Leverage SAP Product Costing for Joint Production

  • by Chirag Chokshi, Associate Director, SAP Financials, SITA Corp.
  • September 22, 2015
Joint production is a production process of two or more finished products. In this example, the production cost is shared between the finished manufactured products. Learn the basics of apportionment of the standard cost between the primary finished product and other co-products. Discover the significance of a preliminary settlement transaction for the variance calculation of a joint production scenario.
Learning Objectives

By reading this article, you will learn how to:

  • Set up the material master costing1 view  for joint production
  • Set up a bill of material (BOM)
  • Configure source structure and relate it with the material master
  • Analyze costing run results for the primary co-product
  • Analyze a variance and know the significance of a preliminary settlement for variance analysis and the period-end process for joint production
Key Concept

Joint production is a production scenario that involves the manufacture of more than one finished product simultaneously. The finished products that are manufactured simultaneously in the joint production scenario are called co-products. The main finished product is called the primary co-product. Usually, there is a specific output anticipated for each co-product against the production of a given quantity of the primary co-product.

Consider a scenario in which company AZBY is a manufacturer of pumps. During the manufacturing of pumps, company AZBY also produces other co-products, such as two different types of sheet metals as well as remnants of sheet metals. Therefore, for this scenario, pump (Material ID: T-COP) is the primary co-product (i.e., the main finished product). The remaining three co-products are sheet metal ST37 (T-COP1), sheet metal ST38 (T-COP2), and sheet metal remnants (T-COP3), respectively. The quantity produced for the three co-products is 0.05 M2, 0.03 M2, and 0.10 M2, respectively, for the production of one pump. (M2  stands for meter squared.) The costs to manufacture a pump and associated three co-products are categorized in three distinct categories: material costs, production costs, and miscellaneous costs. The ratio of cost allocation across all co-products is different for each cost category. I explain the following product costing steps that company AZBY needs to complete for joint production processes during the manufacturing of its pumps:

  1. Set up the material master for the T-COP with the allocation and source structure
  2. Set up a bill of material (BOM) for the T-COP
  3. Calculate the standard cost for the T-COP
  4. Complete the production order and cost object controlling processes for joint production

Note
A joint production scenario requires a specific setup in order to enable the system to compute standard cost accurately as well as to perform period-end transactions, such as variance calculation and settlement. The joint production setup for product costing includes specific master data configuration as well as business processes.

The case study for this article includes four co-products; namely, T-COP, T-COP1, T-COP2, and T-COP3. T-COP is the primary co-product. First, I explain the material master setup of T-COP, the significance of allocation and source structure assigned to T-COP material master data, and the configuration of the source structure. If the source structure is assigned to the material master, you can define a different ratio of cost allocation for each cost category. A source structure enables you to classify the costs in different categories based on the origin of the cost. If a source structure is assigned to an apportionment structure in the material master, you can define the ratio of cost apportionment across co-products for the cost categories configured for the source structure. If no source structure is assigned to the apportionment structure in the material master, the cost apportionment ratios cannot be defined for different cost categories, and only one ratio applies to the total cost. Therefore, without a source structure, the cost apportionment ratio can be defined for total cost only, and different ratios for different cost categories cannot be defined.

Chirag Chokshi

Chirag Chokshi is associate director of SAP Financials at SITA Corp. He has worked on SAP Financials since 2001 and specializes in implementing the Financial Accounting and Controlling modules along with their integrated areas for companies in industries such as consumer products, the chemical process industry, pharmaceuticals, the public sector, and industrial machinery and component manufacturing. He has worked on various complex projects, including global rollouts, greenfield implementations, and SAP system upgrades. In addition, he has developed various pre-configured solutions with a focus on SAP Financials. 


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