Introduction
In the Bike Company, employees use production accounting to get an insight into the cost of goods manufactured (COGS) for the products produced so that they can control the manufacturing costs during the production process.
Before you can use production accounting, you calculate the planned costs for each product or service in a cost estimate using product cost planning (see learning journey, Outlining Cost Estimate Options). Then, during production or service provision, actual costs are collected on cost objects during simultaneous costing. This is done by event-based production cost posting which includes the posting and calculation of work in process (WIP), overhead and variance triggered by business events such as goods movement or activity confirmation. In this way data from production accounting is transferred to other components in SAP S/4HANA Cloud. With event-based production cost posting, the production costs are posted when incurred rather than at period end during period-end closing activities. It also enables parallel valuation for group and local accounting standards in support of parallel accounting.
By analyzing the respective cost objects, different questions within production accounting can be addressed. You may already know some of them from product cost planning (see learning journey, Outlining Cost Estimate Options). Production accounting can help answering questions such as the following:
- Matching with planned costs: Do the actual costs of an order match the planned costs?
- Production variances: Are there any production variances between actual and target costs? Why did these occur?
- Contribution of manufacturing steps: How much does each step in the manufacturing process add to the product's overall cost?
- Organizational unit contribution: How much of the cost can be attributed to specific departments or teams?
- Material, production, and overhead costs: What are the expenses for materials, production, and overhead in this process?
- Improving production efficiency: How can we make our production process more efficient? Did continuous improvements influence the costs?
- Competitive pricing: Can we offer the product at a competitive price in the market?
The cost object on which the actual costs are to be collected and analyzed during production depends on your controlling requirements. Possible cost objects are production orders, process orders, product cost collectors, sales orders, and projects. The controlling requirements result from the production scenario you use. The three different main production scenarios are as follows:
- make-to-stock (MTS) scenario
- make-to-order (MTO) scenario
- engineer-to-order (ETO) scenario
In addition, there are special scenarios, like joint production or rework orders, which will not be discussed further here.
From the given production scenario result the production accounting method and cost object you use. The following two production accounting methods can be distinguished:
- Product cost by order is recommended in lot-based environments. It is typically used in order-related or lot-based production where the focus of production and cost analysis is on a particular quantity (production lot size). Costs are collected and analyzed on manufacturing orders for a particular quantity.
- Product cost by period is recommended for products with relatively high design stability and are repetitively manufactured over an extended period of time. With this method, you collect and analyze costs on product cost collectors periodically.
While product cost by order is used in lot-based discrete and process manufacturing (MTS), sales-order-related (MTO) and project-related (ETO) production, product cost by period is used in repetitive (MTS) production.
Overview Production Scenarios and Production Accounting Method Used
| Production Scenario | Production Accounting Method |
|---|---|
| Lot-based make-to-stock (MTS) production | Product cost by order |
| Repetitive make-to-stock (MTS) production | Product cost by period |
| Sales-order-related production (MTO) | Product cost by order |
| Project-related production (ETO) | Product cost by order |
In the following lessons, you will get to know the different production scenarios as well as their main characteristics. In addition, you will learn why which production accounting method is used in the individual production scenarios.
In the same way that a cost estimate can be created for both physical (tangible) and non-physical (intangible) goods in product cost planning (see learning journey, Outlining Cost Estimate Options), production accounting can also be used for both tangible and intangible goods. In this course, however, we will once again focus on tangible goods.