Improve Profitability by Monitoring Rework and Failure Costs with Failure Cost Processing

  • by Siva Prasad Ramachendruni, Senior Consultant
  • May 5, 2011
Learn how to use failure cost processing for substandard or damaged finished goods rework. You can capture costs and view reports for better monitoring and control of the rework.
Key Concept
In manufacturing environments, rework operations are usually carried out with two traditional approaches: costs are collected in the same order or in a separate rework order. With these two approaches, rework cost reporting becomes cumbersome because it requires many custom modifications. To achieve better monitoring and control of failure or rework costs and improve profitability, you can use an alternative hidden approach called failure cost processing. The SAP standard system does not show this in the SAP Easy Access menu.

Rework or scrap is a normal part of a discrete or repetitive manufacturing scenario. Goods that do not meet standard quality norms are reworked again to bring them up to salable, finished condition. When they cannot be reworked adequately, they are deemed scrap and are discarded. In an SAP system, you use two approaches to capture the rework scenario:

1. The rework operation is inserted automatically in the main production order, and the goods are confirmed at this operation.

2. A separate rework order (without material) is created, costs are captured on the rework order, and the rework order is settled to the main production order.

With the first approach, the visibility of rework costs is lost as the rework costs are collected under the same production order. With the second approach, rework costs can be tracked, but with two limitations:

  • It involves period-end activity of settlement of rework orders
  • Linking of rework costs with the original production order or material is possible only after settlement

The second approach presents limitations because you are not able to report on rework costs correctly at any point of time for an original order or material.

In addition, both of these approaches fail to report on:

1. What the rework inventory is (valued at standard cost) at any point of time

2. The rework expenses listed according to responsible cost center and the reason for rework (e.g., poor quality or labor error) for the reworked product 

 

Siva Prasad Ramachendruni

Siva Prasad Ramachendruni is a senior consultant (SAP Financials) working for a multinational corporation in the IT sector with 12 years of functional and SAP experience. He helps companies streamline business processes and gain efficiency through effective cost management. He is an Indian Cost and Management Accountant and has a master’s degree in financial management.

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