regarding product costing in a pharma industry
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Regarding Product Costing in a pharma industry, there can be 2 main approaches:
1) Product Costing By Period:
The product cost by period method is recommended for products that have relatively high design stability and are
manufactured over an extended period of time. If you are manufacturing your products in a repetitive manufacturing
environment, you always use product cost by period. Product cost by period may also be appropriate in order-related
production or process manufacturing environments. A prerequisite for successful use of the product cost by period
method is that you are focusing on manufacturing a product over an extended period of time.In product cost by period
you normally collect the costs on product cost collectors. If you cannot (or do not want to) assign costs to particular
product cost collectors, you can use a cost object hierarchy. You can then collect costs at levels above that of the
product, such as product groups or areas of responsibility.
2) Product Costing By Order(Process order/Production order):
Product cost by order is recommended in lot-based production environments. Typical applications of product cost by
order are in order-related production or batch-based process manufacturing. The production process is based on
manufacturing orders where the focus of production and cost analysis is on a particular quantity (production lot size).
Some other concepts which you will normally encounter in pharma is :
a) Existence of co-products & by-products
b) Sub-contracting scenarios
c) Use of materials like enzymes, whose cost will depend upon the activity level.
Management will expect reports on yield/usage variances at the month end at a product level.
Coming to the important question of material ledger:
First we need to understand the concept & then let the business decide to implement or not:
There are 2 basic objectives of doing material ledger:
1) Carrying inventories in multiple currencies and/or valuations
2) Determining actual costs for externally procured materials and materials produced in-house. In addition, actual
costing uses actual costs to valuate inventories of raw materials, semifinished products, and finished products. Actual
costing calculates an actual price (periodic unit price) for each material, into which all actual costs for the particular
period flow
Concept behind actual costing of material ledger:
Actual costing valuates all goods movements within a period at the standard price (preliminary valuation). At the
same time, all price and exchange rate differences for the material are collected in the material ledger.At the end of
the period, an actual price is calculated for each material based on the actual costs of the period. This actual price is
called the periodic unit price and can be used to revaluate the inventory for the period to be closed. In addition, you
can use this actual price as the standard price for the next period
Actual Costing therefore combines the advantages of price control using the standard price with the advantages of
the moving average price.
Things which you need to be careful about before implementing material ledger:
a) Material Ledger once activated cannot be deactivated for a valuation area.
b) ML requires a high level of discipline in normal & period end closing transactions.
c) For the duration of ML period end closing, no goods movement should happen in the relevant valuation area.
d) ML is a very advanced & scientific concept. Make sure that the client team as well as the implementation
consultant are capable of appreciating & handling the complexities. The sophistication level of ML can be judged fom
the fact that for go-live issues, SAP themselves have a separate heldesk team for issues related to Material Ledger.
Trust the above info helps.