A Guide to Selecting the Appropriate Cost Object to Support Your Manufacturing Process

  • by Birgit Starmanns, Senior Director, Solution Marketing, EPM and Finance Solutions, SAP
  • July 26, 2011
A company can choose between different methods for manufacturing its products, depending on the type of product, complexity of the production process, and whether the product is manufactured in response to customer demand for particular options. Different cost objects are available within product costing in SAP ERP, which complement each manufacturing process.
Key Concept
A cost object is a type of controlling object that captures the costs associated with a value-added process, such as manufacturing a product. Depending on the manufacturing process, a different cost object may be used in the system to collect the costs incurred in producing a product. The costs are commonly collected by the same objects that are used to manage the manufacturing process. For example, for products that are managed by lot size, a production order is used for building discrete units of a product, and a process order is used for products that are created using recipes and formulas. In a repetitive manufacturing scenario that focuses on costs by period, a product cost collector is used to collect and manage costs. Finally, for customizable products, options for managing costs include a sales order item, a production order, and a project.

The manufacturing process that you choose to produce a particular product depends on a variety of factors, including the type of product, how many units are produced in a production run, and whether a product has configurable options. For example, the manufacturing process for an MP3 player is very different from the production of a beverage or an automobile. In addition, multiple manufacturing methods are often used within the same company for different product lines.

With the integrated nature of SAP ERP, the product costing method is closely aligned with the manufacturing process. Postings that are made in logistics, such as a goods movement, also create the corresponding financial postings in the SAP General Ledger and in the managerial accounting (CO) module. Product costing captures the costs that result from the daily production transactions, such as the cost of resources, including raw material components, labor and machine hours, as well as costs that are allocated through controlling processes, such as overhead.

To support this close alignment between production and product costing, a different cost object is used to track and manage the cost associated with each manufacturing process. In this article, I summarize the different manufacturing processes, their characteristics, and the cost objects they employ. For a summary of the manufacturing processes, and the cost objects that are most commonly used for each scenario, refer to Table 1.

Birgit Starmanns

Birgit Starmanns is a senior director in solution marketing at SAP for EPM (Enterprise Performance Management) and Finance solutions. Birgit has more than 20 years of experience across solution marketing, solution management, strategic customer communities, and consulting. Her functional experience is in finance, including core SAP ERP and enterprise performance management, as well as customer relationship management, which has allowed her to focus on the integration of cross-functional business processes. Prior to joining SAP, she was a principal in management consulting organizations, redesigning business processes and implementing SAP R/3 and R/2 for numerous Fortune 500 and SME companies, with a focus on management accounting. Birgit holds a BA and an MBA from the College of William and Mary.

This June, Birgit Starmanns will be speaking at the SAPinsider Financials 2015 conference in Nice, France. View event details here.

 

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