Product Costing Controlling

Product Cost Planning is a tool for setting standard prices of FG and SFG. The standard price is
compared against the actual cost of production and any difference between the standard price and
actual cost is recorded as variance by the system. It will also form the basis for valuation of FG and
SFG inventories at the period and year end. It uses information from the Overhead Cost Planning to
calculate costs such as labour, machine, or factory overhead.
Product Cost Controlling includes:
Overhead

Cost

Planning:

It

consists:

Planning of activity output quantity and activity prices for production cost center.
Overhead rate maintenance in overhead cost sheet for overhead prices.

Product

Cost

Planning:

It

consists:

Creation / Marking / Release of cost estimate for all in-house manufactured products. It includes
the raw material cost and conversion cost like labour, machine or factory overhead from overhead
cost planning.
Cost Object Controlling: It consists:

Periodic adjustments of actual costs posted to production cost center and activity.
Calculation of overhead, WIP cost and variances for production orders/product cost collector and

there settlement to FI.

Overhead Cost Planning
Overhead cost planning involves activity wise quantity output & cost planning in respective
production cost centers, based on which activity prices are derive for a particular period interval. It
forms part of the overall product cost planning process, and is a prerequisite for standard costing in
product cost planning. Product Cost Planning accesses material prices of input material in BOM,
activity prices of activities performed for an operation under taken in respective work center attached
to the production cost center.
Planning is used to determine the activity price on the basis of planned costs and planned activity
quantities. These prices are used to valuate activities during the current period and also for future
periods. On the basis of the actual activity output quantity (confirmation through production order)
and cost booked in finance in previous periods, the planning data will be updated periodically to
derive new activity prices for the next periods. The actual activity output quantity in production order
and cost booked in finance are simultaneously updated by the system in production cost center.

Planning Version
The planning process is not a one-time event, but an iterative process which usually goes through
several cycles. The basis for calculation of plan prices and resulting plan prices itself is stored by
way of versions in the system. The SAP system allows us to have multiple versions at the same
time. We can use these versions as the basis for analysis. These versions are stored separately in
the system and can be compared with each other in the information system (plan/plan comparisons,
or comparisons of the actual costs with different versions).
When we create a controlling area, the system automatically creates version 0 (plan/actual). The
actual values when entering costs in FI or allocating costs using distribution/ Assessment cycles
internally in CO and actual activity output quantity in production order are by default posted in
version 0 through cost element. Version 0 will also be used to store the plan prices required for
internal activity allocation during product cost planning and actual activity confirmation in production
order. We will use version 0 for plan/actual comparison as it contains both plan and actual data for
analysis purposes. We can use any number of additional plan versions. However, no actual data is
recorded in these alternative versions. We can only plan data in these additional versions.
In general, use Version 0 & Version 1 for our planning purpose. The plan and actual data in version
0 will be maintained at average price method on quarterly basis while version 1 will be maintained at
periodic price method on quarterly basis. Version 0 plan and actual activity prices will be used in
product cost planning and production order to derive internal activity prices. The comparative
analysis of activity prices in version 0 and 1 will give the variance between activity prices based on
average price method and periodic price method.
Planning Layout
Planning profiles in cost center planning contains list of predefined planning layouts in the standard
system. Planning layouts are predefined Forms for manual entry of planning data. These forms
contains list of objects like cost elements, cost center and activity types for which periodically
planning data will be maintained in the respective plan version.
Cost
center
planning
In production planning (PP module) either each individual machine or a group of machines will be
defined as a work center. Each work center will be assigned to a production cost center and the
activity type viz. labor hour, machine hour etc for costing. This assignment would be done in the
work center master record in PP.
Activity output/Cost element

Activity Output Quantity

The first step in cost center planning is to plan for the activity output for all production cost centers.
Activity types are used to determine the quantity-based output of a production cost center. This will
represent the planned utilization (in man hours/machine hours) of various activities at each work
centre. These activities should be planned in sync with the planned capacity utilization to meet the
product cost planning for the period.
Activity output planning will be done using transaction KP26. In activity output planning, we plan the
activities utilized by a production cost center. This represents the quantity-based output of a cost
center. During activity output planning we can manually set the plan price per unit of activity with
which the SAP system valuates the activity during allocation from production order to production cost
center. We can choose to retain this price or have the system overwrite it during plan price
calculation.
The planned quantity for the activities associated with the respective cost centre will be revised from
quarter to quarter based on the actual activity quantity recorded through PP in the respective cost
centre. The revision will be done either manually by looking into the cost centre report or through the
auto copy functionality KP98. The planned price per unit of activity after the KSPI run is updated in
the fixed price column for the period. The future activity price for standard cost estimate are derived
using the planned price in the fixed price column and the activities confirmed in PP are hereinafter
valuated with the new rate as updated in the fixed price.
Primary Cost Element Planning
Primary cost planning involves planning of overhead cost that arises because of the production
activity. It refers to the activity cost incurred in producing the plan output on a production cost center.
It includes direct labour cost, direct machine cost, direct expenses and other indirect overhead.
Primary cost planning is purely a value or amount based planning. In this case the system records
the plan cost against the combination of each production cost center, primary cost element and
activity type. Primary cost planning is done using transaction code KP06. The planned value for the
activities associated with the respective production cost centre will be revised from quarter to quarter
based on the actual activity cost recorded through FI in the respective cost centre. The revision will
be done either manually by looking into the cost centre report or through the auto copy functionality
KP98.

Secondary

Cost

Element

Planning

In addition to primary cost ( direct cost), secondary cost ( indirect cost) are often incurred in the
production process. This is because production cost center takes service of other support cost
centers to produce its own activity. Secondary cost on the production cost center results from
internal cost allocation from support cost centers through distribution or assessment cycle based on
statistical key figure, activity type or primary cost already recorded in receiver cost center.
Activity Price Calculation
Activity price calculation is the last stage in the process of overhead cost planning. This is required
to be done for all production cost centers. It is through activity price calculation run (KSPI Plan
Activity Price, KSII Actual Activity Price) that the activity price per unit of activity for an activity type
is derived by the system. KSPI updates activity price in the fixed price column for the activity type
and cost center which can be seen through KP26 and is used for standard cost estimate. It also
updates plan prices column in KBK6 with plan activity price which is used to valuate activities
confirmed through production order. Unlike KSPI, KSII updates only fixed price column in
KBK6. The future activities going to be confirmed through production order can also be valuated
using this price.
Periodically activity price calculation will be executed for each manufacturing plant for those
overheads which should be fully absorbed/loaded on the inventory. Activity price will be calculated
automatically iteratively on the basis of the planned activity quantity updated in KP26 for cost
center/activity type and value or amount updated for cost center/cost element/activity type through
KP06. The price calculation method i.e. average price or periodic price for activity prices will depend
on the calculation method maintained in the planning version 0 and 1 respectively.

Overhead Cost Sheet

Costs (other than Direct material, Direct labor & Machine cost), which are not directly attributed to
the products are called overhead cost. Overhead cost can be of different types, such as, Material
Overhead, Labor Overhead, Production Overhead, Administrative Overhead, Selling & Distribution
Overhead.
Cost which will be covered in the above categories will be as follows:
(1) Material Overhead: Cost of all the indirect material which will not be captured through BOM.
(2) Labor Overhead: Cost of all the indirect labor which will not be captured through Routing.

(3) Production Overhead: Other production cost which will not be capture through prime cost as well
as material & labor overhead.
(4) Administrative Overhead: Cost of administrative expenses other than production cost.
(5) Selling & Distribution Overhead: Cost of selling & distribution expenses
Allocation of the above mentioned overheads can be on percentage-basis or on quantity-basis. The
overhead allocation amount is derived for each of these overhead through overhead costing sheet.
The costing sheet includes all parts relevant for the overhead costing, and determines the rules for
calculating the values to be posted.
The structure of the costing sheet includes the following parameter:
(1) Calculation Base: it includes the primary cost elements like direct material consumption account,
internal activity allocation like direct labour cost to which a particular overhead rate is to be applied.
Calculation base condition is specified in the Base column of the cost sheet.
(2) Overhead Rate: overhead rate determines under what condition and to what extent the
percentage-based or quantity-based overhead rate should be applied to the direct costs specified in
calculation base. Overhead rate condition is specified in the overhead rate column of the cost sheet.
(3) Credit: when a production order/product cost collector is debited with overhead an entry is
credited to overhead cost center. This overhead allocation is done through overhead cost element
specified in credit column along with the cost center of the overhead row.