PRODUCT COST estimates are the calculation of the cost of a material based on settings from the material master and additional master data such as BOM, routing or master recipe, and a production version. Creating a cost estimate fixes a cost at a point in time. Cost estimates are used for comparison to actual costs and for inventory valuation of produced materials.
Product cost estimates are mandatory for any produced or purchased material valued at standard price. The cost estimates for produced materials should be based on most common way to produce the material, that is, the most common BOM and routing or the master receipt combination which is represented by the production version. Purchased materials (intercompany and external purchases) can be costed using a purchasing info record (PIR) and conditions, a planned price, or the material’s own standard or moving average price.
During the annual or monthly costing process, materials are costed in a costing run. Costing runs are used to cost mass amounts of materials in a single company code. The costing run allows you to select certain materials, explode their quantity structure, cost, analyze, and mark and release.
There are several prerequisite master data requirements before costing materials:
MATERIAL MASTERS, must be created, including MRP, accounting, & costing views for all materials that should be costed.
The quantity structure: bills of material, routings and/or master recipes must be created. In addition, production versions may optionally be created.
Purchase information records and condition types must be established if desired for costing purchased materials.
CO master data including: Primary and secondary cost elements, cost centers, and activity types are required. Optionally, mixed costing ratios and alternatives and additive costs may be created.
Configuration including: Cost component structure, costing variant, and valuation variant must be created. Other optional configuration items like costing sheets may be created.
This chapter will detail the relevant prerequisite configuration and master data required prior to costing. First, we will dive in to costing related configuration that must be established prior to creating cost estimates or running a costing run. Some configuration is optional, but the majority of costing configuration is mandatory.
Configuration of costing and valuation variants and cost component structure are required to set the strategy for costing materials. The costing variant holds the criteria for costing. Costing variants contain a costing type, which determines the object to be created and valuation variant.
Valuation variants contain parameters for valuation of a cost estimate. In a valuation variant, you can specify the strategy sequence for how costs are selected. For produced materials, the component’s standard cost, moving average price, purchase info record price plus conditions, or planned prices may be selected. You can also choose a particular plan/actual version and average the plan activity rates for the year or take the current activity rates.
The cost component structure is used to indicate which costs should be included, whether to include the variable or total costs, and how to group costs in the cost components.
The costing variant contains all the control parameters for costing. Separate costing variants can be used for standard costing, preliminary costing of product cost collectors, and other valuation strategies that are updated to planned price, tax, and commercial price fields on the material master. Costing variants are configured in transaction OKKN or through the IMG menu path SPRO • CONTROLLING • PRODUCT COST CONTROLLING • PRODUCT COST PLANNING • MATERIAL COST ESTIMATE WITH QTY STRUCTURE • DEFINE COSTING VARIANTS.
The first screen (see Figure 4.1) displays all created costing variants. Many of these costing variants are SAP standard. If a change is required, a new costing variant should be created with a relevant description. To create a new entry, select NEW ENTRIES. To modify an existing costing variant, select the line and then select the DETAILS button.
Figure 4.1: Costing variants
First, we will create the costing variant to be used to release standard cost estimates by accounting. We define the costing type, valuation variant, date control, and quantity structure on the control tab (see Figure 4.2).
Figure 4.2: Change costing variant control tab
On the quantity structure tab, you generally leave the default settings (see Figure 4.3). There are options to ignore product cost estimates without quantity structure and controls for transfer control.
Figure 4.3: Change costing variant quantity structure tab
On the additive cost tab, we indicate if additive costs should be included (see Figure 4.4).
Figure 4.4: Change costing variant additive costs tab
On the update tab, we indicate if saving is allowed. We also enable saving the error log, determine whether default parameters can be changed by users, and if cost itemization should be saved in addition to the cost component split (see Figure 4.5).
Figure 4.5: Change costing variant update tab
On the assignments tab, no changes are required. You can click on the buttons to display or change the related configuration assigned to the costing variant (see Figure 4.6).
Figure 4.6: Change costing variant assignments tab
On the miscellaneous tab, no changes are required. You can click on the buttons to display or change the related configuration assigned to the costing variant (see Figure 4.7).
Figure 4.7: Change costing variant miscellaneous tab
Valuation variants determine the strategy for costing runs. The valuation variant is configured in transaction OKK4 or through the IMG menu pathSPRO • CONTROLLING • PRODUCT COST CONTROLLING • PRODUCT COST PLANNING • MATERIAL COST ESTIMATES WITH QTY STRUCTURE • COSTING VARIANT: COMPONENTS • DEFINE VALUATION VARIANTS.
The first screen in Figure 4.8 shows all valuation variants. To create a new valuation variant, select NEW ENTRIES.
Figure 4.8: Valuation variants
The valuation variant strategy sequence configuration searches for a relevant price until one is found. If a material is produced, it will use this strategy sequence for each component material’s price.
In the valuation variant shown in Figure 4.9, a non-produced material’s cost estimate will return the planned price 1 price if it exists. If no planned price 1 exists, it will return the standard price. If the material does not have a planned price 1 or standard price, it will return the moving average price.
Figure 4.9: Valuation variant material valuation tab
In the activity type/processes tab, you determine a strategy sequence and priority for determining the activity rate. In the example in Figure 4.10, the plan activity price is taken as an average of all fiscal year periods. You could select instead to take the plan price for the period, or the plan price as an average of the remaining periods in the fiscal year. There are also several options to pull the actual price of a previous period or the actual price for the period.
An interesting piece of configuration in the valuation variant is the use of the purchase information record and pricing conditions. I used this configuration at a client recently to drive intercompany purchased materials. The purchase information record (PIR) is a master record that contains information about purchasing a specific material for a plant from a vendor.
To implement this option, choose the strategy in the valuation variant price from purchasing info record. Then continue to select the option quotation price via condition table in the sub-strategy sequence. In costing sheets, you can assign pricing conditions to a valuation variant for use in costing purchased materials.
Figure 4.10: Valuation variant activity types/processes tab
In the subcontracting tab, you determine a strategy sequence and priority for determining the price for materials that are subcontracted. In the example in Figure 4.11, the net quotation price is selected. There are several other options to pull the net, effective, or gross price from the quotation or purchase order.
Figure 4.11: Valuation variant subcontracting tab
In the external processing tab, you determine a strategy sequence and priority for determining the price for operations that are externally processed. In Figure 4.12, you can see that the new quotation price is selected. There are several other options to pull the net, effective, or gross price from the quotation or purchase order.
Figure 4.12: Valuation variant external processing tab
In the overhead tab, a costing sheet can be applied to finished and semi-finished materials, material components, and/or subcontracted materials. In the example in Figure 4.13, a costing sheet is applied to finished and semi-finished materials.
Figure 4.13: Valuation variant overhead tab
In the miscellaneous tab, you can click through to the assignment of price factors for relevancy to costing configuration (see Figure 4.14).
Figure 4.14: Valuation variant miscellaneous tab
Costing types indicate which price to update. Costing types are configured in transaction OKKI or through the IMG menu pathSPRO • CONTROLLING • PRODUCT COST CONTROLLING • PRODUCT COST PLANNING • MATERIAL COST ESTIMATE WITH QTY STRUCTURE COSTING VARIANT: COMPONENTS • DEFINE COSTING TYPES.
Figure 4.15 illustrates the SAP standard costing types.
Costing type ‘01’ allows updating cost estimates to the standard price field. You can also select tax price fields, commercial price fields, no update allowed, or prices other than standard price. These settings determine if a material can be marked and released to the standard price field, or updated to tax, commercial, or planned price fields (Figure 4.16).
Figure 4.16: Costing types price update tab
The SAVE PARAMETERS tab allows you to choose whether the date should be included when a cost estimate is saved for cost estimate with quantity structure and additive cost estimates. The example in Figure 4.17 chooses the date with the start of period. You can also select with date or without date.
Figure 4.17: Costing types save parameters tab
The MISCELLANEOUS tab allows you to choose the calculation base to apply overhead. You can choose cost of goods manufactured, cost of goods sold, external procurement, inventory (commercial), inventory (tax-based), inventory valuation, sales and administration costs, or transfer price surcharge (see Figure 4.18).
Figure 4.18: Costing types miscellaneous tab
Quantity structure declares which type of production data to use for a costing run. Quantity Structure Control is configured in transaction OKK5, or through the IMG menu path SPRO • CONTROLLING • PRODUCT COST CONTROLLING • PRODUCT COST PLANNING • MATERIAL COST ESTIMATE WITH QTY STRUCTURE • COSTING VARIANT: COMPONENTS • DEFINE QTY STRUCTURE CONTROL (see Figure 4.19).
Figure 4.19: Quantity structure control configuration
The quantity structure in Figure 4.20 uses costing BOMs and does not round component quantities when costing.
Figure 4.20: Quantity structure control BOM tab
The quantity structure in Figure 4.21 uses routing ‘01’ which represents production routings that are released.
Figure 4.21: Quantity structure control routing tab
Transfer control indicates the strategy for choosing a standard cost for a stock transfer. You may produce a product in one plant and want to use that same cost in another plant where the product is not produced. In other words, the material is costed in the plant where produced, and not costed in the receiving plant. This configuration option improves performance in costing runs and can simplify the costing process.
Transfer control can be configured in transaction OKKM or through the IMG menu path SPRO • CONTROLLING • PRODUCT COST CONTROLLING • PRODUCT COST PLANNING MATERIAL COST ESTIMATE WITH QTY STRUCTURE • COSTING VARIANT: COMPONENTS • DEFINE TRANSFER CONTROL.
The first screen shows the transfer controls created. The transfer controls listed in Figure 4.22 are SAP standard configuration.
Figure 4.22: Transfer control configuration
Within transfer control configuration, the strategy sequence is defined for single-plant transfers and cross-plant transfers (see Figure 4.23). A single plant transfer refers to a scenario where a component material cost estimate exists for a material in a plant, and the material is not re-costed. If you want to recost, you can select no transfer as a strategy.
Figure 4.23: Transfer control single-plant tab
If a current, future, or previous cost estimate is selected in the strategy sequence, the system will only take a cost estimate from the current fiscal year, or within the selected period. If other cost estimates are selected, you must also indicate the costing variant and costing version that should be selected (see Figure 4.24).
Figure 4.24: Transfer control cross-plant tab
Cross-plant transfer refers to transfers from other plants, or production that occurs in other plants. In this case, the special procurement key is considered in order to transfer the cost estimate from that plant. If the transferring or producing plant exists in a different company code, you can indicate how the material should be costed in the configuration to activate cross-company costing in transaction OKYV. If you are costing across company codes, the system transfers the cost estimate from the other plant. If you have not activated cross-company costing, the system uses a price from the material master.
If you select TRANSFER ONLY WITH COLLECTIVE REQUIREMENTS MATERIAL, the system only uses the transfer control strategy for materials with collective requirements and individual requirements are ignored. The individual/collective requirement indicator is on the MRP 4 material master view and is used in make-to-order scenarios. Individual requirements mean requirement quantities of dependent materials are stated individually. On the other hand, collective requirements will group together dependent material requirement quantities. If a material will be procured from another plant using cross-company-code stock transport orders, this indicator should be set to collective requirements in the issuing plant because individual stock management is not possible in both plants.
Origin groups help subdivide material costs further within a cost element. Condition types must be assigned to origin groups because condition types are on stock transport orders and the origin group defines the type of cost to be added to the stock transport order (see Figure 4.25).
Origin groups are configured in transaction OKZ1 or through the IMG menu path SPRO • CONTROLLING • PRODUCT COST CONTROLLING • PRODUCT COST PLANNING • BASIC SETTINGS FOR MATERIAL COSTING • DEFINE ORIGIN GROUPS.
Origin groups were created for gross price and freight % to further break out the transfer costs in a stock transfer order.
Figure 4.25: Origin group configuration
Next, you assign condition types or origin groups in transaction OKYO or through the IMG menu path SPRO • CONTROLLING • PRODUCT COST CONTROLLING • PRODUCT COST PLANNING • SELECTED FUNCTIONS IN MATERIAL COSTING • RAW MATERIAL COST ESTIMATE • ASSIGN CONDITION TYPES TO ORIGIN GROUPS (see Figure 4.26).
Figure 4.26: Assignment of condition types to origin groups
Now when you perform a cost estimate for a material with conditions, these conditions will appear on a separate line with the origin group indicated.
Cost component structure
Cost component structures allow us to define which types of costs should be included in costing runs and how these costs should be grouped. You can create cost components for major cost categories like raw materials, packaging, overhead, labor, and setup. The cost component structure is configured in transaction OKTZ or through the IMG menu pathSPRO • CONTROLLING • PRODUCT COST CONTROLLING • PRODUCT COST PLANNING • BASIC SETTINGS FOR MATERIAL COSTING • DEFINE COST COMPONENT STRUCTURE (see Figure 4.27).
Cost component example
In addition to standard cost components like raw materials, packaging, labor, overhead, and setup, you may want to see separate cost components for critical or high cost components. You can also create separate cost components for things like royalties and intercompany markup, so that these costs are easily identifiable.
Figure 4.27: Cost component structure definition
For each cost component, you must define the attributes. You can determine if the cost component should contain only variable costs or both fixed and variable costs. You can also determine if the cost component can be rolled up in the cost estimate. In the filter criteria for cost component views on itemization, you determine if the cost of goods sold is not relevant, cost of goods manufactured, or SG&A. You can also define if variable and fixed costs, or just variable costs, are relevant for different valuation methods of inventory (see Figure 4.28).
Figure 4.28: Cost component attributes
After determining the cost components in your cost component structure, you assign cost elements and origin groups to each cost component. This allows the system to know which cost elements are relevant in your cost estimate. If a cost is calculated with cost elements or origin groups that do not exist in the cost component structure, you will receive an error. It is important to ensure this configuration is comprehensive of the required cost elements (Figure 4.29).
Figure 4.29: Cost component assignment of cost elements
There are further configuration options in the cost component structure where you can define cost component views and cost component groups. These are optional configuration pieces that may or may not be relevant in your business scenarios.
Costing sheets are an optional configuration item that can be used to add overhead costs to cost estimates. Typically costing sheets are used to add overhead costs that cannot be specified on a BOM, routing or master recipe, or with purchasing or sales conditions. You might choose costing sheets to add royalty costs or building overhead costs like electricity. Costing sheets are configured through the IMG menu path SPRO • CONTROLLING • PRODUCT COST CONTROLLING • PRODUCT COST PLANNING • BASIC SETTINGS FOR MATERIAL COSTING • OVERHEAD • DEFINE COSTING SHEETS.
Costing sheet example
For example, in each beauty product line, we have different overhead rates that need to be applied based on different materials. We will create a costing sheet to apply this overhead cost and use a calculation base of total costs using a cost element group. We will use a percentage overhead rate of 3%, and specify the overhead secondary cost element.
To configure a costing sheet, start by creating a new entry and creating a description for the costing sheet (Figure 4.30). You can only assign one costing sheet per costing variant, but you can add multiple calculations in the same costing sheet. Unless you are costing with multiple costing variants, you likely only need one costing sheet.
Figure 4.30: Costing sheet configuration
Next, define the calculation base that the overhead rate will be applied to. Create a base and name in a transaction through the IMG menu path SPRO • CONTROLLING • PRODUCT COST CONTROLLING • PRODUCT COST PLANNING • BASIC SETTINGS FOR MATERIAL COSTING • OVERHEAD • COSTING SHEET: COMPONENTS • DEFINE CALCULATION BASES (see Figure 4.31).
Figure 4.31: Costing sheet calculation base
Then, select a base and click on DETAILS on the left. Determine if the cost portion for the calculation base should factor in fixed, variable, or total costs. Enter a range of cost elements, a single cost element group, or a range of cost element groups (Figure 4.32).
Calculation base example
For example, you may choose labor as a calculation base to apply an overhead rate for employee health benefits, garnishments, and other labor related charges besides payroll. You may want to only consider the fixed cost portion of labor cost elements because this represents salaried employees, rather than variable costs which represent hourly employees. You would select the variable radio button in the calculation base details. You could create a cost element group in transaction KAH1 that contains all labor cost elements and specify it in the calculation base details. The costing sheet will consider the variable portion of labor cost elements in the cost estimate in order to apply the overhead rate.
Figure 4.32: Costing sheet calculation base details
The next configuration step is to determine the overhead rate that should be applied based on the previously defined calculation base. There are several options for how the overhead should be assigned. You can choose a percentage overhead (ex: 5%) or a dollar overhead (ex: $5 per 10 LB). Overhead keys are configured in a transaction through the IMG menu path SPRO CONTROLLING • PRODUCT COST CONTROLLING • PRODUCT COST PLANNING • BASIC SETTINGS FOR MATERIAL COSTING • OVERHEAD • DEFINE OVERHEAD KEYS (see Figure 4.33).
Figure 4.33: Costing sheet overhead key
If you choose to apply a percentage overhead rate, you create each overhead rate, assign a name and determine the dependency. The overhead rate can be applied based on the overhead type and overhead key as shown in the example in Figure 4.34. Other dependencies include overhead type, overhead type and company code, overhead type and plant, overhead type and business area, overhead type and order type, overhead type and order category, and an overhead type and version.
Percentage overhead rates are configured through the IMG menu path SPRO • CONTROLLING • PRODUCT COST CONTROLLING • PRODUCT COST PLANNING • BASIC SETTINGS FOR MATERIAL COSTING • OVERHEAD • COSTING SHEET: COMPONENTS • DEFINE PERCENTAGE OVERHEAD RATE.
Figure 4.34: Costing sheet percentage overhead
In the percentage overhead details, you specify a validity date range, overhead type (plan or actual), the previously defined overhead key, and the percentage rate (see Figure 4.35).
Figure 4.35: Costing sheet percentage overhead details
If you choose to apply a quantity-based overhead rate, you create each overhead rate, assign a name and determine the dependency. The overhead rate can be applied based on the overhead type and an overhead key as shown in the example in Figure 4.36, or with many other dependencies. Quantity-based overhead rates are configured through the IMG menu path SPRO • CONTROLLING • PRODUCT COST CONTROLLING • PRODUCT COST PLANNING • BASIC SETTINGS FOR MATERIAL COSTING • OVERHEAD • COSTING SHEET: COMPONENTS • DEFINE QUANTITY-BASED OVERHEAD RATE.
Figure 4.36: Costing sheet dollar quantity-based overhead
In the quantity-based overhead details, specify a validity date range, overhead type (plan or actual), the previously defined overhead key, and the dollar amount per unit (see Figure 4.37).
Figure 4.37: Costing sheet dollar overhead details
The final configuration piece before returning to the costing sheet is the credit key. Credit keys are configured through the IMG menu path SPRO • CONTROLLING PRODUCT COST CONTROLLING • PRODUCT COST PLANNING • BASIC SETTINGS FOR MATERIAL COSTING • OVERHEAD • COSTING SHEET: COMPONENTS • DEFINE CREDITS (see Figure 4.38).
Figure 4.38: Costing sheet credit key
In the credit key details, specify the secondary cost element where the overhead rate should appear in the cost estimate. A secondary cost element must be specified and not a primary cost element, because this overhead rate is only within the CO module and should not post to the FI module. Read more about COST ELEMENTS, to get a better idea.
Figure 4.39: Costing sheet credit details
Now that the calculation base, overhead rate, and credit are configured, you can return to the costing sheet and enter the details. The costing sheet in Figure 4.40 is a standard SAP costing sheet that adds material overhead, manufacturing overhead, administrative overhead, and sales overhead. The rows should be entered so the first line is the calculation base, the second line is another calculation base, or the overhead rate and credit. The row with the overhead rate should indicate the rows from and to that contain the relevant calculation base. You can see in the example in Figure 4.40 that both wages and salaries are treated as a calculation base for adding manufacturing overhead. You can also add text rows to include descriptions to make the costing sheet easier to understand.
Figure 4.40: Costing sheet rows
After configuring the costing sheet, return to the valuation variant overhead tab and assign the costing sheet to finished and semi-finished materials, material components, and/or subcontracted materials (see Figure 4.41).
Figure 4.41: Costing types miscellaneous tab
The example in Figure 4.42 is an example of a cost estimate for a material that includes a costing sheet. You can see the separate line item with the overhead rate secondary cost element (credit key) that indicates the costing sheet rate of 26% (percentage overhead rate) applied to the total material cost (calculation base). You know the costing sheet was picked up when the costing sheet appears on the valuation tab, see Figure 4.42.
Figure 4.42: Cost estimate with costing sheet overhead rate
Mixed costing is a pre-costing run option you can establish for materials that have multiple purchasing or production strategies that can be weighted to determine the standard cost. There are two basic configuration items required to define quantity structure types and define costing versions. These configuration items will not be covered here, but can be found through the following IMG menu path SPRO • CONTROLLING • PRODUCT COST CONTROLLING • PRODUCT COST PLANNING • SELECTED FUNCTIONS IN MATERIAL COSTING • MIXED COSTING. Mixed costing procurement alternatives are created in transaction CK91N.
If a material is both purchased and produced, it should be created with procurement type X in the material master. These materials will cost using the primary BOM and routing or master recipe (production version 1). If a BOM and routing or master recipe do not exist, it will cost using the valuation variant strategies. If used correctly, mixing costs can help reduce purchase price variances and production order variances for materials that have multiple valuation alternatives with different costs.
Mixed costing examples
For example, if a material is procured from vendor A at $5 per EA, produced at $4 per EA, and valued at a mixed cost of $4.50 (50% weight given to each alternative), each purchase will result in a $.50 unfavorable variance. Each production order that has no other variances will result in a $.50 favorable variance. If the standard cost was valued at $4, the purchase price variance would increase to $1 per EA, and the production variance would be non-existent.
Another example is if a product is procured from two different vendors that have different purchase prices. If the cost is mixed, each purchase from either vendor will result in a purchase price variance, but the purchase price variances and standard cost will be more accurate.
Figure 4.43 shows a material that is both procured and produced in the same plant. I selected the BOM and routing that will be mixed with the procurement strategy. More procurement alternatives can be added beyond two, but mixing should really only be performed when you have very consistent ratios for the various alternatives.
Figure 4.43: Define valuation alternatives
Each procurement alternative requires a ratio to determine the cost weight for each alternative, called a mixing ratio. You can update these percentages throughout the year, but you need to subsequently re-roll costs in order for the change to take effect in the cost estimate. Typically, you only want to mix costs for materials that have a consistent and well-established mixing ratio. Valuation alternative ratios are created in transaction CK94 shown in Figure 4.44.
Figure 4.44: Define alternative ratios
Alternative ratio examples
For example, if a material is purchased 40% of the time from vendor A and 60% from vendor B, you specify those percentages in this transaction.
Unit cost estimate/additive costs
Unit cost estimates are another optional precursor to costing runs. Unit costs are created individually for a material in a plant. Unit costs are manually created estimates instead of relying on the system to calculate the cost estimate using the quantity structure and material master data.
Additive costs are additional costs that can be added individually per material, per plant. Additive costs are another option for adding costs that cannot be determined by the quantity structure. Unit cost estimates and additive costs are created in the same transaction, CK74N (see Figure 4.45).
Figure 4.45: Create unit cost estimate
Additive cost examples
Some companies choose to use additive costs to add overhead costs like royalties, intercompany markup, and freight costs. These are good examples of costs that cannot be calculated by the system, but I personally feel there are easier ways to include these costs in a standard cost. Pricing conditions are a more sustainable way of adding these types of costs because they can be added for an entire group of materials, not one material at a time. Regardless, this option is at your disposal should the need arise.
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