Understand Your Project Costs in an Engineer-to-Order Manufacturing Environment

  • by Birgit Starmanns, Senior Director, Solution Marketing, EPM and Finance Solutions, SAP
  • February 17, 2014
Financials/SCM
In the engineer-to-order manufacturing process, a product with the exact specifications desired by a company’s customers does not yet exist. Instead, you design and then produce the product specifically for that customer, using Project System (PS). As you collect costs and bill the customer, an accounting entry is made at each step; some of these postings take place in FI, whereas others are posted only in Managerial Accounting (CO). Follow the flow of these accounting entries to understand the reconciliation process between FI and CO.
Learning Objectives

By reading this article, you will know how to:

  • Understand the controlling objects that you use for an engineer-to-order process
  • Understand the integration between sales orders in the sales and distribution (SD) module and the controlling objects in the Project System (PS) module
  • Understand the accounting entries made in a typical period in both the FI and CO modules to track the cost of engineering and manufacturing
Key Concept
In designing and building a product, a project allows you to manage phases of the engineering process as well as the detailed manufacturing steps of complex tasks. The project helps you collect both costs and revenues and manage your resources. A work breakdown structure element (WBS) is used to hierarchically reflect project phases. In addition, a network, which can be thought of as a complex production order, manages individual tasks and resources, as well as the dependencies between these tasks.

When your business model involves creating unique products for your customers, you need to understand the costs involved in the actual build of a product. However, you also need to include the time and costs to design and prototype the product, which is usually an iterative process. Only then can you understand the true profitability of an engineered product.

An example of an engineer-to-order (ETO) project is a large construction project, such as building a bridge or highway, which is only built once. Alternately, after designing a product, such as an airplane with particular seating configuration based on the airline’s specifications, you can then build multiple airplanes based on that same configuration. Although I use a very simple example here with only one design step, the design process is typically iterative, and may involve interplay between design and production — for example, if a prototype needs to be built even before the actual product is manufactured.

In the SAP system, you use Project System (PS) to track both the phases of the project as well as the individual tasks. Keep in mind that in an ETO environment, there is no standard cost; instead, you use planned costs to estimate the cost of designing and manufacturing the product. Actual costs are then posted to the project. These costs become the cost of goods sold through direct financial postings and via logistics processes, including revenue when the customer is billed and costs for both design time and manufacturing.

I focus on tracing each step in an ETO manufacturing process and analyzing the postings that are made in both FI and Managerial Accounting (CO). I show both the FI and CO postings made throughout each period to the project, including cost collection and the revenue received from the customer based on intermittent billing. A complex project is normally open for many periods, so the postings that I discuss can occur in every period in which the project is open.

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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