Valuating Resource Consumption (goods, labor)

When the production order is created and the production is launched, additional steps are immediately triggered. There are several methods for initiating them. Let’s concentrate on the general principle and suppose your SAP S/4HANA Cloud system uses the Event-Based Production Cost Posting solution.

Before discussing the details of the postings, let’s review the main apps for monitoring the sequence.

If you want to track up-to-date production cost data for event-based manufacturing orders, even in parallel ledgers and in multiple currencies, you can use the Analyze Production Costs - Event-Based app.

It provides you with a cost comparison of actual, plan, and target costs at order level for open and closed manufacturing orders, as well as per cost component groups. Indeed, if cost component structures have been set up for different analysis needs, you can use this combination of cost components. Only cost components that are defined as Cost of Goods Manufactured are shown.

The Order Costs Details - Event-Based app offers a cost comparison of actual, plan, and target costs at both order header and item levels, in multiple currencies, for orders using the Event-Based Production Cost Posting solution (3F0).

You can access it directly or from the Analyze Production Costs - Event-Based app.

The main interest is to provide you with the following:

• The full details of costs by G/L account, and by business transaction
• A variance split after orders are delivered, or technically completed

Let’s now outline the overhead costs calculation related to prior business event postings, such as goods issues and activity confirmations.

To know more about the overhead costs' calculation, please refer to the course, Evaluating Cost Estimate options.

As already mentioned, SAP recommends using the event-based overhead calculation, the default method in SAP S/4HANA Cloud, Public edition. This method, part of the Event-Based Production Cost Posting (scope item 3F0) solution, posts production costs as well as their associated overhead costs as they occur rather than at the end of the period. Overhead costs are automatically posted alongside each business transaction when producing a service or material, such as issuing goods or confirming production activities. This method eliminates the need for additional steps in Management Accounting and Margin Analysis.

The calculation uses a costing sheet associated with the order type through the valuation variant.

After defining this event-based costing sheet, the system calculates the overhead for each business transaction input. If a transaction includes a cost that matches a cost element defined in the costing sheet’s cost basis, the overhead is calculated based on the specified percentage rate. The system posts the resulting overhead amount in a separate journal entry.

If an outgoing posting is partially or completely reversed (for example, cancellation of activity or goods issue), the system recalculates or reverses the overhead, keeping the overhead costing consistent.

Each time goods are received into inventory; the system valuates the receipt and credits the manufacturing order accordingly. The actual costs posted to an order can equal or differ from the value an order is credited upon goods receipt.

Such credit and debit differences are processed during order settlement. Depending on whether the production is finished or not, there are 2 situations to distinguish. Here, the production is still ongoing. Work in process (WIP) is capitalized.

The WIP value is the difference between the actual debit costs and actual credit costs of an order that hasn’t been fully delivered. Actual debit costs include raw materials/components value, internal activity, external activities, and order overhead. Actual credit costs include the finished product value that was delivered from order to stock.

In SAP S/4HANA Cloud, Public Edition, the Event-Based Production Cost Posting (3F0) scope item is selected by default. In addition, if the Settlement based on business events approach is chosen for your production order (through event-based processing key RSEBW in order type), the system calculates and settles WIP automatically, after each additional goods issue or activity confirmation.

You can use the Work in Process – Event-Based app that uses event-based posting to show up-to-date work in process and other information for all production orders (order type categories 10 - production orders).

More generally, statuses have also an impact on the type of calculation to be performed: WIP or variances (detailed later in the lesson).

Product Cost by Order has the following statuses:

• If the order has neither the status delivered (DLV) nor technically completed (TECO), WIP is calculated based on actual costs. The difference between all debits and credits of the order is the value of the WIP.
• If the order has status DLV or TECO, any existing WIP will be canceled, and the system considers the entire remaining order balance as variances. Various variance causes are evaluated and summarized into appropriate variance categories.

There are 2 situations to distinguish depending on whether the production is finished or not. Now, the production is finished.

When the last finished goods are delivered to stock, the order status is set to Delivered (DLV). Any remaining work in process value must be zero. The variance is settled.

Order balances are posted to both total price differences and production variance categories, which can indicate production performance in product profitability reporting. Meanwhile, the total price difference is settled to the actual costing/material ledger.

Before discussing variance calculation, let's review the different valuations in the production process. At the start of the fiscal year, production accounting sets a standard cost estimate using routing and bill of materials data, determining the standard price for bike framesets applied to all goods movements. Then, the production order calculates planned manufacturing costs, and variances are found by comparing the results of the preliminary cost estimate (planned costs for the order) with the results of the standard cost estimate (planned costs for the material). After the final goods receipt, actual costs are compared with both estimates for variance analysis.

After some configuration activities, total variance (difference between the actual costs debited to the object and the credit from goods receipt) can be split into different variance categories:

• Input quantity variance
• Input price variance
• Resource usage variance
• Output price variance
• Lot size variance
• Remaining variance

This topic is detailed in the course, Detailing Production Accounting by Order, or you can see Variance Split Categories for more information.

In order to improve your analysis, you can use the following apps. From the Production Cost Overview - Event-Based app launcher, you can drill down in to the variance details for specific orders.

You can also use directly the Analyze Production Costs - Event-Based app to have an overview of the total variance and variance split.

The most detailed is the Order Cost Details - Event-Based app.

The Product Profitability with Production Variances app can be used to analyze contribution margins and other profitability characteristics. It allows for a detailed examination of fixed and variable costs based on the standard cost component split. Additionally, it provides reporting on product variances. This app supports only production variances with the event-based variance category split.