Detailing a Production Order from a Management Accounting Perspective

Production orders include data relevant to logistics, manufacturing, and management accounting. They feature an order header with multiple tabs, granting access to all information and settings. Furthermore, it provides the user with detailed views of components, operations, and cost analysis.

Upon order creation, the system transfers the necessary quantity structure to the production order. This includes a bill of material (BOM) listing the input materials (components) and a routing with detailed information on production activities (operations) which are required for production.

Based on the quantities to be produced and the quantity structure, the system generates a preliminary cost estimate, providing planned values that serve as a benchmark for analyzing costs during production.

To ensure that all components and operations are accurately costed, it's essential to set the Relevant to costing flag in the respective BOM and routing of the product.

Let’s have another look at the relevant settings from a management accounting perspective.

How does the system ensure that production quantities are valuated correctly using the right cost rates, prices, and surcharges, to calculate the production costs for the production order?

As highlighted in green in the figure above, the Control tab on the order header contains various settings and keys that affect the costing of the production order.

Below, the most important settings are summarized:

• The order type is entered upon order creation. It defines the order’s purpose and contains a range of parameters affecting the way it is processed in the system. This includes, for example, order status management or parameters for planning, budgeting and settlement.

• Different costing variants for plan and actual costs (here PYR1 and PYR2) are assigned, defining how the costing for plan and actual costs is performed.

• A costing variant includes additional settings, such as a valuation variant. This variant determines the prices, surcharges, and cost rates that used to valuate materials and activities. Although the valuation variant is not displayed in the screenshot above, it plays a crucial role in calculating plan and actual cost.

• A costing sheet comprises different settings that steer how overhead costs are calculated. The correct sheet is determined by the valuation variant as well.

• The overhead key can be used optionally to determine order-specific or material-related overhead rates.

• In event-based Production Accounting, event-based processing keys (see the EB Procg Key field) are used to activate event-based WIP and variance posting at the order type level.

• The Event-based Posting checkmark is set automatically if the event-based processing key has been assigned.

• To post-production costs to the production order, it is essential that the order status is set to REL (Released).

The figure above illustrates an example of how a planned output of 10 bikes is valuated in a production process. After creating the production order, a preliminary cost estimate is generated, providing planned values for the production order.

This calculation is done as follows: All BOM items and operations in the routing of the bike (quantity structure) is valuated using their prices, surcharges and cost rates (value structure). As mentioned above, the correct value structure is selected by the respective valuation variant.

The preliminary cost estimate typically includes the following planned costs:

1. Direct material costs result from planned material consumption for all input materials required for production. These materials are issued and valuated at the material price selected by the valuation variant. Typically, the standard price (or moving average price) from the material master is selected (for example, 10 PC × 1.000 EUR).

2. Direct production costs are planned to record all activities related to production, including labor hours, machine hours and production setup. In this simplified example, only 50 labor hours are planned in total and valuated at a cost rate of 100 EUR per hour, resulting in direct production costs of 5.000 EUR. These costs are debited to the production order through a confirmation which equals an activity allocation. The correct cost rate is selected according to the settings of the valuation variant (for example, cost rate of current period).

3. Overhead costs are calculated based on the planned direct material costs and direct production costs. In this case, a surcharge of 10% is applied to each overhead. All detailed settings for overhead calculation are specified in a costing sheet, which is determined by the valuation variant.

4. A goods receipt is planned for delivering all bikes to stock. The planned delivery value results from the planned production quantity of 10 bikes valuated at the bike’s standard price (1.650 EUR). This standard price has typically been calculated and released in the bike’s material master through a costing run.