conceptual design - product costing

1.1. Controlling Organizational Structure

The Controlling Area represents the cost accounting environment where costs and revenues are managed, and internal managerial reports are generated. AAA will have one Controlling area, AAA Group, CCG. In addition to the Controlling Area an Operating Concern, AAA Group, CCG has also been defined. The Operating Concern is the main organizational unit for Profitability Analysis. It contains the tools for analyzing contribution margins of business units and market segments. In the Controlling Structure hierarchy, the Controlling Area is under the Operating Concern and all Company Codes are linked to the Controlling Area. The Operating Concern and Controlling Area currencies have been identified as USD. See Figure 2.5.

Figure 2.3

Operating

Concern (CO -PA)[SAP Profitability Analysis

(CO-PA) module]

Concord Keystone Sales

Corp.

4100


Corp.

4100

Concord Camera Canada

4200


4200

Concord Camera(Europe)

Limited

3100


Limited

3100

Concord Camera France

S.A.R.L

3400


S.A.R.L

3400

Concord Camera HK

Limited

5100

Concord Camera HK

Limited

5100

Concord HenggangElectronics

Factory

5200


Factory

5200

ConcordShenzhenLimited

5300


5300

Concord Camera GmbH

3300

Concord Camera GmbH

3300

(US) (Canada) (UK and Northern Ireland)

(France) (Germany) (HK) (PRC) (PRC)

Controlling

Area(CO)[SAP Controlling

modules]

Concord Camera Corp.

1000


1000

(US)

Company

Codes (FI)[SAP Financial

Accounting modules]

Concord Group

CCG

Concord Group

CCG

Concord Group

CCG

Concord Group

CCG

Starprint Corp.

SAP Code TBD

Starprint Corp.

SAP Code 4500

(US)

Concord Camera

Hungary

SAP Code TBD

Concord Camera

Hungary

SAP Code 3500

(Hungary)

Concord Keystone Graphics

SAP Code TBD

Peter

Bauser

SAP Code 3600

Concord Latin America

SAP Code TBD


SAP Code 4300

Goldline(Europe) Limited

SAP Code TBD


SAP Code TBD

(Germany) (Latin America) (UK and Northern Ireland)

Legend:

Grey highlighted box represents a dormant company

Controlling Organizational Structure


SAP Code TBD


SAP Code 3200

( (Latin America) (UK and Northern Ireland)

Legend:



Concord Camera

Hungary

SAP Code TBD

Concord Camera

SAP Code 6100

(Australia))

Australia

Operating

Concern (CO -PA)[SAP Profitability Analysis

(CO-PA) module]


Corp.

4100


Corp.

4100


4200


4200


Limited

3100


Limited

3100


S.A.R.L

3400


S.A.R.L

3400

Concord Camera HK

Limited

5100

Concord Camera HK

Limited

5100


Factory

5200


Factory

5200


5300


5300

Concord Camera GmbH

3300

Concord Camera GmbH

3300

(US) (Canada) (UK and Northern Ireland)

(France) (Germany) (HK) (PRC) (PRC)

Controlling

Area(CO)[SAP Controlling

modules]


1000


1000

(US)

Company

Codes (FI)[SAP Financial

Accounting modules]

Concord Group

CCG

Concord Group

CCG

Concord Group

CCG

Concord Group

CCG

Starprint Corp.

SAP Code TBD

Starprint Corp.

SAP Code 4500

(US)

Concord Camera

Hungary

SAP Code TBD

Concord Camera

Hungary

SAP Code 3500

(Hungary)

Concord Keystone Graphics

SAP Code TBD

Peter

Bauser

SAP Code 3600


SAP Code TBD


SAP Code 4300


SAP Code TBD


SAP Code TBD

(Germany) (Latin America) (UK and Northern Ireland)

Legend:




SAP Code TBD


SAP Code 3200

( (Latin America) (UK and Northern Ireland)

Legend:



Concord Camera

Hungary

SAP Code TBD

Concord Camera

SAP Code 6100

(Australia))

Australia

SAP Code 6100

(Australia))

Australia

1.2. Cost Center Structure

The standard cost center hierarchy represents the organizational structure of AAA’s departments (active managerial units). Over 200 departments have been identified. Their organizational relationships are shown in five hierarchical levels: Level 1: AAA Group – the highest Cost Center Group that represents Global AAA Bbb Corp. Level 2: Cost Center Groups that represent AAA’s legal entities, for example, Keystone Sales (CC US), CC UK, CCGermany and CC HK. Level 3: Cost Center Groups that represent AAA’s major department categories, for example, Sales, Administration and Production. Level 4: Cost Centers and Cost Center Groups. The Cost Centers represent departments within major department categories (Level 3 Cost Center Groups). The Cost Center Groups are other department categories that are further sub-divided into more specific departments. Examples of Level 4 Cost Centers are Marketing, Finance and Production Line under Sales, Administrative and Production Cost Center Groups respectively. Examples of Level 4 Cost Center Groups are Design Engineering and Quality Engineering. Level 5: Cost Centers (departments) for Level 4 Cost Center Groups. An example is Industrial Engineering department under Design Engineering Cost Center Group. In addition to the standard cost center hierarchy described above, alternate hierarchies can be defined specifically for reporting or allocation purposes. The European head office will be set up as an alternate hierarchy where European head office cost centers from each European company code will be grouped together as an alternate hierarchy cost center group. Below is a summary of the Cost Center Groups on the Standard Cost Center Hierarchy. The detailed cost center information is documented in Appendix Error! Reference source not found. The naming convention for Cost Center Groups and Cost Centers will be described in more detail in Section 1.3 on Cost Center Accounting.

1.3. Cost Center Accounting

Cost Center Accounting provides the mechanism to collect and report operating activity within organizational units of a company. At AAA, these units are represented by departments within each Reporting Unit. SAP cost centers have been arranged in a hierarchy to reflect AAA’s department structure that facilitates internal reporting and accountability. Each cost center generally represents a department or unit that is the responsibility of a manager. Managers can then monitor the performance of their departments by accessing reports on their cost centers. Costs in a cost center can be easily allocated to other cost centers or different cost units within the system. Cost allocations are implemented though allocation cycles where the

sending and receiving cost units, and the allocation basis for cost distribution are user defined The diagram below shows how financial postings get booked to a cost center through a transaction in the Financial module. When the expense is posted, a cost center in the Controlling module may be included as the department responsible for incurring the expense.

Figuring 3.6 Postings in FI and CO The main cost center business transactions are: Primary cost postings – these are postings that occur in CO when expense accounts are posted to the G/L in the FI module. Actual cost allocations – these are the distribution of postings from one cost center (the sender) to another or a group of cost centers (the receiver). The distribution could be to other receiver objects besides cost centers (such as an internal order). Cost center planning (Budgeting) - this is the process of entering budget figures for department expenses. Plan cost allocations (distribution / assessment) - this is the same as the actual cost allocation but the figures being distributed are the budget figures rather than the actual postings.

GL/FI Posting

FIN

AN

CE

Required

FI Document Header

FI document Line Items

Enter Header Detail

- Company Code

- Posting/ Document Date- Reference no.

- Currency/ rate

Enter FI Line Item

Is it a B/S item?

Enter- G/L Account- Amount- Text (if needed)

Enter- G/L Account

- Amount- Text (if needed)

YES

Which CO object to assign?

Enter another Line item

NO

END

Cost Center

FI Posting Only Integration to CO(Controlling Only

P&L Item

Balance Sheet Item

COPA Profit Segment

Statistical Internal Order

Optional

B

A

CD

A. Overhead CostB. Cost Reducing RevenueC. Operating SaleD. Sales Reduction

Real Internal Order

Or

1.3.1. Statistical Key Figures

Statistical key figures serve as a basis for internal allocations and as references in the key figure analysis framework. Statistical key figures can be used for internal cost allocations, and can be defined as either fixed values or totals values. There are two major types of allocation in SAP: 1. Distribution 2. Assessment Distribution is the process of cost allocation used to allocate primary costs of cost center using the original primary cost elements. In this method, the costs being allocated will be retained into the original cost elements. On the other hand allocation by assessment could be applied to both primary and secondary costs using a secondary assessment cost element which is different from the original cost elements. In this case, the costs being allocated will be posted to a secondary assessment cost element. In AAA Bbb, the statistical key figures are defined for assessment purpose:

The statistical key figures used are: Employees Man-hours Floor space Quantity by Finish Goods

1.3.2. Overhead Allocation

Costs are initially posted to a 'common' (or shared) cost center during the month, and at the month end these costs are allocated to respective cost centers based on the allocation basis. Costs can be allocated via reposting or allocation cycle. AAA will re-assign shared costs mainly though allocation cycles. Allocations of costs to the respective cost centers are done based on i.e. head-counts, transaction volumes, percentage, etc. The following are defined in the allocation cycle:

1. Sender cost center 2. Receiving cost center 3. Allocation basis (floor space, percentage etc) 4. Sender primary cost element 5. Receiving secondary cost element (if use assessment allocation method)

1.3.3. Re-posting of cost

Incorrect posting of costs and revenues can be corrected with the re-posting function in cost center accounting. This enables users to amend specific line items from CO documents and provide management with a clear audit trail when reviewing adjusted CO postings.

1.3.4. Period End-Closing

Period end closing process is a monthly activity in CO and it refers to the following areas:

Execution of allocation cycles to apportion cost from common or shared cost centers to final cost centers. The following tasks have to be executed at every period end closing:

1. Ensure postings are completed from sub modules and sub modules have closed 2. Execute all the active allocation cycles 3. Check key figures to sub modules (i.e. total Cost Center Accounting figures to agree to

total G/L expense accounts etc) 4. Generate monthly reports 5. Lock current posting period for controlling

1.4. Internal Order

Internal orders are used to monitor overhead costs incurred for a specific event, project or activity. It can be used for a restricted period when executing a job, or for long-term monitoring of portions of overhead costs. Internal Orders are company code dependent. Internal order groups can be created for cross-company reporting. Overhead cost orders will be used to collect actual costs incurred. This allows costs to be monitored continuously. The overhead costs assigned to the overhead cost orders are settled (in full) as costs to other cost collectors. This is generally on the periodic basis, at month-end.

1.4.1. Order Master Data Creation

For AAA Bbb HK internal orders will be used to keep track of Project costs. In addition, internal orders will be used to keep track of the legal costs associated to which law firm and cases for AAA Bbb Corporation.

The order type determines the following: The Order Category Orders have different purposes in the R/3 System, for example they can be used to monitor R&D expenses that can be settled to fixed, monitor short term or long term overhead expenses. The structure and function of an order, as well as the transactions you use to process it, all depend on the order category. Numbering Assignment You must assign each order type to a number range. Number assignment takes place centrally for all orders of this order type. Control Indicator This allows you to change the below control indicator centrally for all orders of this order type. Commitments Management For each order type, you must specify whether you want to use commitments management (contractual or scheduled commitment that is not yet reflected in Financial Accounting but will lead to actual expenditures in the future). For example when entering into contract such as a Purchase Order, the commitment cost of this PO can be reflected in the internal order and this amount will be reduced every time a goods receipt is done based on this PO. This allows scheduled costs that have not impacted financial accounting to be shown to user. If service PO is used then commitment management can be applied to this as well. Integrated Planning If you want to update planned activity input directly on the sending cost center, you can activate integrated planning as a default value. When required, you can change the indicator in the order master data. Status Management An order can pass through many statuses. The status controls, for example, which business transactions are allowed on the order. For example, the system will not allow any posting into an order that has not released yet

In additions to R&D expenditure and legal expenses, there are some other possible order types for other types of expenditure such as expatriate expense, travelling expense, trade show etc. More order types could be defined in the detailed design phase.

1.4.2. Order Actual Transaction Posting

Currently, at AAA, two transactions types have been identified for Orders: Costs Associated to Projects These are project expenses which management wishes to capture separately from other expenses. Certain expenses will be capitalized while others will be expensed off. Legal Cost by Law Firm and Case These are legal expenses which management wishes to capture separately. Each order will represent the Law firm and specific Cases the costs are associated to. More order types are to be defined later.

1.4.3. Month End Process

Figure 3.7.3 Settlement in an Internal Order For Internal Orders that capture Legal Costs by law firms and case, there is no settlement needed. For Internal Order that captures Project expenses, there will be a need to settle the capitalized expenses part to an Asset Under Construction (AUC) on a monthly basis, and the expenses portion will be settled to a P&L account or cost object. Once the project is completed and all costs have been settled to AUC, the status of the internal order will be closed and no further posting can be made. Further settlement will be needed to a Fixed Asset (with an intangible asset class) in order to amortize the cost over a 24 month period using straight line method. In order to help the users to separate the total project costs into the portion to be capitalized and the portion to be expensed more easily, the costs items (i.e. the expense accounts) will be grouped into these two categories by means of a parameter called “source structure assignment” used in the settlement rule of the internal order. When the settlement rule is defined, the user can assign some costs to be settled to a cost center, and other costs that are tagged as capitalized to be settled to an Asset Under Construction (AUC).

S e t t l i n g C o s t s i n a n I n t e r n a l O r d e r - - R &D S c e n a r i o

FINANCE

R & D

G o o d s R e c e i p t /I n v o i c e

R e c e i p t ( w i t hI / O a s s i g n e d )

F I D o c u m e n tP r o c e s s i n g( w i t h I / Oa s s i g n e d )

E x p e n s eV a l u e P o s t e d

t o I n t e r n a lO r d e r

E n t e r A U C n u m b e ra s r e c e i v e r i ns e t t l e m e n t r u l e

M o n t h E n dS e t t l e m e n t

t o A U C

A f t e rf i r s t

S h i p m e n t

S e t t l e m e n tt o a r e a l

A s s e t s

N O

Y E S

1.5. Product Costing

1.5.1. Logistics Master Data

The logistics master data required for product costing and the usage is summarized as follows:

Logistics Master data

Major Usage

Material master (MRP views) Provide data of procurement source (such as internal production, external procurement or subcontracting) for product cost calculation.

Material master (Accounting view)

Provide financial data such as inventory price of raw materials and the consumption G/L account (through account determination valuation class).

Material master (Costing view) Provide costing calculation control parameters such as overhead group, origin group etc. (will be discussed in more details in later sections).

Routing master Provide standard production time (SPT) that is relevant for labour and production overhead calculation.

BOM master Provide list of raw materials and their usage quantities for the production of the product.

Purchasing info record of raw material purchase

Provide purchasing price of raw materials for raw material cost calculation when the inventory price is not yet available in the material master.

Purchasing info record of subcontracting

Provide subcontracting labour cost for subcontracting materials.

(For detailed definitions and function of the above master data, please refer to the design documentation of the relevant logistics modules)

1.5.2. CO Master Data

Cost Center A cost center is used to represent a department in AAA. The cost centers of the production departments will be used in product costing. Activity Type prices (i.e. labour and production overhead rates) are planned at each production department cost centers and each of the production department cost centers will be assigned to a work center in PP such that the activity prices could be assigned to work center for labour and overhead cost calculation.

Activity Types Activity types classify the activities produced in the cost centers within a controlling area. For production related cost centers, activity types are generally referring to the production activities. Using the activity types, we can calculate activity prices by cost budgeting of

activity-dependent cost items. The activity prices will be used to calculate the production labour and overhead costs to be absorbed into inventory of the products produced. The production related activity types in AAA are listed below:

Activity type

Description Activity unit

CAMLAB Labour cost for bulk bbb Hour (H)

CAMAOH Assembly labour overhead for bulk bbb Hour (H)

CAMLOH Component labour overhead for bulk bbb

Hour (H)

CAMOH Other overhead for bulk bbb Hour (H)

PAKLAB Labour cost for packaging Hour (H)

PAKAOH Assembly labour overhead for packaging Hour (H)

PAKLOH Component labour overhead for packaging

Hour (H)

PAKOH Other overhead for packaging Hour (H)

SKCLAB Labour cost for silkscreen Hour (H)

SKCAOH Assembly labour overhead for silkscreen Hour (H)

SKCLOH Component labour overhead for silkscreen

Hour (H)

SKCOH Other overhead for silkscreen Hour (H)

Origin Groups Origin group is a parameter in the costing view of a material master. If offers an additional dimension to sub-divide or classify raw materials into different categories for reporting and analysis purposes in product costing. In AAA, the origin groups will be defined as a more detailed nature classification of raw materials and components such that the material costs could be further sub-divided into different natures for analysis. An appropriate value of the origin group must be assigned to the Origin Group field in the costing view of the material master. The origin groups defined in AAA:

Origin group code

Description

B1 Electronic parts in bulk bbb

B2 Plastics parts in bulk bbb

B3 Metal parts in bulk bbb

B4 Lens parts in bulk bbb

B5 Other parts in bulk bbb

P1 Raw materials for packaging

S1 Raw materials for silkscreen

Overhead group Overhead group is another parameter that is being entered into the costing view in the material master data. Unlike the origin group which is generally applied to raw materials, the overhead group is usually used in semi-finished or finished goods for control of production overhead calculation. In AAA, 2 overhead groups will be defined to classify products into two separate categories according to the need of production royalty calculation. One group represents production royalty is needed and the other group represents production royalty is not required. The overhead group is assumed to be entered into the material master for finished goods products only because the royalty will only be calculated on finished goods level. The two overhead groups to be defined are:

Overhead group

Description

ROY0 No production royalty

ROY1 Production royalty calculation required

Different overhead groups represent different products groups which are subject to different charge rate of royalty. Therefore, number the overhead group required for royalty calculation could be expanded depending on the detailed requirements.

Percentage Overhead Keys A percentage overhead key is a key where you can specify the conditions in percentage rates for overhead allocation to the product cost of a product. You could have a flexibility to define different percentage rates with different overhead keys. In AAA, the major need of defining different overhead keys to separate the overheard allocation into three different categories namely bulk bbb, packaging and silkscreen. The followings is the list of overhead keys to be defined in AAA:

Percentage Overhead key

Description Calculation base to be applied

ZMO1 Material overhead for bulk bbb All raw material costs for bulk bbb

ZLO1 Labour overhead for bulk bbb All labour costs for bulk bbb

ZMO2 Material overhead for silkscreen

All raw materials cost for silkscreen

ZLO2 Labour overhead for silkscreen All labour costs for silkscreen

ZMO3 Material overhead for packaging All raw materials costs for packaging

ZLO3 Labour overhead for packaging All labour costs for packaging

Quantity Overhead Keys A quantity overhead key is a key where you can specify the conditions of overhead allocation in terms of a fixed amount per unit of quantity. In AAA, the major usage of the quantity overhead key is for definition of production royalty rate which is a fixed amount applied to different products. In addition to royalty, quantity overhead keys will also be used in the cost estimate calculation in Net Billing because some of the cost items in Net Billing also require application of a fixed amount rate to the product cost. The preliminary design of the quantity overhead keys to be defined is as follows :

Quantity overhead key

Description Calculation base to be applied

ZR1 Production royalty Finished goods production output quantity

ZNB1 Consumption VAT for testing battery (Net Billing only)

Finished goods production output quantity

ZNB2 Consumption VAT for testing film (Net Billing only)

Finished goods production output quantity

Costing Variants A costing variant is a collection of different control parameters of product cost calculation. The major control is the logic and pricing strategy of the different costing components such as materials cost, activity prices (SPT costs), subcontracting price and general overhead allocation. Three different major costing variants will be defined in AAA: 1. Standard cost estimates calculation for material valuation (i.e. cost estimates

calculation for material master standard price update) 2. Cost estimate calculation for Net Billing 3. Cost estimate calculation for other Request for Quotation (RFQ) purposes

Pricing control of costing variant for material valuation:

Costing items Pricing strategy priority sequence Additional control

Material cost

1. Inventory valuation price from accounting view of material master. 2. Effective price taken from purchasing info record.

Activity price Standard activity rates for the year. Planning version 0

Subcontracting cost

Effective price from subcontracting purchasing info record.

General overhead allocation

Percentage overhead keys and quantity overhead keys for royalty.

Pricing control of costing variant for Net Billing:


Material cost

1. Inventory valuation price from accounting view of material master 2. Effective price taken from purchasing info record (The above strategy is just a preliminary suggestion. Wilson Yuen and Stanley Wan will have more detailed discussions on that to finalised the logic)

Activity price Standard activity rates for the year.

A planning version different from 0 such that different standard rates could be applied.

Subcontracting cost



Percentage overhead keys and quantity overhead keys for Net Billing.

Pricing control of costing variant for RFQ:


Material cost

1. Plan price 1 from material master (this price is to be maintained manually by users on selective materials). 2. Inventory valuation price from accounting view of material master. 3. Effective price taken from purchasing info record.

Activity price Standard activity rates for the year. Planning version 0

Subcontracting Cost



Percentage overhead keys and quantity overhead keys for royalty.

The source of the pricing will be kept in each product cost estimate as an audit trail.

1.5.3. Summary of Product Cost Approaches

Finished Goods Inventory in Production Plant 5100 Valuation at moving average price per batch (FIFO batch valuation) A new batch number will be generated for each production order (work order) producing the finished product. Each batch will have a unique material cost. The material cost of a batch is calculated from semi-finished goods and raw materials that are directly constituting to the finished product according to the BOM.

Semi-finished Goods Inventory in Production Plant 5100 Valuation at standard price updated from standard cost estimates. All inventory of each semi-finished product will be valuated the same (at the defined standard cost) The standard cost can be updated either: 1) manually, or 2) automatically from the cost roll-up (can be using weighted average) of the lower levels of the BOM and can be selectively updated only for certain semi-finished products. Re-valuation of existing inventories for semi-finished product will happen whenever the standard cost is updated. The gain or loss will post to the P/L accounts

Raw Materials Inventory in Production Plant 5100 Raw materials will be valuated for each batch of the receipts of purchase using the purchase order price. The batches of raw materials will be issued to production orders at FIFO. No re-valuation of raw materials will be required.

All Inventory in Branches Inventory will be valuated for each batch of the receipts of STO using the STO price (transfer prices plus the landed costs). The batches of goods will be delivered to customers at FIFO. No re-valuation of inventory will happen.

1.5.4. Activity type prices planning

The activity type prices in AAA are the standard labour and overhead rates which will be applied to the standard production time to calculate the absorption of standard labour and overhead cost. In AAA, the standard rates are being calculated in the yearly budget and the rates will be applied for the whole year. In SAP, the same thing is being done in cost center planning. In cost center planning, the budget of activity type dependent costs (i.e. production related labour and overhead costs will be entered into each production cost centers). On the other hand, users have also to plan the budgeted activity quantities and enter the budget into each production cost centers respectively. After that, users could run an activity price calculation programme to calculate the related activity price per unit of activity quantity. The planning data could be entered as a yearly total figures or be broken down into different monthly total, depending on the actual needs of the user when doing the budgeting. This activity has to be done before you can calculate the correct product cost estimate.

1.5.5. Percentage Overhead Rates Maintenance

In addition to the activity type prices, the product costing users in AAA have to maintain the percentage overhead as well such that the general overhead could be allocated into the product cost by the desired percentage rates. There is no standard system function in SAP R/3 to help the user to calculate the percentage rates. Users have to come up with the percentages outside the system and then enter the rates for each percentage overhead keys. There is a validity period of each rate values. That means users could enter a monthly or yearly percentage rate by maintaining different validity period. This activity has to be done before you can calculate the correct product cost estimate.

1.5.6. Quantity Overhead Rates Maintenance

The maintenance procedure of quantity overhead rates is very similar to the percentage overhead. The major difference is that the rate being entered for quantity overhead is a dollar amount value per unit of quantity instead of a percentage rate. Similar to percentage overhead, there is a user-definable validity period for each amount rates. This activity has to be done before you can calculate the correct product cost estimate.

1.5.7. Cost Estimate Calculation

This is the process for calculating a product cost of a product. You will have to calculate a cost estimate of a product in the following major scenarios: Calculation of the standard production cost estimate of a new product and use the standard cost estimate as the standard price for future inventory valuation. Calculation of the new standard cost estimate of an old product if you want to revaluate that inventory valuation price of that product. Calculation of a new standard cost estimate of a product for purposes other than inventory valuation (such as for Net Billing and other quotation reference or other purposes). In scenario 1 and 2 above, you should use the costing variant desired for calculation of standard price for inventory valuation to process your cost estimate calculation. You could also calculate different versions of cost estimates for other purposes. However, only one version (version 01) could be updated into material master standard price as the inventory valuation price. If you have really calculated different versions of costing for the same materials, they will be kept in the system unless being deleted or overwritten by a new calculation of the same version.

Product Costing - Process Overhead Rate, Activity Rate for the next period

<Function>

Run activityprices

calculation

Activity pricescalculated bythe system

Calculatestandard

cost

B

Enter budgetedcosts of the costelements of the

activity types inCost CenterPlanning

Enter budgetedquantity of the

activities in CostCenter Planning

Enter productionoverhead rates into

the system

In scenario 3, you should use the costing variant desired for Net Billing calculation because the calculation logic and the standard rates required will be different from the normal inventory cost calculation. Again, you could calculate and save different versions of costs. But in this case, all versions cannot be updated into the material master for inventory valuation. \Major difference of the calculation logic in Net Billing could be summarized as follows:

Cost items Calculation Major difference

Assembly labour Standard assembly hours X hourly rate specific to Kodak

Standard rate will be different from inventory valuation rate from a different planning version

Consumption of VAT for testing batteries

Fixed amount per unit of product.

Fixed amount based on quantity overhead. This item does not exist in inventory valuation

Consumption of VAT for testing film

Fixed amount per unit of product.

Fixed amount based on quantity overhead. This item does not exist in inventory valuation

All part costs Summation of BOM item part costs

A specific set of exchange rates is being used to convert the part prices into USD

The calculation logic for all other cost items will be the same as the inventory valuation calculation Two processing options are available for cost estimates calculation, individual processing or mass processing using a tool called Costing Run. In both cases, you could choose to do the costing calculation for selective materials only.

1.5.8. Standard Price Update from Standard Cost Estimate – Mark & Release

Mark and release are two technical steps to be done in SAP product costing to update your standard cost estimate into the standard price of the material master for inventory valuation. That means the steps are only required for inventory standard price update. Cost estimates that are used for other purposes are not required to do these two processes. From inventory valuation points of views, the inventory valuation will only be effective after the standard cost estimate has been marked and released to the material master. That means even if you have calculated a new standard cost estimate in product costing of an old product, the old product will not be revaluated if you have not yet marked and released the new cost into material master.

1.5.9. Standard Cost Estimates for Single Use Bbb (SUC)

In AAA, the single use bbb could be produced from newly produced components (virgin version) or recycle components (recycle version). There will be two BOMs for every single use bbb model, one BOM is for virgin production the other is for recycle production. When calculating the standard cost of SUC, according to the current practice, AAA CCHK Finance will define a percentage ratio mix of the two BOMs to come up with a single mixed standard price for the SUC. This approach is also a standard feature in SAP R/3 product costing system called Mixed Costing. Mixed costing allows you to update a mixed standard price from different production alternative BOMs. You have to define a percentage mixing ratios of the different production alternatives and the system will mix the prices of the different production alternatives by the mixing ratio to come up with a single weighted average standard price. (The mix is controlled by CCHK Finance. To change the mix in the system, change the system mix ratio, then re-calculate the new price)

1.5.10. Product Cost Estimates for New Products

In AAA, the development of a new product consist of many different phases. At the early stage, a material number may not be available for the new product. But AAA finance still needs to come up with an early estimation of product cost of the new product. In SAP, this process could be done via Reference and Simulation Costing. The detailed requirements and the solution of this issue will be defined in the detailed design phase.

Product Costing - Process Standard Cost Estimates for the next period

FIN

AN

CE

Ind ividual

Costing run

Yes

No

No

Current month

Error in cost

calculation?

Beginning of the next

month

End

Sent errormessages to

production/MISdepartment for

corrections

Individual

material/mass

processing?

FromB

Calculate

standard cost

estimates

individually(CK11N)

Mass Calculation

by costing run

(CK40N) for

Download

standard cost

estimates with

costing status

"KA"

Mark standard

cost estimates

individually

(CK24)

Mark standard

cost estimates(CK40N)

Download

standard cost

estimates with

costing status

"VO"Release

standard cost

estimates

(CK40N)

Releasestandard cost

estimates

individually

(CK24)

1.5.11. Production Order Processing for Semi-finished Goods

Production order of semi-finished goods are used to manage the production of non-finished goods components (such as plastic components) or sub-assemblies (such as PCBA or bulk bbb). All such materials are being regarded as WIP in AAA’s terminology.

Raw material consumption at backflushing Raw material costs are being posted and captured into the production order by a goods issue posting. According to the to-be design in PP, the goods issue posting will be done automatically at backflushing. The system will automatically consume the raw materials to the production according to the usage quantity defined in production BOM. Suppose $100 of raw material cost is consumed in the production order, the accounting posting will be as follows : Cr. Raw material inventory 100- Dr. Raw material consumed 100 The raw material consumption cost will be posted to P&L and captured into the production order.

Labour and production overhead cost allocation In addition to raw material consumption, the production time consumed in the production order will also be entered during backflushing entries. Suppose the production time being entered is 10 hour and the standard rate for labour and overhead are $1/hr and $2/hr respectively, the labour and overhead cost being allocated into the production order will be $10.00 and $20.00 respectively. The posting will be as follows Dr. Labour cost (to production order) 10 Cr. Labour cost absorption (from cost center) 10- Dr. Overhead cost (to production order) 20 Cr. Overhead cost absorption (from cost center) 20- All the above postings are pure CO postings (i.e. statistical postings in CO only) using secondary cost elements which does not have any posting effect in the general ledger. But the implication in CO is that $10 and $20 labour and overhead costs are being charged from the production cost center to the production order.

Absorption of Production Cost to Inventory at Goods Receipt When the production of certain units of the semi-finished goods is completed, a goods receipt should be done to post the completed units back to the inventory pool for other stages of production. This transaction will also be done automatically by means of backflushing entries. In other words, the backflushing entries will post the consumption of raw materials, production time being charged to the production order and the goods receipt of the completed units at the same time. (Raw materials should be issued at FIFO. But for semi-finished goods, only the standard cost is used)

During each goods receipt posting, the amount of inventory of the semi-finished goods being received will be posted to inventory account at the standard price which have already included the raw material cost, labour and production overhead, and the general percentage overhead (calculated from standard cost estimates). Suppose the standard price of the semi-finished goods is $129.00 which includes $90 of standard raw material cost, $10 of standard labour cost, $20 of standard production overhead cost, and $9 of general overall cost (10% of the total standard raw material cost), the goods receipt posting will be as follows : Dr. Semi-finished goods inventory 129 Cr. Factory output from production 129- The credit posting is a P&L item which capitalizes standard cost amount of $129.00 from the P&L in the production order to the inventory. In other words, the WIP inventory of the semi-finished goods which is being valuated at the standard price of $129.00 has also included the absorption of the standard labour cost, the standard overhead cost and the general overhead cost.

Month End Processing – General Overhead Allocation The percentage general overhead allocation to production order will be done as part of the month end procedure for production orders. Continue with our previous example of the production order of which $100 of actual raw material cost has been posted and general overhead rate is 10%. That means the general overhead being allocated to the production order will be $10.00. The posting will be as follows : Dr. General overhead cost (to production order) 10 Cr. General overhead cost absorption (from cost center) 10- Similar to the labour and production overhead cost postings, the above postings are CO postings only which have no effect in the general ledger.

Month End Processing – WIP Calculation After finishing the general overhead allocation process, all the cost capturing postings of the production order in that period could be treated as completed. The next step to be done in the overall month end procedure will be WIP calculation.

With our existing example, the cost items posted into the order are as follows : Raw material costs 100 Labour cost 10 Production overhead 20 General overhead 10 Factory output 129- ------------------------------------------- Total net P&L in order 11 The net order balance of $11.00 left in the production order will be treated as the WIP amount in SAP R/3 if the overall status of the production order has not yet completed. Normally, a production order is treated as completed when the total goods receipt quantity = the total goods quantity planned to be produced. In SAP R/3, actually the nature of WIP calculation and the corresponding posting in FI general ledger is just an accrual posting for the costs that have not yet been absorbed by goods receipt and are still remained in an incomplete production order at the time of month end processing.

Month End Processing – Variance Calculation After finishing the WIP calculation, users have to process the variance calculation process. If the production order in our existing example has been completed, the remaining order balance of $11.00 will be treated as production variance instead of WIP. The total $11.00 of production variance could be broken down into different cost natures (such as $10.00 raw material cost and $1.00 of general overhead costs) and different sources (such as price or quantity usage of raw materials). The breakdown will be posted and stored into different value fields in COPA for analysis.

Month End Processing – Settlement Settlement is the last step of the month end procedure for production orders. The usage of the settlement is to generate accounting postings for the calculation results of WIP and variance calculations. If the order is incomplete (i.e. total goods receipt qty is less than the total planned output qty), WIP will be posted and the entries will be as follows: Dr. WIP 11 Cr. WIP capitalisation 11- (You will know if the order is complete when the total delivered quantity is equal to the total quantity to be produced)

The posting effect is to post an accrual of the P&L amount of $11.00 back to the balance sheet. If the production order is completed in the next period, this accrual posting will be reversed automatically by the system of the next month end settlement. If the order is complete (i.e. the total goods receipt qty = total planned output quantity), production variance will be posted and the entries will be as follows: Dr. Production Variance 11 Cr. Factory output from production 11- The overall effect is to reclassify the net P&L cost in the production order into production variance account. In additions to the above general ledger postings, the production variance will also be broken down and posted into COPA.

1.5.12. Production Order Processing for Finished Goods

Production order of finished goods are used to manage the production of the finished products. In most cases, this present the final packing process in AAA. But actually the whole production order execution process will be exactly the same as the orders for semi- finished goods.

Raw material consumption at backflushing Materials used for final production of finished goods and the required semi-finished goods will be consumed into the production order by backflushing. Suppose $100 of packaging raw material cost and $200 costs (from standard price) of semi-finished goods are consumed in the production order, the accounting posting will be as follows : Cr. Raw material inventory 100- Cr. Semi-finished goods inventory 200- Dr. Raw material consumed 100 Dr. Semi-finished goods consumed 200 The material consumption cost will be posted to P&L and captured into the production order.

Labour and production overhead cost allocation The same logic mentioned in the semi-finished goods case still applies. Suppose the production time being entered in backflushing is 10 hour and the standard rate for labour and overhead are $1/hr and $2/hr respectively, the labour and overhead cost being allocated into the production order will be $10.00 and $20.00 respectively.

The posting will be as follows Dr. Labour cost (to production order) 10 Cr. Labour cost absorption (from cost center) 10- Dr. Overhead cost (to production order) 20 Cr. Overhead cost absorption (from cost center) 20-

Absorption of Production Cost to Inventory at Goods Receipt The production costs in the finished goods production order will be capitalised into finished goods inventory during goods receipt (i.e. backflushing). But the production order cost estimate (i.e. the plan cost of the production order) will be used (instead of the standard cost) to post the good receipt value Suppose the production order cost estimate of finished goods is $329.00 which includes $200 of semi-finished goods costs, $90 of standard raw material cost, $10 of standard labour cost, $20 of standard production overhead cost, and $9 of general overall cost (10% of the total standard raw material cost), the goods receipt posting will be as follows : Dr. Finished goods inventory 329 Cr. Factory output from production 329-

Month End Processing – General Overhead Allocation Continue with our previous example of the production order of which $100 of actual raw material cost have been posted and general overhead rate is 10%. That means the general overhead being allocated to the production order will be $10.00. The posting will be as follows : Dr. General overhead cost (to production order) 10 Cr. General overhead cost absorption (from cost center) 10-

Month End Processing – WIP Calculation With our existing example for finished goods order, the cost items posted into the order are as follows: Semi-finished goods costs 200 Raw material costs 100 Labour cost 10 Production overhead 20 General overhead 10 Factory output 329- ------------------------------------------- Total net P&L in order 11

Same as semi-finished goods order, the net order balance of $11.00 left in the finished goods production order will be treated as WIP if the order is incomplete (i.e. the total goods receipt quantity is less than the total planned output quantity)

Month End Processing – Variance Calculation Unlike semi-finished goods, this process is virtually not required for finished goods order because the finished goods is valuated at moving average price

Month End Processing – Settlement If the order is incomplete (i.e. total goods receipt qty is less than the total planned output qty), WIP will be posted and the entries will be as follows: Dr. WIP 11 Cr. WIP capitalisation 11- If the production order is completed in the next period, this accrual posting will be reversed automatically by the system of the next month end settlement. The overall mechanism is exactly the same as the production for semi-finished goods If the order is complete (i.e. the total goods receipt qty = total planned output quantity) and the finished goods inventory has not yet been sold before month end, the production variance will be posted to finished goods inventory as follows: Dr. Finished goods inventory 11 Cr. Factory output from production 11- After the posting, the inventory value becomes $340.00 ($290 + $11) which is the total actual cost incurred in the production order. If the order is complete (i.e. the total goods receipt qty = total planned output quantity) and the finished goods inventory has been sold before month end, the production variance will be posted to P&L as production variance Dr. Production variance 11 Cr. Factory output from production 11- After the posting, the total P&L at period end will also become $340 ($290 of COGS + $11 of production variance)

Product Costing - Production Order Period End Processing

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overheadallocation (KKAX)


production ordersettlement (KO88)



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calculation(KKAX)

Product Costing - Production Order Period End Processing

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order/massprocessing?

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calculation(KKAX)

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(KKS2)






calculation(KKAX)

conceptual design - product costing

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