Getting into Product Cost Collectors, Target Costs, Work in Process and Variances from a Functional Perspective

The Event-Based Production Cost Posting solution includes posting and calculating work in process (WIP), overhead, and variances triggered by business events such as goods movement or activity confirmation. With this solution, the production costs are posted when they occur and not at the end of the period. The solution thus enables earlier transparency of the contribution margin during the production process. It also relieves controllers of complicated period-end closing tasks. In addition, parallel accounting is also supported by the solution.

The figure above describes how the general process of event-based production cost posting works with a product cost collector:

1. The product cost collector must have been created.

2. The material cost estimate for the material/plant combination must also be created. Since it contains BOM and routing information for manufacturing the product, it is used to calculate the target costs.

3. The target costs in turn form the basis for the valuation of the following:

• Material, activity, and overhead costs per lot size
• Work in Process (WIP)
• Cost Variances

4. Afterward, the actual costs are posted by posting with reporting point backflushes in the Confirm Repetitive Manufacturing (MFBF) app.

For each reporting point set as a milestone, you can create confirmations that result in the following:

• The materials consumed between two reporting points and the overhead costs incurred are posted.
• Automatic activity allocation is generated (if the corresponding settings have been made in the repetitive manufacturing profile).
• An automatic goods receipt is posted at the time of the last reporting point backflush.
• WIP and total variances are calculated dynamically.

5. You can use the Revaluate Orders option in the Postprocess Event-Based Postings - Product Costing job template of the Schedule Product Costing Jobs app to manually split the total variance into variance categories.

If exceptions occur, you can settle the product cost collector using the Postprocess Event-Based Postings - Product Costing app. The settlement revaluates the posted values, such as WIP and variances, so that the order is balanced to zero.

During the entire process, the target costs and actual costs including WIP and variances are calculated, and not only at the end of the period. With the help of the Analyze Production Costs - Event-Based app, you can evaluate the data throughout the process.

Product Cost by Period enables periodic cost analysis at product level. Here, the costs are analyzed by period and not by lot.

In repetitive manufacturing, you must always use a product cost collector. This has order category 05 (product cost collector).

In general, the product cost collector is a cost object in Product Cost by Period that records the target costs and actual costs incurred during the production of a material. The main cost object of the product cost collector is the product.

Since the product cost collector is always the cost object in repetitive manufacturing, the following prerequisites must be met for the creation of a product cost collector:

• The repetitive manufacturing indicator must be set in the material master record.
• A repetitive manufacturing profile must be defined and assigned to the product in the material master record.
• A production version must be created for which repetitive manufacturing is set to allowed.

Based on the product cost collector, overhead costs, work in process (WIP), and variances can be calculated for the period for each product cost collector.

The product cost collector answers the following questions:

• Which components are consumed in which quantity for production?
• What activity is used for production?
• What quantity is produced, what is the scrap quantity?

The product cost collector is similar to the internal order in Management Accounting. It is used jointly by controlling and production. Quantity data for consumption, activities, and production is entered in production. In Controlling, this data is linked to the cost estimates to calculate target/actual variances.

You can use the product cost collector to implement lean controlling. The costs incurred by logistical operations on the production version (for example: goods issues, confirmations, and goods receipts) are updated directly on the product cost collector.

The validity period of the product cost collector can extend over several fiscal years. It is debited when assigned actual costs are posted, for example, by material withdrawal from the warehouse or by internal activity allocations. The product cost collector is credited by the delivery of the manufactured materials to the warehouse.

In our scenario, which uses the backflush method in repetitive manufacturing, the product cost collector is debited with actual costs by reporting point backflushes.

Goods receipt postings result in the product cost collector being credited.

A product cost collector can be created for any combination of material, plant, and production version.

A separate product cost collector must be created for each production version used in repetitive manufacturing. The costs for a production version are collected on a product cost collector. As a result, the product cost collector always refers to the production version and only indirectly to the material to be produced.

When the product cost collector is created, the following objects are generated automatically:

• A production process whose production process number in repetitive manufacturing links the production process, the production version, and the product cost collector.
• The order number under which the product cost collector is saved.

When you save the product cost collector, the status REL (released) is set automatically.

When you create the Product Cost Collector, you must specify the material, plant, controlling level: production version, the production version number, and the order type of the product cost collector.

As the default rule Str - with strategy for tracing factor determination has to be selected. This default rule cannot be changed in Customizing! This default distribution rule is used for Product Cost Collectors and controls that 100% of the costs are settled to the material with a periodic settlement type.

When you create a Product Cost Collector for the plant, you must specify the order type YBMR, which is the only one supported for Product Cost Collectors. Based on this order type, the transaction key and costing variants are derived automatically.

According to the event-based processing key, PCCEB - Product Cost Collector - Order - Op. Key, Event-Based Production Cost Posting is activated. Event-based WIP at target costs are calculated. The total variance is not split into variance categories, only the variance total is calculated.

Due to the selection of the event-based transaction key, the following costing variants are used:

• Planned Cost Variant: PERM - Preliminary PCCEB
• Costing Variant Actual Costs: EYRM - Product Cost Collector

In turn, the valuation variants are automatically selected from the definition of the costing variants:

• Valuation Variant YR6 - Prod. Order planned RR WIP for the planned cost variant
• Valuation variant ERM - REM: Actual Event Based for the costing variant Actual Costs

The planned cost variant PERM - Preliminary PCCEB determines the costing sheet in the product cost collector master data that is used to calculate overhead costs. If no costing sheet can be derived from the planned costing variant, the costing sheet 1010EP - Event Based Costing Sheet (DE) of the costing variant Actual Costs is used. The costing variant Actual Costs EYRM - Product Cost Collector is used to valuate activity amounts in the actual costs.

The above figure shows that instead of the planned cost variant for product cost collectors (PERM - Preliminary PCCEB), the corresponding settings of the material cost estimate are used to calculate the target costs, the work in process (WIP), and the variances of the product cost collector, that is:

• The standard price for the material valuation
• The plan price as the average of all fiscal year periods for the valuation of the activities
• Costing sheet 1010EP - event-based costing sheet for overhead calculation

In make-to-stock production, target costs are always calculated based on the standard cost estimate for the material produced, that is, the material cost estimate.

To calculate the target costs correctly, a valid material cost estimate with the status FR (Released Without Errors) and the cost statement must exist in the period in which the last goods receipt is posted. This means that the goods receipt date must be within the validity period of the cost estimate (costing date from to costing date to).

If, at the point of time of the goods receipt, you use the Confirm Repetitive Manufacturing app to create actual data, for example, if you enter a specific output quantity, the corresponding total target costs are calculated dynamically after the actual data has been posted and are not saved in a database table.

The figure above describes the formula used to calculate the target costs.

The target costs, in turn, serve as the basis for calculating Work in Process (WIP) and variances.

In the delivered, non-changeable, event-based processing key, PCCEB - Product Cost Collector Order-Event Based Key, in the detail view of the Event-Based WIP and Variance Posting configuration activity, it is defined that the Work in Process is to be calculated on the basis of the target costs.

WIP represents the unfinished products that have not reached the end of the production line during the production process.

Since, in material costing, the routing defines the required operations and activities, while the BOM defines the components (materials) assigned to the operations, WIP amounts are calculated as follows:

• When a quantity confirmation is posted at a milestone reporting point, WIP increases by summing up all costs incurred at the reporting point, including the operation costs between the previous milestone reporting point and the confirmed reporting point.
• If the scrap quantity is confirmed at any reporting point, the WIP quantity of each previous reporting point is reduced accordingly.
• If the goods receipt is posted with the last reporting point confirmation, the WIP amount is deducted accordingly.
• Therefore, to calculate the total WIP for a specific Product Cost Collector order, you first aggregate the WIP values of all milestone reporting points and then subtract the goods receipt value.

The posting and calculation of work in process (WIP), overhead, and variances is triggered by business events such as goods movement or activity confirmation. At the same time, the production costs are posted when they occur, and not at the end of the period, which allows earlier transparency of the contribution margin during the production process, as well as relieving the controller of complicated period-end closing tasks.

In Product Cost by Period, WIP and variances can exist on one Product Cost Collector at the same time. To determine the total variance, the actual values confirmed in the period are compared with the target values. The work in process is deducted from the difference between the actual costs and the target costs to show the variance.

In Event-Based Production Cost Posting of Product Cost by Period, actual costs are collected on the product cost collector when a reporting point backflush is carried out, that is: yield and scrap quantities are entered in the Confirm Repetitive Manufacturing app. As a result, Work in Process and variances are calculated and posted to the Product Cost Collector in real-time.

The event-based processing key PCCEB (Event-Based Key of PCC Order) determines that work in process is calculated based on target costs. Variance can be split into different variance categories. The material is the only valid posting receiver.

To achieve event-based WIP and variance posting, the following prerequisites must be met:

• Reporting point backflush has been specified in the repetitive manufacturing profile.
• The Repetitive manufacturing profile has been assigned to the material in the material master record.
• At least one transaction has been specified as the milestone reporting point in the routing.
• The transaction has been set to relevant to costing.
• The WIP source accounts have been defined and the WIP account determination rules have been assigned to the relevant company codes.

In Product Cost by Period, the work in process (WIP) is calculated at target costs. For WIP at target costs, WIP and variances are calculated based on the standard cost estimates of materials. When backflushes are posted to the PCC in event-based postings, WIP and variances are calculated in real-time.

Depending on the event-based processing key, PCCEB - Product Cost Collector - Order - Op. Keys, the WIP sources and account determination rules for event-based WIP postings are determined.

For the Bike Company scenario, the figure above describes the production cost sources of work in process and assigns the G/L accounts, with the help of which the postings are made, to the corresponding source. This means that all G/L accounts for which work in process can be calculated (for example: Material Costs, Internal Activities, External Activities) have to be assigned to the source type Production Cost Sources.

Since Event-based WIP posting generates a financial document when a material consumption or activity confirmation takes place, the WIP account determination rules must specify the Financial Accounting G/L accounts for inventory posting of work in process, reserves for unrealized costs, and offsetting G/L accounts for gains and losses.

For the example of the Bike Company, the figure above describes the WIP-related G/L accounts that are defined in account determination.

If the WIP is increased based on material consumption or activity confirmation, the system makes the following postings:

• The balance sheet account for work in process is debited
• The P&L account for inventory changes is credited

The goods receipt to stock is posted as follows:

• The balance sheet account for work in process is credited.
• The P&L account for inventory changes is debited.

In our example, the WIP account determination rules are assigned to company code 1010 - DE Company Code and document type SA - G/L account document for event-based WIP and variance posting.

During the production process, the actual confirmed materials and activities may differ from those specified in the BOM and routing, or an unplanned scrap quantity has been entered. This results in variances which represent the difference between actual costs and target costs.

The upper figure shows how the total variance is calculated for a specific PCC order:

Total variance = Actual input cost - Goods receipt value - Total WIP amount

For a product with price control S (standard price) in the material master record, the variance is posted directly with the reporting point backflush.

Using the field, SLALITTYPE (Subledger-Specific Line Item Type), a standard field of the ACDOCA table, the variance categories, including the total variance, are technically set up.

The numerical results of the total variance and the variance categories still to be considered are stored in the transaction data table, ACDOCA, with reference to the SLALITTYPE field.

The figure shows that the SLALITTYPE number 9120 represents the total variance. This number is hard-coded in the system and cannot be changed. The system does not write a SLALITTYPE number for the automatic offsetting entry for the total variance.

The actual account for the total variance and all variance categories can be derived using account determination. Depending on the debit or credit posting, the above table shows the price difference accounts defined for the Bike Company and the respective offsetting account.

The records in both tables each give an example of the technical storage of the total variance posted in table ACDOCA. The respective numeric value is an example value that is not related to the Bike Company scenario.

In the delivered non-changeable event-based processing key PCCEB - Product Cost Collector Order-Event Based Key, the Variance Split option is set to Yes and all variance categories are selected in the Event-Based WIP and Variance Posting configuration activity and there in the detailed view. These settings cannot be changed.

The variance categories are also specified using the field SLALITTYPE (Subledger-Specific Line Item Type).

The figure above shows which technically hardcoded SLALITTYPE number is assigned to which variance category. This shows that no separate accounts can be defined in the system for variance categories!

Variance split for product cost collector is not triggered automatically by real-time business transactions. To split the total variance into different variance categories, a job must be manually scheduled for the specified product cost collectors in the Schedule Product Costing Jobs app.

To schedule the job, use the job template Postprocess Event-Based Postings - Product Costing and set the option Revaluate Orders. As a result, a revaluation is performed and the total variance is split into the following variance categories:

Caused by differences between the target and actual prices of the materials and activities.

Input Price Variance = (Actual Cost / Actual Input Quantity - Target Cost / Target Input Quantity) x Actual Input Quantity

Caused by differences between the target and actual quantities of the materials and activities used. The differences can only be calculated when the target and actual input quantities are not zero.

Input Quantity Variance = (Actual Input Quantity - Target Input Quantity) x (Target Cost/Target Input Quantity)

Caused by differences between which resources were planned and which were consumed. When unplanned resources are used, or planned resources are not used, actual costs or target costs will be zero, and resource usage variance is calculated.

Resource Usage Variance = (Non-planned) Actual Costs - Target Costs

Output price variance occurs if the standard price has changed between the time point of delivery to stock and the time point when the variances are calculated. It represents the difference between actual credit and target credit of an order.

Output Price Variance = Actual Cost Credit - Target Cost Credit = Actual Output Quantity x (Actual Price - Standard Price)

The remaining variance consists of the differences that can't be attributed to any of the above variance categories.

Remaining Variance = Total Variance - Input Quantity Variance - Input Price Variance - Output Price Variance - Resource Usage Variance

In addition to the total variance that has already been posted and the corresponding offsetting entry, additional data records are created in the ACDOCA table if the total variance is split into variance categories. The sum of the variance category values equals the total variance.

As you can see in the figure above, the amounts of the variance categories are posted to the combination SLALITTYPE/Price Difference Account and the system uses the same price difference account that is also used to post the total variance!

Once again, the respective numerical values are purely example values that are not related to the Bike Company scenario.

The figure above shows in which analytical apps you can display event-based WIP and variance values in company code currency and group currency for parallel ledgers.

You can use the analytical app, Analyze Production Costs - Event-Based, to do the following:

• See up-to-date production cost data for event-based product cost collectors
• Get a cost comparison of target and actual costs for product cost collectors
• See total variance and variance split for product cost collectors

The Product Cost Collector Details - Event-Based app enables the user to do the following:

• See a breakdown of event-based cost postings for product cost collectors.
• Get a detailed cost comparison of actual and target costs for product cost collectors 
• Compare target costs against actual costs
• View full details of costs by G/L account
• See up-to-date cost information based on material consumption and activity confirmation from the most recent repetitive manufacturing backflush postings

If the user uses the Work in Process - Event-Based app, they can do the following:

• See work in process (WIP) and related production cost data in real-time for event-based orders
• Check WIP data for product cost collectors on any specified date, filterable by plant, product group, and so on
• Get insights into recent trends, including the change in WIP versus the previous month, and over recent days
• Get additional info such as planned output quantity, completed quantity, and estimated completion cost for each order
• See WIP quantity documents generated for valuating WIP at actual prices in Actual Costing.

By using the Display Line Items - Production Accounting app, you can analyze the following:

• Display line items in production accounting
• Set filter, sort, and group the items based on various criteria. 

All reports use the field SLALITTYPE (Subledger-Specific Line Item Type) to categorize the variances as described.