When a production order is released, production can commence and actual costs can be posted to the production order. The production process starts with goods issues and continues with activity confirmations.
Goods issues ensure necessary input materials are withdrawn from stock and made available for production. The material consumption decreases inventory and triggers an expense posting in Financial Accounting, debiting the production order as a cost object. The withdrawn quantities are valuated at the material price selected by the valuation variant for actual costs.
Activity confirmations capture produced quantities in operations, along with corresponding production times (machine hours, labor hours, and setup). The resulting direct production costs are posted to the production order through direct activity allocation, debiting the order and crediting the cost center where the work centers are assigned to.
In the event-based approach, overhead costs based on the direct material costs and direct production costs are instantly calculated and posted to the production order. WIP (Work in process), which refers to the value of goods currently being under production, is posted immediately as well.
All of these actual costs can be analyzed using different reporting apps such as the Analyze Production Costs – Event-Based app. The next figures provide examples of how the costs are calculated and analyzed.
Material and Production Costs
The figure above illustrates direct material costs resulting from a goods issue and direct production costs resulting from an activity confirmation, both of which serve as the basis for calculating overhead costs.
Material overhead costs may occur due to various generic expenses, such as storage costs for materials. The calculation of these costs is as follows:
The general ledger (G/L) account for raw material consumption (51100000) serves as the basis, with an initial amount of 500 EUR that has already been posted to the production order. To this amount, a 5% surcharge is applied, resulting in material overhead costs of 25 EUR. The production order is then debited with this additional amount while another cost object (for example, warehouse cost center) is credited.
Using the same logic, production overhead costs, such as for work preparation, can be calculated. For instance, 200 EUR for personnel hours posted to the production order through activity confirmation (using G/L account 94311000) are subject to a 10% surcharge. This results in the production order being debited with 20 EUR and another cost center being credited accordingly.
All necessary settings for an overhead calculation are defined in the costing sheet in customizing. This sheet answers key questions such as
- The G/L accounts that are used as a basis for overhead calculations
- The applicable overhead rates
- The G/L that is used to debit the production order
- The sender object that is credited through the overhead calculation
Work in Process (WIP)
Work in process (WIP), referring to the value of goods currently being under production, is determined based on the order status. In order-related Production Accounting, the order’s actual balance is considered WIP as long as goods are still under production (for example, 3 out of 10 pieces).
Throughout the production process, WIP is updated event-based with each production event, such as goods movements and activity confirmations. As outlined in the above figure, WIP increases with the progress of production (for example, when goods are issued or activities are confirmed). As soon as goods are received over time, WIP decreases.
To calculate WIP, you proceed as follows: Consider the actual costs incurred so far, including raw materials, production activities and overhead costs, for an order that is not yet finally delivered. Then, subtract the value of finished products already delivered to stock from these costs to get the WIP.
When all items have been finally delivered and the order status has been marked as "delivered" or "technically completed," the actual balance is considered as production variance. The event-based variance posting will be detailed later.
Cost Analysis
Coming back again to the bike example, the figure below illustrates the start of production with a goods issue for all required input materials and an activity confirmation for the assembly of 6 out of 10 bikes.
Based on these production events, the following actual costs incur:
Direct material costs are posted due to the goods issue, with the input materials valuated at the price from the material master (6 PC × 1.000 EUR).
The bike assembly is recorded through an activity confirmation. In this direct activity allocation, 30 labor hours are entered in total and valuated at a cost rate of 100 EUR per hour, resulting in direct production costs of 3.000, debiting the production order.
Event-based overhead costs are calculated directly from the posted direct material costs and direct production costs, with each being subject to a 10% surcharge.
Due to ongoing production, event-based WIP is posted. The actual balance of the production order is considered to represent the current WIP value.
Note
In the figure above, all input materials are issued at once. However, it is also possible to issue a first batch of 6 pieces and then perform another goods issue for the remaining materials. In the demos and exercises of this course, you will see the latter approach.