case of product cost collect and hence, SAP has provided separate
Costing Type for Product Cost Collector which contains relevant configuration to be opted for. Hence, it also
becomes very important to identify the requirement and try to find if any standard costing type or costing
variant is provided by SAP for the scenario (in most of the cases you will find the answer as YES) and if yes,
go for it. If you do not find appropriate standard configuration, take a cautious approach while customizing.

Note: For the standard cost estimate, you must update automatic costing with the with start of period indicator. This
ensures that the results of the standard cost estimate can be used as the standard price for that period. For the other
costing types, you can update the costing results with the with date indicator, for example. In this case the current
date becomes part of the key.
  Additive Cost Estimatesthe purpose is to allow to enter the additive cost with effect from which date, either
with date or without date or with start of the period. It will always considers the start of period in case of
standard cost estimate.

Misc. Tab:

This tab contains following two parts

Cost Portion for Overhead Application

 This part works as a calculation base for calculating the overheads. Here we have to select the cost
component view that will be used for calculating overheads (Costing Sheet).The cost component view can
be used as a calculation base in the OH calculation for the semi-finished goods in the cost estimate of the
finished goods. This option is used as a calculation base on the COGM component field to calculate the OH
for the semi-finished goods during the cost estimate of the final component.
 Partner Cost Component Splits

Key that uniquely defines a combination of partner and direct partner.

 To view the partner cost breakup details in the subsidiary companies in the cost estimate of the product. This
option is applicable only for group valuation view. We can set the partner split parameters in the combination
of company code and plant or the combination of comp. code, plant, profit center and business area
combinations. It won’t applicable for your legal valuations.

Cost component Structure

  It gives the breakup of the cost estimate of products like material cost, packing mat cost, consumables,
Mach. Cost etc. The cost component structure contains the cost components (grouping of costs or cost
elements)
 Each cost component specifies whether it is relevant for valuation of inventory or not and also it specifies
under which cost components to be updated. Eg.COGM, COGS, Inventory, and Tax inventory etc. Each cost
component specifies whether it is to be rolled up or not.
 Any component which is relevant for inventory should be rolled up and shown under COGM view.
 The cost component can have maximum of 40 components in case of all components are variable. In case
of all components are fixed, then the CCS can have maximum of 20 components.

Variable – 1

Fixed –2

 There are two types of CCS. One is Main CCS and the other is Auxiliary CCS.

Cost Component Structure Contains Cost components:

1. Material cost
2. Packing material cost.
3. Consumables.
4. Cleaning cost.
5. Machining cost.
6. Labor cost.
7. Material OH.
8. Admin OH.
 Cost component represents the grouping of cost or cost elements.
 Each cost component specifies which portion of cost to be displayed and to be considered for valuation of
inventory.eg. Variable cost, or consider fixed and variable cost.
 Each cost component specifies whether to be rolled up or not. Every cost component should be rolled up or
not. Every cost component should be roll up cost component which is relevant to COGM & inventory
valuation
 Each cost component specifies whether it is relevant for inventory valuation or not.
 Each cost component, we need to specify which views to be updated eg.COGM, COGS, or tax inventory or
commercial inventory.
 Main CCS can be called as Primary CCS.It is only possible to update to the material master std. price field.
Auxiliary CCS is not possible to update to the material master std. price. We can able to transfer both main
CCS and Auxiliary CCS to COPA. Auxiliary CCS can be used to view the breakup of the cost in the alternate
view.

Cost component groups:

 It is nothing but further grouping of cost components within the CCS.It displays the cost at higher
summarized level.eg.Mat cost, Dir OH, IOH etc. We can define maximum of 99 cost component groups but
we can be able to use maximum 25 cost component groups across the cost component structures within the
controlling area.
 One cost component can have maximum of 2 cost component groups. One cost component group can be
assigned to multiple cost components.

Types of Cost component structure:

1. Main CCS.
 Only possible to update to the material master std. price.
2. Auxiliary CCS.
 Cannot be possible to update to the material master std. price.
Note: Both can be possible to update to the costing based COPA.

Main CCS: The main CCS can also be called as primary CCS or Principle CCS.Main CCS is mandatory for the
standard cost estimate. Main CCS cost estimate is only possible to update to the material master std. price field and
also possible to transfer to the Costing based COPA.

Auxiliary CCS: The purpose of this is to view the breakup of the cost estimate of product in the alternate view in
addition to main CCS.The auxiliary CCS cost estimate is not possible to update to the material master std. price field
and is possible to update to the costing based COPA.

Primary cost component split:

 The purpose of this to view the activity cost in terms of primary cost element wise. Then, we need to activate
the relevant CCS with the primary cost component split indicator.
 The primary cost component structure can be activated either for Main CCS or Auxiliary CCS or Both.
 We can activate PCC.split for those CCS designed or structured with primary cost elements.
 The below activities or settings are to be done to get the primary split:
1. Need to assign the primary split CCS in the versions.
2. Need to perform the system calculated activity price.

Delta cost component Split:

 It displays the profit between two company codes under the delta cost component split in group valuation
view.
 The delta cost component split is not relevant for inventory valuation. It is not required to assign any cost
element to the delta cost component. We can define maximum one delta cost component per one CCS .It is
relevant only for group valuation.

Int. / Ext. cost split:

The purpose is to view the cost estimate for the raw materials in terms of grouping of cost like procurement cost,
freight, insurance etc.

Assignment to the Organizational unit:

 We can assign maximum two CCS i.e. Main CCS and Auxiliary CCS to the combination of Company code,
Plant and Costing Variant. But recommended is to always use the same CCS across all the plants for all the
costing variants for the specific company.
 If you have different CCS for different plants, then it is not possible to read the cost estimate from other
plants which belong to different CCS’s.
 Even though we can define and assign different CCS for each plant wise within the company code. But it is
not recommendable to define multiple CCS within the company code i.e. for each plant wise. The reason is
that, we cannot assess the cost estimate from one plant to another plant which belong to different CCS’S.
That is why, we will maintain uniform CCS across the plants within the company code.

Define the CCS: (OKTZ)

Click on NEW ENTRIES.

Enter the following and Save:

Select C1 and click on cost components with attributes.

Click on New entries.

Enter the following and Save:

Creation of cost component group:

Click on new entries.

Enter the following and Save.

Assign C1 cc group to 01 Raw material cost component.

Create the cost components up to Consumables and assign to the relevant group.
Same will applicable till packing cost.

Same with IOH.

Assign the cost components to CCS:

Select the cost component and click on assignment. And click on new entries.

The names will automatically come when you click enter.

101000: Raw material cost element.

101001: Raw material import cost element.

943000: Secondary cost element.

941000: 41 Category cost element.

Enter the following and Save.

Cost component views:

The PURPOSE of this that which cost component view cost to be displayed to view the cost break up.

Click on New entries and save.

Auxiliary CCS:

Select C2 and click on Cost Component with attributes.

Click on new entries.

Do the same for similar kind of components.

For Salaries, power and Misc. exp.

Save.

For MOH.
For AOH:
Save.

Go back and select all cost components and click on assignment of cost elements to CC’S.
Enter the following and Save.

Assign the Auxiliary CCS to the Organizational unit or Company code.

Assignment: Organiz. Units – Cost Component Structure:

Activate the CC structure and activate C1 and C2 and activate primary split to C2

Assign the primary cost component split in the CO versions.

IMG>Controlling>org.>Maintain versions

Select the 0 version and click on settings for each fiscal year.

Select 2016 and Double click.

Assign the Auxiliary CCS (c2) here and tick the below indicator and save.
Notes on the various indicators:

1. Cost share Indicator:

It specifies whether the fixed and variable costs or only variable costs are to be displayed in the cost estimate.

2. Cost Roll up:

This indicator determines whether the costing results of the cost component are rolled up to the next highest costing
level. By activating this indicator, we can specify that which cost component is rolled up to the next highest costing
level. We need to select this indicator for those components which is relevant to the COGM &Inventory valuation.

3. Cost component group:

The purpose of this is to view the cost estimate break up at the higher summarization level. It is the further grouping
of the cost components. One cost component can have maximum 2 Cost component groups.

Further criteria for cost component view on itemization:

In this tab, we can specify the cost components to be displayed under which cost component view.

Inventory valuation:

This indicator controls which cost component is relevant foe inventory valuation.

COGS> which cost component is to be under COGS view.

Initial cost split:

It is to view the cost estimate of raw materials into different groups like procurement cost, overhead or freight
charges, insurance etc.

Delta profit for group costing:

This option is used in multiple valuation concept and prerequisites is needed. To use this function, only into material
ledger multiple valuation concept is activated. The purpose is to display the internal profits between company codes
under the separate cost component in the group valuation view. We can select maximum one cost component with
delta profit indicator for cross component structure .The delta profit cost component is not relevant for inventory
valuation and also not required to assign any cost element to the cost component which is activated as delta profit
indicator.

COSTING SHEET

Overhead: THE COST WHICH IS OTHER THAN MATERIAL COST.

 Overhead is of two types:

1. Direct OH : Expenditure of dept. which are directly involved in the production.

Basis of Allocation:
  Activity types are used as a base to allocate DOH.Activity types are specified in Routing. When you do the
activity confirmation (CO11N), OH is allocated to the production order.
2. Indirect OH: Service dept. cost.

Basis of Allocation:

Based on Activity type:

 Separate activity types are defined for IOH allocation purpose.eg.Seperate activity types are created for
Main.Dept. Admin Dept., Procurement dept. etc.

Routing and Work center:

 Here we will add the created new IOH activity types to the original activity types in the Routing. Drawback is
increases WC master data and increases routing operations and activity types number limitation per Work
center. We can recover the 100% overhead and it won’t arise under or over absorption of overhead.
 When you do the confirmation of activity, it will updated to the production order.

Template allocations:

 It contains formulas and Rules along with using the activity types. Advantage is PP master data won’t be
disturbed and we can recover the 100% overhead and it won’t arise under or over absorption of overhead.
While executing the template allocation program, the OH is allocated to production order at the month end.
Not based on Activity type:

 It is the pure traditional method. Costing sheet method is used to allocate IOH to production order. OH is
allocated on an assumption basis. We cannot recover the 100% overhead and it will always arise under or
over absorption of overhead. In the period end process, while performing the Actual OH calculation program,
OH is allocated.

COSTING SHEET:

 It specifies what % of OH to be applied or what quantity rate of OH to be applied on which amount and
under which conditions to be applied and from which cost center to be allocated and which OH cost element
to be used to debit in the order and credit in the cost center.
 Costing sheet components:
1. Base.
2. OH rate.
3. Dependency Key.
4. OH type.
5. Credit key.
6. Base:

Grouping of cost elements on which OH rate is applied.

2. OH rate:

Specifies OH% to be applied. It contains dep key OH type.

3. Dependency key:

It specifies the conditions, the OH rate is to be applied in which conditions.

4. OH Type:

It differentiates the plan and actual OH type.1-Actual and 2-Plan OH. We can maintain different OH rate for Actual
and Plan OH by using OH type.

5. Credit Key:
 It species which cost center to be credited during the actual OH calculation and also it specifies which OH
cost element to be used to credit in the cost center and to debit in the order.
 One credit key represents one cost center.

Case example:
 Dependency key is the plant in both the cases.
 One OH rate key (c100) is required for mat OH of 10% and 11% & another OH key (C101) is required for
activity OH for 15% and 20%.
 One credit key (C3) is required for procurement department and one (C4) for admin. Department.
  Costing sheet is assigned to Valuation variant in OH tab

Click on NEW entries and enter following.

Click enter and Save.

 Select the material cost and click on details.

 Give your Controlling Area.
Cost portion: It specifies which type or portion of the cost to be grouped for OH calculation purpose.

Total: It considers both Fixed and Variable Cost.

 Click on New entries.

 Give mat. Cost element group and SAVE.

Do same for the base C11.

Percentage overhead RATE:

Click on new entries.

Enter following and SAVE.
Define credits:

Click on new entries and enter following and save :

 Select C3 and click on details:
 Click on new entries AND ENTER following.

 Select C4 and click on details:

 Click on new entries AND ENTER following.
  If you specify value in the Fix % field, then in that case, the specified fixed %is applied on the OH amount as
a Fixed OH and remaining balance becomes the variable OH.

e.g.:

Fix% 70%

Base total 1000

The OH rate is 15%.

Therefore the OH amount will be 150.

On OH amount 150.

Fixed OH (70%) 105

Variable OH (REMAINING) 45

Define Costing Sheet:

Click on New entries:

And SAVE.

 Select the costing sheet and click on costing sheet rows.

 Click on new entries.
Enter as above in the following and save.

Overall Scenario: