Leverage the Benefits of Period-Based Accounting for Special Make-to-Order Manufacturing Scenarios

  • by Muralidharan Sethuraman, Director Enterprise ERP IT Finance, Johnson Controls
  • December 9, 2011
Learn about some special manufacturing scenarios in which you can implement a make-to-order (MTO) strategy for repetitive controlling processes and then manage the manufacturing costs for a product by period and not by individual lot size.
Key Concept
A repetitive manufacturing production process applies to manufacturing sites that are characterized by high volume and continuous production of a finished product. In this type of manufacturing process, a product cost collector is used to manage the production process and to collect associated costs incurred. The focus of a product cost collector is to enable period accounting that shows all costs of producing the finished product, instead of individual lot-oriented cost control, which enables collection of costs to manufacture a particular quantity of units. A product cost collector breaks down the costs for each step of the production process and therefore provides detailed cost information of the project, such as actual costs incurred, which is the variance analysis based on projected (or target) costs versus actual costs at the level of each material.

In an integrated SAP ERP implementation, one of the key decisions that organizations have to make is choosing the type of manufacturing strategy process. This decision depends on various factors such as the type of product, customer-demand fulfilment strategy, and complexity of production process. This decision further influences many other downstream business processes such as production planning and scheduling, shop floor manufacturing execution, and type of product cost controlling. SAP provides you various options within product cost controlling to select the type of cost object that complements different manufacturing processes.

Note
I suggest you refer to the Financials Expert article titled “A Guide to Selecting the Appropriate Cost Object to Support Your Manufacturing Process” to learn about different types of manufacturing processes and how to select the appropriate cost object in alignment with the manufacturing strategy.

MTO Manufacturing Processes

Make-to-order (MTO) manufacturing processes are often characterized by the type of finished products that have multiple variants, such as customer-specific, customized options. Variant configuration functionality in an SAP system allows a customer to select product features according to their requirements when sales orders are placed. This functionality is part of the production planning process that automatically creates manufacturing orders to build the customized product. Examples of this kind of manufacturing include the production of desktop or laptop computers and cars.

In this regular MTO, scenarios producing the customized product are for a specific order quantity (or lot size) generated by the sales order item. Because configuring a product is dynamic, it is difficult to have one standard cost for all product variants. Therefore, the standard cost of the product variant is also dynamically created for each sales order and subsequently used for the valuation of the cost of goods sold and also for product cost controlling of the associated manufacturing order. For this regular MTO scenario, the most common cost object used to manage and collect costs is the production order.

Muralidharan Sethuraman

Muralidharan Sethuraman is director enterprise ERP IT finance at Johnson Controls. He has more than 16 years of industry experience leading and managing multiple SAP implementation and business transformation programs across geographies. Muralidharan is currently leading the SAP S/4HANA program at Johnson Controls. He specializes in SAP Financials and has done design lead, solution architect roles in global SAP implementation programs. Muralidharan is a subject matter expert in the areas of product cost analysis and management, inventory and working capital management, management reporting and profitability analysis, financial analytics and reporting, and business planning. He has published multiple articles in Financials Expert in these areas.

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