Explaining the Product Cost by Period Approach

Production Accounting

Production Accounting gives an insight into the cost of goods manufactured for your products, so that you can control the manufacturing costs during the production process.

It supports you with the following tasks:

Reaching make-or-buy decisions
Determining price floor
Performing complex cost analysis (such as target/actual analysis)
Determine the production variances between actual costs and target costs, and why these occurred
Determining inventory values
Determine whether and how the cost of goods manufactured can be reduced

This figure illustrates that production accounting encompasses analyzing product costs either by individual orders for production lots or by periods for recurring cost control of consistently manufactured products.

Production Accounting is divided into the following components:

Product Cost by Order
Product Cost by Period

Product cost by order is recommended in lot-based production environments.

Typical applications of product cost by order are in order-related production or batch-based process manufacturing.

The production process is based on manufacturing orders where the focus of production and cost analysis is on a particular quantity (production lot size).

You can use Product Cost by Period in the make-to-stock production environment. It's recommended for products that have relatively high design stability and are manufactured over an extended period of time.

If you are manufacturing your products in a repetitive manufacturing (REM) environment, you always use Product Cost by Period.

Product Cost by Period

Product Cost by Period enables periodic analysis of costs at the product level.

You analyze costs by period rather than by lot, which means that you collect the costs on a cost object over an extended period of time and analyze them in each period.

This figure illustrates the process flow of make-to-stock production and repetitive manufacturing (REM) using product cost by period, including cost object and product cost collector, leading to warehouse stock.

In Product Cost by Period, you use product cost collector (PCC) as the cost object.

It enables you to collect costs at the product level independently of the production type.

Regardless of whether the production environment is order-related production, process manufacturing, or REM, you collect the production costs for the product on a PCC and analyze the costs in each period.

Note

In Product Cost by Period, you always calculate WIP based on target costs.

You can use Product Cost by Period for the following purposes:

Create a material cost estimate
Calculate and analyze target costs and actual costs for the PCC
Calculate or update the work-in-process (WIP) inventory and the finished goods inventory
Calculate and analyze variances for each period

In Product Cost by Period, you can do the following anytime triggered by business events or at period end for the PCC:

Calculate overheads
Calculate the value of your unfinished products (WIP)
Calculate variances
Settle the WIP and variances to Actual Costing

PCC enables realization of lean cost management scenarios. The costs incurred from logistical transactions on the production version such as goods issues, confirmations, and goods receipts are updated directly on the PCC.

Example:

You enter reporting point backflushes in REM confirmations. The PCC is debited with actual costs.

You create a goods receipt. The PCC is credited.

Sequence of Steps in Product Cost by Period

The sequence of steps in Product Cost by Period is as follows:

The PCC is debited by posting actual costs that are assigned to it.
For example, this can be done by withdrawing materials from inventory or through internal activity allocations.
The PCC is credited when the finished materials are received into inventor.

This figure illustrates the components and flow of product cost by period, centering on the Product Cost Collector and including elements like target costs, production costs, work in process, total variance, and key processes such as goods receipt, goods issue, operation confirmation, and backflushing.

Note

In Product Cost by Period, the WIP is calculated at target costs.

In repetitive manufacturing, you must enter reporting point backflushes.

Confirmed quantities are valuated at target costs when the WIP is determined.

In Product Cost by Period, WIP and variances can exist on a PCC at the same time.

To determine the total variance, the actual values confirmed in the period are compared against the target values.

The WIP is deducted from the difference between actual costs and the target costs to determine the variance.

Note

The PCC is valid over an extended period of time. The validity period can extend across more than one fiscal year.

Course Scenario

The following units are set up like a case study for the scenario of the Bike Company‘s production of handlebars.

This figure showcases the components involved in the production of a bicycle handlebar, including the grip, hand lever brake, and bar.

This will help to understand all relevant settings for the Product Cost by Period approach.

Since handlebars for bikes are produced in a repetitive manufacturing (REM) environment using the Backflush Method this fits for the Product Cost by Period variant of Production Accounting.