Simple Overview of Product Costing in SAP

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Product costing is often regarded as the most challenging module in SAP. While this reputation builds a certain mystique around the topic, I promise that it is attainable after reading this post. SAP is the world’s leading enterprise applications provider, offering a broad market of technology applications including analytics, cloud, mobile, and database solutions. Headquartered in Walldorf, Germany, SAP provides solutions for companies of all sizes and industries to, simply put, run better. SAP is currently ranked by Forbes as one of the world’s most powerful brands and innovative companies.

Product Costing in SAP

Controlling is one half of the Finance (FI) module in SAP, and one of the most integrated modules within the system. The controlling module in SAP contains sub-modules for overhead accounting, cost center accounting, profit center accounting, cost element accounting, and product cost controlling. Product costing integrates with so many other modules in SAP, yet users in other areas tend to know so little about product costing processes.

To the disbelief of many, product costing is not magic! It is a highly complex area of the system, but I find that with patience and research, anyone can understand the basics. The first thing to know about product costing is that it only exists in companies that actually manufacture something. Someone once told me they performed product costing at a large bank, which was a clear indication that they did not know what they were talking about! The idea is calculating the cost of a produced product for internal management reporting and inventory valuation.

The controlling module design depends on the process decisions made by other areas of the company. For this reason, product costing configurators and business users must have an understanding of the entire design of the SAP system, with focus on production execution, warehousing, sales, distribution, purchasing, payroll, and maintenance. This post will focus on the product costing design, but will also highlight key areas that may differ depending on design in other modules.

Let’s start with why we perform product costing. We cost products for 3 reasons:

1. To determine how much products cost to produce.

2. To develop reports used by sales, marketing, and executives.

3. To build financial statements for internal and external reporting (both profit and loss statement and balance sheet).

Organizational Hierarchy

The second highest level in the organizational structure in SAP is controlling area. People often refer to controlling area as the highest organizationalelement. However, the operating concern, used in profitability analysis (COPA), is actually the highest level. Most companies use one controlling area so they can report across the entire company. You must set a controlling area currency and a fiscal year for the controlling area. Companies that require more than one fiscal year will therefore require more than one controlling area.

There are many downstream impacts to other modules if you elect to use more than one controlling area, so it is best to stick to one. For example, if you utilize projects in SAP, you can only report projects across the same controlling area.

Company codes represent legal entities in SAP. You can have multiple plants within a company code as plants are buildings where materials are manufactured, warehoused, or distributed. Depending on the design of your organizational hierarchy, you may have multiple plants within company codes, or you may have a one-to-one relationship between plants and company codes.

Sample organizational hierarchy diagram:

The finance and tax departments generally determine the company code structure; the production department usually determines the plant structure. It is important that the relevant department give careful thought to the naming conventions used for each hierarchy element. Some companies prefer to use alpha and numeric characters to define company codes. This approach typically supports an organization better than smart numbering due to acquisitions and legal entity changes.

Alpha numeric company codes aren’t completely fool-proof though. For example, if you use ‘AM01’ to represent Americas because the US, Canada, and Mexico are considered one region today, consideration should be given to future acquisitions in Central America and South America. Will these countries fit within the ‘AM’ sequence, or will confusion arise when ‘CA’ and ‘SA’ are used to represent other ‘America’ countries.

You can produce a Balance Sheet by each company code, but not by each plant in SAP. A balance sheet is a key financial statement that summarizes the company’s financial position with three sections: assets, liabilities, and ownership equity. You can produce an Income Statement, also known as a Profit and Loss statement or P&L, by each company code and plant in SAP. An income statement is a key financial statement that summarizes the revenues and expenses of a company which is totaled to net income, or profit.

There are further levels under plant that break down each physical location where materials are received, warehoused, staged, and produced. This level is called storage location.

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To connect these concepts back to the product costing module, know that materials have a cost per plant, not company code or storage location. That means the same material can have a different cost per plant, which is referred to as plant-specific costing. Later in this post, we’ll discuss options to set up a cost that applies to more than one plant or all plants. This is often referred to as a global standard cost or transfer costing.

Now that you have a brief understanding of the organizational hierarchy in SAP, you have a reference point when these hierarchy elements appear throughout the posts.

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