Standard cost estimate is a tool for establishing prices for materials.

It is used to calculate the

costs of goods manufactured and the costs of goods sold for each product unit.

In order to establish the cost estimate with quantity structure of a material, the bills of materials
and routing of the material must exists for the materials to be costed.

The cost estimate with quantity structure uses the material master data to determine the
material consumption and internal activities required to produce the product.

Costing calculates the cost of goods manufactured for each material made in-house in the BOM
structure.

Preliminary cost estimate is done in planning cost stage so as to know how much we need to
produce the materials. This is as good as planned cost and once the production is finished, the
Standard cost estimate is done periodically to update the finished material price in the materials
master.

Whereas SAP provides in built facility of mixed costing by entering mixed ratio for production
versions. In order to utilize this, REM backflush is to be done using data from the preliminary
cost estimate of the production version. Postings will be done with the data available in the
preliminary cost estimate but the material can have a standard cost estimate which will have a
weighted average cost estimate depending upon the mixed ratio of the production version
maintained for the material. Main advantage of using mixed costing is, it can valuate in-house
manufactured inventory with precise costing and update stock values in balance sheet.

Standard Cost Estimate - This is the cost done for updating the manufacturing cost of the
material in the material master.
This will be one of the basis for valuation of inventory. This is required irrespective of whether
we are in REM scenario or Discrete scenario

2. Preliminary Cost Estimate - This is normally used for calculation of target costs. Target costs
are very important for calculation of WIP and Scrap. Without Target costs, we cannot do the
settlement of any Product Cost Collector. alternatively we can define that Standard cost can be
considered for Calculation of Target costs. it all depends on the business requirement of the
client.

Preliminary cost estimate is required only in case of Repetittive scenario (not in Descrete
scenario).

In repetitive scenarios for all the Finished, Semi-finished products for which we are going to
have Product Cost Collector (in REM for all HALB and FERT materials we will have Product
Cost Collector). So for all the product cost collectors Preliminary cost estimate is required to be
done

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Standard Cost Estimate

Material cost estimate used to calculate the standard price in the material master
record. The cost estimate must be executed with a costing variant that updates the
material master, and the cost estimate must be released.

1.1.1 Purpose

GIL requires Cost of goods manufactured and Cost of goods sold for a
product.

Costs are broken down and costs are known at each level of production
steps.

Cost of goods manufactured is comparable within the plant or across the

plant.

To provide a standard or benchmark in order to assess production efficiency.

To update a price in the material master to determine stock valuation or post

to Profitability Analysis.

To fix the selling price of the material.

This is aimed at the level before the product is started to be produced via
production order.

1.1.2 Master Data

BOM, Routing, Material Master, Cost center and activity types

1.1.3 Features with respect to GIL

On the basis of planning, standard cost is estimated for each material produced at
the beginning of the year/beginning of the month.

1.1.4 Business Process

Costing with a quantity structure is the tool for costing the product cost before it
goes to production order stage. It sets the price for the material at material master.
It calculates cost of goods manufactured and cost of goods sold. We can use such
prices for valuating material at standard price.

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Quantity structure is the products BOM and routing. Before a cost estimate is
prepared for the product, a BOM or Routing should exist for the product.

The standard cost estimate uses PP master data to ascertain the materials and
internal activities required. The cost estimate is prepared automatically using the
data.

Each cost estimate is based on costing variant. The costing variant contains settings
and parameters for costing. The settings decide how the costing is executed.
Costing variant determines as how the prices are to be taken from the system for
materials and activities. Costing variant specifies particular valuation variant and
costing type. Costing variant contains additional parameters to select the BOM and
routing automatically and for updating the price to the material master.

1.1.5 Define Costing Variants

Costing Variant PPC1 - GIL - Standard cost est. has been maintained. (subject to
final decision of stakeholders)

The costing variant is attached to:

Costing Type 01 Standard cost est. (mat.)

Valuation Variant 001 GIL - Valuation variant
Date Control GIL Std cost est. - month
Find Quantity Structure PC01 Std qty structure determined - 2
Transfer Control PC01 Plant transfer GIL

Error management 3 - Log and save messages, mail inactive

Additive costs 3 - Take into account and include additive costs

Saving cost estimate with quantity structure x (saving allowed)

Defaults for update parameters

Save cost element itemization x (allowed)

Save itemization x (allowed)
Save error log x (allowed)

Costing variants contain all necessary control parameters for costing.

Costing variants form the link between the application and Customizing, since all
cost estimates are carried out and saved with reference to a costing variant.

Costing variants allow you to define how costing is carried out. Among other things,
they control how the quantity structure or the value structure is created.

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A costing variant contains the following control parameters:

Costing type
Valuation variant
Quantity structure determination
Transfer control

1.1.6 Define Costing Types

Standard costing type 01 is being used [Standard cost est. (mat.)]

Saving material cost estimates

With qty. structure - with start of the period

Additive cost est. - With start of the period

Update of material price x - Standard Price

Valuation view legal valuation.

Here you define the technical attributes of the cost estimate.

You define the purpose for which a material cost estimate can be used by specifying
which field of the material master record the results of the costing can be
transferred to. The costing type for the standard cost estimate allows, for instance,
the standard price to be updated. You can set only one indicator for each costing
type.

Update Cost estimate

Standard price Standard cost estimate (01)
Tax price Inventory cost estimate

Commercial price Inventory cost estimate

Other price except std Modified standard cost estimate or
price Current cost estimate
No update Any cost estimate

Note the following when defining the parameters for the standard cost
Estimate:

The cost component view for stock valuation is used in the calculation of the
standard price.

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 This cost component view contains the cost components that are flagged as
relevant for stock valuation.

1.1.7 Define Valuation Variants

001 - GIL - Valuation variant is maintained

Strategy sequence for material valuation

1 Valuation price according to price control in material master

2 Moving average price
3 Standard price

Strategy sequence for internal activities

1 1 Planned standard rate of the period

Costing Sheet for calculation over head

GIL1 GIL Costing Sheet

Here you create a valuation variant that contains the required parameters for the
valuation of a cost estimate.

You also specify which costing sheet is used to calculate overhead.

Material component with or without additive costs

Here you define the sequence in which the system searches for prices in the
accounting view or the costing view of the material master to valuate the
materials.
For material cost estimates, you also specify whether additive costs can be
added to the selected price.

Internal Activities

Here you define the sequence in which the system searches for prices in
activity type planning or actual activity price calculation in Cost Center
Accounting to valuate the internal activities.
You also specify which plan/actual version in Cost Center Accounting is used.

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Overhead

You can link the valuation variant to a costing sheet. The costing sheet contains the
parameters that control the calculation of overhead.

1.1.8 Define Transfer Control

PC01 - Plant transfer has been maintained

Cross plant transfer strategy Sequence

1 Future standard cost estimate

2 Current standard cost estimate
3 Previous standard cost estimate

For example, this is required for the transfer of castings from the foundry to brakes
division plants.

Casting has a its own BOM in the foundry plant and is costed separately. This cost
estimate of casting needs to be picked up while costing other materials in brakes
plants.

In this step you define parameters for partial costing. Partial costing prevents new
cost estimates from being created for materials in the BOM that already have
costing data. The existing costing data are simply transferred into the new cost
estimate, which results in reduced runtimes.

Partial costing can be used to advantage in the following situations:

You want to calculate the costs for a new product. The BOM for this product
contains materials that have already been costed, and you do not want to
cost these materials again.

You want to cost all new products during the course of the fiscal year. You
define a costing run that includes all materials, and use the transfer strategy
to assure that only new products are selected.

You specify cross-plant transfer with the special procurement type. You do
not want to explode and cost the quantity structure in the other plant.

1.1.9 Define Date Control

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GIL1 - Std cost est. year/month has been maintained

Costing date from F - Start of next posting period

Costing date to G - End of next posting period
Qty structure date A - Costing date from
Valuation date A - Costing date from

In costing, date control IDs control the dates on which the quantity structure and
the value structure are created. These dates determine the following:

The validity period of the cost estimate

The date on which the quantity structure is determined
The date on which the quantity structure is valuated

Date control determines which dates are proposed or displayed when a cost
estimate is created, and whether the user can change these dates.

If you intend to calculate variances with reference to the cost estimate, make sure
that the cost estimate is valid in the periods in which you will calculate the
variances.

If you intend to valuate scrap or work in process with the results of the standard
cost estimate, you should make sure that the cost estimate is valid in the periods in
which you will calculate variances or work in process.

1.1.10 Define Quantity Structure Determination

Standard setting retained.

Quantity structure determination is used in cost estimates with quantity structure to

specify for each plant how the system searches for valid alternative BOMs and
alternative routings to create a quantity structure for multilevel BOMs. The search is
carried out on the basis of two parameters:

Application of BOMs to determine alternatives automatically

This key determines how the system should choose the suitable alternative
for the different company areas in which the BOM is used.

Selection ID for selecting alternative routings

This key determines the priority given to routings during routing selection.

Quantity structure determination also specifies whether the required quantity for
BOM components with dimensional units of measure is rounded up to the next
whole number if the calculation of scrap-adjusted quantities results in a fraction.

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Quantity structure determination is also linked by plant to the order type.

To be able to use the quantity structure determination in costing, you must assign it
to the costing variant.

Overhead will be allocated based on user-defined parameters. Parameters are

defined in Cost sheet.

The costing sheet integrates all elements of overhead costing. It consists of the
following rows that are processed during the calculation:

Base rows
Base rows contain the bases of the overhead calculation: the cost elements
and origins for which overheads are to be calculated. You can take the
calculation bases directly from the costing sheet and then maintain them as
necessary, or define them separately in the step Define calculation base.

Overhead rows
You define the overhead rows by assigning overhead to them. An overhead
row references one or more base rows or totals rows. The amount contained
in these rows, along with the percentage rate calculated using the overhead
rates, delivers the overhead amount.

You can take the overheads directly from the costing sheet and then maintain them
as necessary, or define them separately in the steps Define percentage overhead or
Define quantity-based overhead.

The overhead row contains a credit key that defines which object (cost center or
order) is credited during the overhead calculation.

You can either take the credit keys directly from the costing sheet and then
maintain them as necessary, or define them separately in the step Define credit.

Totals Rows

No calculation bases or overheads are assigned to the totals rows. They are
used only to form subtotals or end totals.

In product costing, the costing sheet for overhead calculation is selected through
the valuation variant.

For overhead surcharges on semi-finished products that are used in the subsequent
production step, the calculation base specifies what cost component view is used as
a basis for overhead calculation. The cost component view is specified in the costing
type.

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1.1.10.1 Costing Sheet: Components

1.1.10.1.1 Define Calculation Bases

Kindly refer the costing sheet

A calculation base defines a group of cost elements for which common overheads
are calculated. In each controlling area, you assign individual cost elements or cost
element intervals, or origins or origin intervals, to calculation bases.
For production overhead costs, you can differentiate between fixed and
variable costs for the calculation base. In this way, you can charge the fixed
and variable portions of the activity price differently for activity types.

For material overhead costs, you can differentiate the materials used. If
you want to define different material overhead costs for particular raw
materials, you can define origin groups and define your own calculation
bases for particular origin groups.

1.1.10.1.2 Define Percentage Overhead

An overhead determines the conditions under which overhead is applied to an

object.

In this step you define percentage overhead, such as 5% in controlling area 1000.
In addition, you can define quantity-based overhead (Rs10 per piece).

Percentage overhead is a good idea if, for example, you want to calculate quantity-
independent overhead on costs for particular cost elements in a cost center.
Quantity-based overhead, on the other hand, is calculated per unit of measure in a
cost element.

You can combine the two by, for example, assigning a 10% overhead to a cost
element and an additional RS.3 per hour.

Overheads are limited in duration and can be adapted to meet your requirements
as part of current settings.

You must assign a condition to each overhead. Examples of such conditions include
the contents of particular order fields. The system prescribes which fields you can
use. For example: if you enter "plant" as a condition, a defined overhead is
calculated for each plant.

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 Using this condition, the system can access the relevant condition fields in the
appropriate condition tables. All the condition tables delivered in the standard
contain the fields "Controlling area", "Overhead type" and at least one field from
the order master.

Plan, actual, and commitment overhead can be calculated. The overhead type
distinguishes between the three.

1.1.10.1.3 Define Credits

Refer the costing sheet for details

Cost allocation is part of the process of determining overhead. If this leads to an

object being debited with actual costs, another object must be credited at the same
time. This can be either a cost center or an order. Such postings are recorded under
a secondary cost element of cost element category 41 in the SAP System.

In the credit, you also define what percentage of the overhead is allocated as fixed
costs. If you enter "*", the fixed portion of the costs is determined via the
specification in the relevant calculation base.

1.1.10.1.4 Define Cost Components

Illustrative Cost Component structure GIL - Cost Component has been designed

Cost Comp. Cost Component Cost element (From) Cost element (To)
010 Raw Material
020 Other raw mat. Cost
030 By product credit
040 Alloys & Chemicals
050 Fuel & Energy costs
060 Production costs
070 Material Overhead
080 Production Overhead
090 Cost of goods mfg.
100 Admin. Overhead
110 Sell & Dist. Overhead
120 Cost of goods sold

The cost components split the results of product costing into raw materials,
material overhead, external activities, setup costs, machine costs, personnel costs,
production costs, and so forth.

The cost components can be

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 Displayed in product costing
Analyzed in the information system

The cost components also serve as a filter for the costing results. They determine
What costs are included in the cost estimate for the higher-level material.
What costs should be part of the standard price for the material costed.
What costs should be part of the commercial and tax price for the material
costed.

The structure of the cost components (such as raw materials, material overhead,
external activities, setup costs, machine costs, personnel costs, production costs,
and other costs) is the same for each material in the BOM. This means, for
example, that

The costs for a raw material appear under the cost component "raw
materials" in the cost estimate of the semi-finished material and the
higher-level semi-finished materials and finished materials

The costs for the usage of an internal activity appear under the cost
component "production costs" in the cost estimate of the semi-finished
product and the higher-level semi-finished products and finished products

This way the product cost estimate shows you not only the total costs for the usage
of a semi-finished product but also what the costs are composed of. This is called a
cost component split. The system updates a cost component split for each material
in the BOM (including the raw materials).

There are many reports in the information system to analyze the cost estimates.
The results can be linked to the relevant BOM. Reports are like Costed Multilevel
BOM, itemization.

The reports could be arrived in cost component splits for cost of goods
manufactured.

Saved cost estimates can be compared to the cost estimates of previous periods or
cost estimates of the two materials can be compared.

Cost estimates can be used for make or buy decisions.

Saved cost estimate has to be marked and released in order to update the Material
Master as standard price.

: Standard Cost Estimate

1.2 Product Cost by Order

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In Product Cost by Order, the manufacturing orders themselves are the cost
objects. Costs charged to manufacturing orders are usually analyzed and settled by
lot. The variances can be analyzed after the entire planned production quantity has
been put into inventory.

1.2.1 Purpose
Costing of machine building, tool manufacture and engineering services.

Machine building is done for own use or sale to sub-contractors. Tools are
manufactured and used internally or sold. Engineering services are produced for
export.

Costing for short orders and proto-type orders.

1.2.2 Master Data

BOM, Routing, Cost Center and activity types

1.2.3 Features with respect to GIL

In GIL, machines, tools and engineering services are produced on discrete
manufacturing environment

1.2.4 Business Process

In discrete manufacturing environment, order related production is preferred. In

Product Cost by Order, the manufacturing orders themselves are the cost objects.
Costs charged to manufacturing orders are usually analyzed and settled by lot. The
variances can be analyzed after the entire planned production quantity has been
put into inventory.

For repetitive manufacturing environments, products cost collectors are best

suitable.

Costing is done on the basis of production orders based on quantity structure (PP
production orders) or without quantity structures (CO production orders).

Production order creation is in PP.

Costing variant, costing sheet for overhead calculation and cost component
structure are defined as Standard Cost estimate.

Costing variant for planning and actual cost are defined.

Preliminary Cost Estimates:

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Preliminary costing in the Product Cost by order component calculates the costs for
the production order as a pre-cost.
A preliminary cost estimate for a production order can calculate the costs for the
production process, when a production order is saved or released, as per settings.
You pre-cost a manufacturing order (production order) for the following purposes:

To determine the planned costs for the material being manufactured based on
the planned lot size of the order

To calculate the planning variances and use them to decide what production
version to use

To determine the production variances at a later time.

Pre-cost is done on the basis of BOM and routing. Pre-cost is done when the order
is saved or released, according to the settings.

Actual Costs: Actual costs can be collected on the production order in the following
ways:

It is through the logistical transactions (such as goods issues or confirmations for

activity allocations) for manufacturing orders.

Directly, for example through G/L account postings in Financial Accounting (FI)

You can view the actual costs and the planned costs for the production order at any
time.

Period End Closing:

Revaluation of activity types at actual prices.

Planned activity prices are posted to the production order at the time of
confirmation and at the period end actual activity prices are calculated and
production orders are revalued.

Overhead Calculation

You can apply both percentage overhead and quantity-based overhead to

production orders. In R/3 System, you can assign the overhead to a product by
creating a costing sheet in Customizing for Product Cost Planning. Using this costing
sheet, you specify the level of overhead and the conditions under which it is
calculated.

You can calculate the following:

Material and production overhead

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 Administration and sales overhead

The costing sheet thus specifies the cost elements under which the sales and
administration costs are updated in costing. The cost component structure
determines the cost components under which these costs are shown. It flags these
cost components as sales and administration costs

In order-related production, repetitive manufacturing and process manufacturing,

the sales and administration costs are generally passed on from Cost Center
Accounting directly to Profitability Analysis. The cost of goods manufactured for the
product is passed on to Profitability Analysis.

To be able to calculate overhead in the R/3 System, you must do the following:

Create a costing sheet in Customizing

Assign the costing sheet to the valuation variant in Customizing

In the initial screen of the cost estimate, enter a costing variant that either
contains this valuation variant or that assigns the costing variant to the order
type

To define particular overhead conditions for certain reference objects, you

must do the following:

Enter an overhead group in the master record of the reference object (such
as the material master record, base object master record, cost object)

Enter an overhead key in the costing sheet that is linked to this overhead
group in Customizing for Product Cost Controlling.

WIP Calculation

In R/3 system, the value of components and finished products, which are in the
production process, is referred to as WIP (work in process). WIP is also known as
the stock of unfinished products.

System calculates the work in process in order to determine the costs that have
accrued for production orders that have not yet reached the final delivery stage.

The WIP is determined periodically and forwarded to the financial accounting. A

posting rule is defined and posting rule creates the link to the GL accounts from CO.
Accordingly, the function is associated with month end closing for order related
production.
Each order that you want to calculate WIP should have a results analysis key. It is
defined in customizing. The key integrates the control parameters for calculating
the WIP.

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WIP is actual value of material and conversion cost for the stages completed.

Variance calculation

Comparison of actual costs and planned costs at order level provides the result of
variance calculation. There may be a number of reasons for both positive and
negative plan variances.

There may be difference between the planned quantities and actual quantities
consumed. This is known as usage variance. When target costs are compared with
charged actual costs, it provides the amount of volume variance.
In R/3 system the variances are determined for each cost element and assigned to
number of variance categories. Variance categories specify the cause of a variance
such as price variance or lot variance.

When the order is completed and delivered, the difference between the actual cost
posted to the order and the standard cost estimate of the quantity produced is the
order balance. The order balance is settled in accordance with the control
parameters in the settlement structure.

Target cost versions determine which values are compared in order to determine
the variance.

If the price control is S, that is controlled by standard cost price, then the variance
is posted to price difference account in GL and settled to the CO-PA.

If the price control of the material is V, that is moving average price then the
system posts the variance to the inventory account and individual variance
categories are also settled to the CO-PA.

In GIL, we follow the price control S

In all the situations, the PA transfer structure provides such settlement to CO-PA.

Settlement

When production is completed, the complete order is settled. There are order debits
due to issue of raw material, components and activities or processes to the
production. The outward movement of goods from the order is the delivery of
finished goods to the inventory. The amount of delivery of goods is credited to the
production order. It happens every time the delivery of finished goods are taking
place from production order.

The credit value is based on the price control of the finished product of the
production order. After due credit for the delivery of goods from the production
order, the difference between the debits and credits of the production order is the
variance. The variance amount is transferred to Price difference account or

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Inventory account in accordance with price control of the material. The variance is
also settled to the Profitability analysis.

The settlement parameters are defined in settlement profile and settlement

structure.

The purpose of settlement is to send the cost to the target objects affecting
inventory value or profit & loss.

Variance analysis

The final step in production order life cycle is production order settlement. When a
order is settled the cost are settled to the target objects and order balance amount
is treated in accordance with price control indicator of the finished product.
Accordingly, the amount might be posted to inventory account or price difference
account in Profit and loss account.

Besides the Profitability analysis is settled with variance amount per variance
categories. The variance categories are assigned to cost elements.

The variance categories specified in SAP system for example are Price variance,
quantity variance in consumption, quantity variance in production, resource usage
variance, lot size variance, other in put variance and remaining variance. Besides
scrap is also valued.

Production orders are settled once the production lot size is completed. Accordingly,
the order balance arising in between is WIP at actual cost.
You can analyze costs of manufacturing orders by period. However, SAP
recommends lot-based cost controlling for manufacturing orders. The
manufacturing order must have settlement type FUL (full settlement) in the case of
production orders.

: Product cost by order

1.3 Product cost collectors/Product cost by period

Product cost collector is the cost object in the Product Cost by Period component
that collects the periodic actual costs incurred in the production of a material. When
you use a product cost collector, the product becomes the main cost object.

1.3.1 Purpose
GIL has saleable products like brakes, casting, brake-fluid, polymers etc produced
at different plants. Production is carried out make-to-stock or sales order related
production. Periodical costing is required for such activities.
1.3.2 Master Data
BOM, Routing, Material Master, Cost Centers, work centers and activity types

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1.3.3 Features with respect to GIL
In GIL, it is a repetitive manufacturing environment.
1.3.4 Business Process
You can use repetitive manufacturing as sales-order-oriented production or make-
to-stock scenario. The system generates one or more planned orders that have a
direct link to the sales order item. The material is manufactured on the basis of
these planned orders. The manufacturing process is therefore initiated by sales
orders.
In repetitive manufacturing environments, you must create a product cost
collector to collect the costs of manufacturing of a material.

Product cost collectors is independent of the production type. This means that you
can collect actual costs on product cost collectors in the following production
environments:

In order-related production (that is, when you are using production orders) when
you analyze the costs by period rather than by lot.

You can also use one product cost collector on which the costs for a material are
collected that is manufactured both for the sales order and for the make-to-stock
inventory. A requirement is that the Repetitive-manufacturing indicator in the
material master record is selected.

If you use product cost collectors, there are relatively fewer cost objects than in
Product Cost by Order. This improves performance in period-end closing and in the
information system.
You can pre-cost product cost collectors.
Function of creating Product cost collector is with production planning.
You create a product cost collector for the combination of material, plant, and
production process.
You do not need to manually create the production process for the product cost
collector. The system generates the production process automatically when you
create the product cost collector.
Preliminary Cost Estimates for Product Cost Collectors).
Preliminary costing in the Product Cost by Period component calculates the costs for
the product cost collector.
A preliminary cost estimate for a product cost collector can calculate the costs for
the production process (that is, on the basis of a particular production version or for
a particular combination of BOM and routing). In repetitive manufacturing, you can
therefore create cost estimates for specific production versions.
You can do the following on the basis of the preliminary cost estimate:

1.3.4.1.1 Confirm actual activity quantities

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In simultaneous costing in repetitive manufacturing, you can use the activity
quantity structure of the preliminary cost estimate. This means that reporting point
back flushes use the activity quantities that were used in the preliminary cost
estimate for the product cost collector. However, the actual quantities confirmed are
valuated using the valuation variant of simultaneous costing rather than the
valuation variant of preliminary costing.

1.3.4.1.2 Valuate the work in process

The system calculates the target costs on the basis of the preliminary cost estimate
for the product cost collector to valuate the confirmation quantities for the
calculation of work in process.

Calculate the production variances in variance calculation

The system calculates the target costs on the basis of the preliminary cost estimate
for the product cost collector, and compares these target costs against the actual
costs.
Valuate the unplanned scrap in variance calculation
The system calculates the target costs on the basis of the preliminary cost estimate
for the product cost collector to valuate the confirmation quantities for the
calculation of scrap.

In repetitive manufacturing, SAP recommends that you valuate work in process and
scrap using the target costs calculated in a preliminary cost estimate for the
product cost collector. This enables you to calculate work in process and scrap
variances even if changes have been made in the reporting point structure. You
must update the preliminary cost estimate after the reporting points have been
changed.
Actual Costs: Actual costs can be collected on the product cost collector in the
following ways:

It is through the logistical transactions (such as goods issues or confirmations) for

manufacturing orders (production orders or process orders) and run schedule
headers. For example, goods issues for a production order or reporting point back
flushes in repetitive manufacturing debit the product cost collector with actual
costs. Goods receipts credit the product cost collector.

Directly, for example through G/L account postings in Financial Accounting (FI)

In the screen Display Product Cost Collector, you can access reports by
choosing Display Costs. You can also view the actual costs for the product
cost collector in the Information System at any time
SAP recommendations in repetitive manufacturing environments:

Create a separate product cost collector for each production version.

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When you create the product cost collector, choose the Controlling level Production
Version.

Period End Closing:

1) Revaluation of activity types at actual prices.

Planned activity prices are posted to the production order at the time of
confirmation and at the period end actual activity prices are calculated and
production orders are revalued.

2) Overhead Calculation

You can apply both percentage overhead and quantity-based overhead to

production orders or product cost collectors. In R/3 System, you can assign the
overhead to a product by creating a costing sheet in Customizing for Product Cost
Planning. Using this costing sheet, you specify the level of overhead and the
conditions under which it is calculated.
You can calculate the following:

Material and production overhead

Administration and sales overhead

The costing sheet thus specifies the cost elements under which the sales and
administration costs are updated in costing. The cost component structure
determines the cost components under which these costs are shown. It flags these
cost components as sales and administration costs

In order-related production, repetitive manufacturing and process manufacturing,

the sales and administration costs are generally passed on from Cost Center
Accounting directly to Profitability Analysis. The cost of goods manufactured for the
product is passed on to Profitability Analysis.
To be able to calculate overhead in the R/3 System, you must do the following:

Create a costing sheet in Customizing

Assign the costing sheet to the valuation variant in Customizing

In the initial screen of the cost estimate, enter a costing variant that either contains
this valuation variant or that assigns the costing variant to the order type

To define particular overhead conditions for certain reference objects, you must do
the following:

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Enter an overhead group in the master record of the reference object (such as the
material master record, base object master record, cost object)

Enter an overhead key in the costing sheet that is linked to this overhead group in
Customizing for Product Cost Controlling.

3) WIP Calculation

In R/3 system, the value of components and finished products that are in the
production process is referred to as WIP (work in process). WIP is also known as
the stock of unfinished products. System calculates the work in process in order to
determine the costs that have accrued for production orders that have not yet
reached the final delivery stage. The WIP is determined periodically and forwarded
to the financial accounting. A posting rule is defined and posting rule creates the
link to the GL accounts from CO. Accordingly, the function is associated with month
end closing for order related production.

Each order that you want to calculate WIP should have a results analysis key. It is
defined in customizing. The key integrates the control parameters for calculating
the WIP.

4) Variance calculation

Comparison of actual costs and planned costs at order level provides the result of
variance calculation. There may be a number of reasons for both positive and
negative plan variances.
There may be difference between the planned quantities and actual quantities
consumed. This is known as usage variance. When target costs are compared with
charged actual costs, it provides the amount of volume variance.

In R/3 system the variances are determined for each cost element and assigned to
number of variance categories. Variance categories specify the cause of a variance
such as price variance or lot variance.

When the order is completed and delivered, the difference between the actual cost
posted to the order and the standard cost estimate of the quantity produced is the
order balance. The order balance is settled in accordance with the control
parameters in the settlement structure.

Target cost versions determine which values are compared in order to determine
the variance.

If the price control is S, that is controlled by standard cost price, then the variance
is posted to price difference account in GL and settled to the CO-PA.

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If the price control of the material is V, that is moving average price then the
system posts the variance to the inventory account and individual variance
categories are also settled to the CO-PA.

In GIL, we follow the price control S, (subject to final decision from stakeholders).

In all the situations, the PA transfer structure provides such settlement to CO-PA.

5) Settlement

When production is completed, the complete order is settled. There are order debits
due to issue of raw material, components and activities or processes to the
production. The outward movement of goods from the order is the delivery of
finished goods to the inventory. The amount of delivery of goods is credited to the
production order. It happens every time the delivery of finished goods are taking
place from production order.

The credit value is based on the price control of the finished product of the
production order. After due credit for the delivery of goods from the production
order, the difference between the debits and credits of the production order is the
variance. The variance amount is transferred to Price difference account or
Inventory account in accordance with price control of the material. The variance is
also settled to the Profitability analysis.

The settlement parameters are defined in settlement profile and settlement

structure.

The purpose of settlement is to send the cost to the target objects affecting
inventory value or profit & loss.

6) Variance analysis
The final step in production order life cycle is production order settlement. When a
order is settled the cost are settled to the target objects and order balance amount
is treated in accordance with price control indicator of the finished product.
Accordingly, the amount might be posted to inventory account or price difference
account in Profit and loss account.

Besides the Profitability analysis is settled with variance amount per variance
categories. The variance categories are assigned to cost elements.
The variance categories specified in SAP system for example are Price variance,
quantity variance in consumption, quantity variance in production, resource usage
variance, lot size variance, other in put variance and remaining variance. Besides
scrap is also valued.

: Product Cost Collector

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