Include Actual Costs in COGS with Material Ledger in Release 4.7

  • by Janet Salmon, Product Manager, SAP AG
  • March 15, 2005
Does your cost of goods sold (COGS) figure match your actual costs? Learn how to use new functionality in the material ledger to complete the value flow through R/3 and assign price differences to the cost of sales accounts to ensure that the COGS reflects the actual costs.
Key Concept
SAP uses the term "actual costs" in various ways. For the material ledger, the actual costs are calculated at period close, taking into account all material movements and invoices associated with the raw materials and the actual cost of the confirmations to the production orders. R/3 determines these actual costs using a multi-level costing process that takes account of all goods movements within a plant. This article refers only to the material ledger definition of actual costs.

When manufactured goods are issued from stock to sales, the posting to the cost of sales account is usually based on an estimate of the cost of goods sold (COGS). This estimate — commonly known as the standard cost — is calculated by looking at the bill of material (BOM) and routing for the product and creating a cost estimate for each semi-finished and finished product to calculate the cost of the material shipped to the customer.

While this valuation at standard costs is perfectly acceptable in the United States and Europe, Latin America and Asia legally require companies to value COGS with a price that reflects the actual costs for the product. For more information on this subject, refer to Qian (Sharon) Tang's article "Statutory Requirements Compliance: Are You Ready for China?" in the January 2005 issue of SAP Financials Expert.

I'll show you how to use new functions available with the material ledger (CO-PC-ACT) in R/3 Release 4.7 to adjust the cost of sales accounts to reflect the actual costs for the period. Also, if you are working in a make-to- order environment, I'll show you how to use the same functions to update the sales order or project with the actual costs. (See the sidebar, "What Are Actual Costs?")

First, let's look at how the standard costs for the manufactured product are set. The Product Cost Planning (CO-PC-PCP) functions are used to create a multi-level cost estimate to determine the costs for each material at the start of the year or period. This explodes the BOM and calculates the costs of the raw materials and each semi- finished and finished product in turn to arrive at a standard cost for the product sold to the customer. Usually, a costing run is used to calculate and update the standard costs for all materials centrally.

In principle, the standard costs represent a true and fair view of the material costs. In practice, however, variances can occur at any stage of the manufacturing process, resulting in price differences on the associated purchase orders and production orders. In a standard costing environment, these variances are posted to a price difference account. Clearly, if these variances are significant, the standard costs do not reflect the true costs of manufacturing the product sold.

Janet Salmon

Janet Salmon joined SAP in 1992. After six months of training on R/2, she began work as a translator, becoming a technical writer for the Product Costing area in 1993. As English speakers with a grasp of German costing methodologies were rare in the early 1990s, she began to hold classes and became a product manager for the Product Costing area in 1996, helping numerous international organizations set up Product Costing. More recently, she has worked on CO content for SAP NetWeaver Business Warehouse, Financial Analytics, and role-based portals. She is currently chief product owner for management accounting. She lives in Speyer, Germany, with her husband and two children.

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