Complete the Engineer-to-Order Process with Period-End Postings for Project Valuation

  • by Birgit Starmanns, Senior Director, Solution Marketing, EPM and Finance Solutions, SAP
  • September 12, 2014
In an engineer-to-order manufacturing environment, you iteratively design a product with your customer and then produce the product based on these newly developed specifications. These projects typically run over many financial periods. At the end of each period, you need to ensure that you correctly value the work in process, the cost of goods sold, and the project revenue on your financial statements.
Learning Objectives

By reading this article, you will:

  • Understand how the results analysis (RA) calculation is used to determine the value of the project at each period-end, based on revenues and costs posted to the project
  • See selected accounting entries made at period-end in the FI, Controlling (CO), and Project System (PS) modules to correctly value the engineer-to-order activities on your financial statements
  • Understand at which points in the manufacturing process postings are made to the profitability analysis (CO-PA) module
 

Key Concept
Costs in an engineer-to-order manufacturing environment are captured using the Project System (PS) module, and reside on the profit and loss (P&L) statement. To correctly value the project at the end of each financial period, a results analysis (RA) process calculates the value of the project, based on the costs incurred and any revenue received from your customer.

In an engineer-to-order (ETO) manufacturing environment, a product is designed specifically for a customer, which is often an iterative process. After the engineering design has been signed off, the product is manufactured based on these specifications. These projects can last months or years, depending on the scope of the item that is being designed.

In my prior article, “Understand Your Project Costs in an Engineer-to-Order Manufacturing Environment,” which was posted to the Financials Expert knowledgebase in February 2014, I covered the postings made in the first period of a project, using the example of designing and producing an airplane. I assumed that the engineered product was not completed at period-end. These same postings are made in subsequent periods as well, because costs continue to be incurred on the project. For a summary of these processes, refer to the sidebar “Period Postings.”

The costs that are incurred throughout the period reside on the profit and loss (P&L) statement. As a result, at each period-end you must ensure that you correctly account for the work in process (WIP) and the cost of goods sold (COGS) of the project. In this article, I describe the calculations that are made in the Project System (PS) module, and the resulting entries in both the FI and Controlling (CO) modules at period-end.

To demonstrate the period-end postings at the end of each of the three accounting periods as part of the financial close, I assume the following:

  • In period 1, costs are incurred on the project, but no revenue is received from the customer.
  • In period 2, costs are incurred, and the customer is invoiced based on a project milestone.
  • In period 3, costs are incurred, the product is completed and delivered to the customer, and final invoicing of the customer takes place.

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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