The company in question is one of India’s largest consumer electronics companies, producing a wide range of products in the area of consumer durables including speakers, IT accessories, mobile accessories, personal care appliances, and medical products. It has sold more than a billion products and services across 20,000+ pin codes in India.
To develop a detailed and comprehensive product costing substructure mechanism which embeds into the overall product cost management (PCM)  structure. The PCM framework thus created will form part of the overall management information system (MIS), thereby facilitating a decision support system for the management to make well - informed decisions.
To re-configure the product costing framework into the SAP-ERP system (SAP-CO-PC) so as to enable its alignment with MIS and SAP systems.
Product costing is assigning costs to products based on the principle of cause-and-effect. Given below is a framework for deriving costs for each cost element:
Data Source and Validation Rules
Checking direct expenses booked in GL (using S_PL0_86000030 tcode) with reference to cost centre-wise booking (using KSB1 tcode)
Overheads (Production, Administrative and Selling & Distribution)
Warehouse/ Branches cost (Forming part of S&D overheads)
SAP Costing Methodology
The company implemented the new product-costing framework effectively. Following are the major achievements:
The company observed that the variance between actual material consumption and standard material consumption was ~10-15% (which was charged-off to the product material cost). Accordingly, an effective internal controls mechanism/ framework was put in place to plug the variance gap, which got reduced to ~2-5%.
Duplicate bill of materials (BOMs) existing for different products were identified and subsequently revised/ refined by recalibrating BOMs.
Earlier, material movements were not properly captured which resulted in reconciliation gaps at SKU-level with even unavoidable quantity loss at times (~2% of the total production). The new framework helped in traceability at SKU-level. Thereby, reducing quantity losses to ~0.1% of the total production.
Earlier, there was no distinction between the material codes for products manufactured and traded. After the new product costing framework, the traceability at SKU-level became comparatively easier, resulting in efficient allocation of differential costs to manufactured and traded products.
Selling and distribution cost
The new product costing framework enabled identification of the selling and distribution costs, based on the principle of cause and effect instead of the revenue allocation approach.
2. ⌃ Refer case study on Bill of Material
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Partner, Chandra Wadhwa & Co. (Cost Accountants) | B.Com, FCMA, ACA, DISA | Certified SAP-CO Consultant | Executive Program on Management and Finance (IIM, Ahmedabad)
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