Product costing - the art and science of assigning true costs to a diverse product range

THE INTRODUCTION:

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.

THE PROBLEM:

To develop a detailed and comprehensive product costing substructure mechanism which embeds into the overall product cost management (PCM) [1] 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.

THE SOLUTION:

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:

Cost element	SAP tcodes	Data Source and Validation Rules
Raw material	CK13N  MCRP  KE5Z	Material cost is generally derived from Bill of material (BOM) [Refer footnote 2] using CK13N tcode Quantitative reconciliation of standard vs. actual material consumption* Physical verification of closing material stock helps in further validating BOM. (Expected material closing stock vs. Actual material closing stock) Actual Material Consumption = Material Opening Stock + Quantity Purchased – Material Closing Stock Standard Material Consumption* = Product BOM recipe X FG quantity produced (using MCRP tcode)
Direct Labour	CA03 CR03	Use CA03 tcode to check direct labour hours (production routing) Review work centres mapping using CR03 tcode Analyse actual hours consumed for manufacturing products vis-à-vis estimated hours using the product routing data system Reconcile actual labour cost booked with derived labour cost, based on product routing data and quantity produced Over/ under-absorption to be reviewed in context of normal and abnormal factors
Direct expenses	KSB1 S_PL0_86000030	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)	KSB1 S_PL0_86000030	Checking overheads booked in GL accounts (using S_PL0_86000030 tcode) with reference to cost centre-wise booking (using KSB1 tcode) Review basis of allocation/ assignment of costs to products
Warehouse/ Branches cost (Forming part of S&D overheads)	KSB1 S_PL0_86000030	Checking branch/ warehouse expenses booked in GL accounts (using S_PL0_86000030 tcode) with reference to cost centre-wise booking (using KSB1 tcode) Review basis of allocation/ assignment of costs to products Costs assignment should be in consonance with the principle of cause and effect, if identifiable
Quantitative Analysis	MB5B MB51	Product-wise quantity reconciliation* to be performed using MB5B and MB51 tcodes. *Actual Sales = Opening Stock + Quantity Produced - Closing Stock ± Other Adjustments
SAP Costing Methodology		Moving Average Price (V) changes in consequence of usage and entry of invoices. It is calculated by dividing the value of material by the quantity in stock. As per SAP Best Practice, (V) is recommended for material valuation with raw materials and trading goods. Standard Price (S) is a constant price without considering usage or invoices. Therefore, material stock is valued at the same price over an extended period. Price variances are posted to price difference accounts; and thereby not affecting the standard price. As per SAP Best Practice, (S) is recommended for material valuation with finished goods and intermediate products/ WIP.

THE RESULTS:

The company implemented the new product-costing framework effectively. Following are the major achievements:

Raw material

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.

Quantitative analysis

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.

FOOTNOTES

1. ⌃ https://en.wikipedia.org/wiki/Product_cost_management 🡕

2. ⌃ Refer case study on Bill of Material

CONTACT US

Reach us if you have any concerns regarding cost management accounting issues in your organization.

SANKALP WADHWA

Partner, Chandra Wadhwa & Co. (Cost Accountants) | B.Com, FCMA, ACA, DISA | Certified SAP-CO Consultant | Executive Program on Management and Finance (IIM, Ahmedabad)

Address: 1305 & 1306, Vijaya Building, 17, Barakhamba Road, New Delhi - 110001, India Mail: sankalp.wadhwa@cwcindia.in

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