Explaining Product Cost Planning

Product cost planning assists employees in operational decision making for manufactured products by providing the following detailed information:

• Cost of goods manufactured, and the cost of goods sold
• Calculation of the break-even price for the product
• Comparison of production cost in large versus small lot sizes
• Production cost breakdown and comparison, for example, material costs and wages
• Optimization of the production process
• Production cost by organizational unit
• Manufacturing cost by plant
• Effect of primary costs on production costs

In the SAP S/4HANA application, materials can be valuated with a standard price, which can be set by a standard cost estimate.

Different stages of the product lifecycle are as follows:

• Product idea or simulation

  • At the start of the product lifecycle, Product Cost Planning is used to provide initial cost projections. The projections, which are usually based on existing similar products or structures, must be delivered quickly. These projections must be flexible and variable to accommodate the simulated cost projections.

• Product design and specification

  • At the product design and specification stage, costs can increase as refinements are made to original specifications.

• Prototype of new product

  • After transition to the prototype stage, the first constructive data can be entered in the form of a bill of material (BOM). During this phase, the need for integration and direct access to data in logistics increases. The person responsible for Product Cost Planning creates the data missing from logistics.

• Market maturity of product

  • After products attain market maturity, the integration of master data for tangible goods has a significant impact. At this stage the cost of the product or product range is monitored periodically at regular intervals and cost shifts are analyzed.

• Continuous improvement

  • Improvements in the production process of important products must be reflected by and analyzed in Product Cost Planning.

Definition of Terms:

• Quantity structure: This is referring to the BOM and routing.

• Preliminary cost estimate: This concept is referring to a cost estimate for production orders and production versions (BOM/routing combination). Used to calculate variances.

• Standard cost estimate:

  • Valuation of the planned quantity structure with planned prices.

  • Calculation of standard prices for the valuation of materials with price control S.

• Current cost estimate:

  • Valuation of current quantities with current prices.

  • Costing of materials during the fiscal year in order to analyze changes in costs.

• Modified cost estimate:

  • Valuation of current quantities with planned prices.

  • Costing of materials during the fiscal year in order to analyze changes in costs.

• Inventory cost estimate: This is a cost estimate that is being used to value tax-based and commercial inventory of products (in the Accounting 2 tab of the material master).

  • Valuation of current quantities with tax-based and commercial prices.

  • Establishment of valuation approaches for inventory valuation.

The different stages of the costing sequence are as follows:

• Product idea stage

  • If you plan a new product for which there is no master data in the SAP S/4HANA application, you can perform initial planning and cost projections using Product Lifecycle Costing. In this solution, you manually enter the costing items in a spreadsheet or the cockpit to create a cost estimate. We will examine this process later.

• First prototype stage and ready for market stage

  • When the first material master data is created in the SAP S/4HANA application and production planning (PP) is not an SAP module, you can use the material cost estimate without a quantity structure to manually plan the cost of goods manufactured and the cost of goods sold for the product. Two methods are available for material cost estimate planning without a quantity structure. These are unit costing and multilevel unit costing.

  • Unit costing allows you to plan the cost per unit of the material without detailing the cost of each production phase. Multilevel unit costing enables you to plan cost at assembly level, without requiring production BOMs.

• Saturation stage and decline stage

  • When the complete master data (BOM and routing) is available in the system, you can create a material cost estimate with a quantity structure, which automatically calculates the cost of goods manufactured and the cost of goods sold from existing data in logistics, such as BOM and routing.

Unit costing is a concept referring to the options for costing new products or performing what if scenarios.

https://help.sap.com/viewer/92419cca24534eaebb91b731261d911a/6.17.17/en-US/b25a29e1-b1f0-4732-b0d6-e8f709e26391.html

The following list contains definitions of terms that are used in the previous figure:

• Unit costing can be relatively simple where all items have on common parent (flat list). Use the Create Unit Cost Estimate - Single Fiori app in this case.

• Unit costing can be based on multilevel BOMs. Use the Create Unit Cost Estimate - Multi Fiori app in this case.

• A cost estimate with quantity structure is based on a BOM and routing (or recipe).

• Cost component splits are used to sub-divide costs into high level categories such as material, labor, and overhead.

• Itemization: The items that make a cost estimate.

• Costed multilevel BOM: Hierarchical overview of the values for all costing items of a material or sales order.

The different costing methods are as follows:

• Unit costing and multilevel unit costing

  In the early stages of the product lifecycle, unit costing and multilevel unit costing are the ideal costing methods. These methods offer flexibility and efficient data maintenance. You can refine the cost estimate as more data becomes available.

• Cost estimate with a quantity structure

  When a cost estimate with a quantity structure is created, the system uses master data from logistics to generate a cost estimate. This method costs individual products precisely, and provides various analysis options to compare different alternatives.

• Costing run

  Costing runs are used to process mass data. This method is used periodically to cost an entire product spectrum.

Tangible goods are physical objects. The characteristics of tangible goods are as follows:

• Materials can be produced in-house, subcontracted, or procured externally.
• Data for these materials is located in the logistics components Production Planning (PP) and Materials Management (MM). This data is accessed when the materials are costed.
• Product cost estimates for tangible goods can be used for inventory valuation and comparison purposes in Cost Object Controlling.

Product cost planning is based on various production strategies. The main production strategies are as follows:

• Make-to-stock production

  Make-to-stock production tries to match production with forecast consumer demand.

• Make-to-order production

  Make-to-order production allows consumers to purchase products that are customized to their specifications.

Intangible goods are usually services. Examples of intangible goods are as follows:

• Shipping (packing, storage, quality checking, and so on)
• Telecommunications
• Consulting
• Training

• Product cost planning aids decision-making by detailing costs like goods manufactured, break-even price, and production cost comparisons.
• Different product lifecycle stages impact cost planning, from initial projections to market maturity and continuous improvement.
• Costing methods include unit costing, multilevel unit costing, and cost estimates with quantity structures, each suited to specific lifecycle stages.
• Tangible goods involve physical products, while intangible goods are services, each requiring distinct cost planning strategies.
• Make-to-stock (Align production with forecast demand) and make-to-order (Customize production per customer specifications) are primary production strategies influencing product cost planning.