Complete the Manufacturing Process with Period-End Postings to Recognize Production Variances

  • by Birgit Starmanns, Senior Director, Solution Marketing, EPM and Finance Solutions, SAP
  • December 9, 2009
After you manufacture a product, it is received into finished goods inventory at its standard cost. Understand the month-end postings that are necessary to clear any work in process on the production order, and to recognize manufacturing variances on the profit and loss statement.
Key Concept

The standard cost of a product is used for inventory valuation; it is calculated based on the value of the expected resources required to manufacture that product. In a discrete make-to-stock manufacturing process, the production costs are collected in a production order. After the completed product is received into finished goods inventory, the costs remaining on the production order are written off to the profit and loss statement as manufacturing variances.

The standard cost of a product, which is used for inventory valuation, is developed based on the expected resources that are required to manufacture each unit. Direct costs include the raw materials and components, as well as the hourly rate of setup, labor, and machine resources required to produce the product. The indirect costs include overhead allocations for costs collected at a company-wide level, such as general facilities and administrative costs.

The costs that are collected rarely exactly match the standard cost that has been developed for a product. Costs incurred during production that are either above or below the standard cost are written off to the profit and loss (P&L) statement as variances when the product is completed and placed into inventory.

I will use a make-to-stock product as an example, in which each product is manufactured to the same specifications, to describe the postings that are made in both FI and CO. These postings originate across SAP ERP processes, including manufacturing, materials management, and sales and distribution, and are captured in the product costing (CO-PC) module.

In my prior article, “Hone Your Manufacturing Cost Understanding for Better Decision Making,” which was posted to the Financials Expert knowledgebase in September 2009, I covered the postings made in the first period of a production order, with the assumption that the product was not completed at period end. In this article, I will discuss the postings that are made in the second accounting period, in which the product is completed and the variances of the manufacturing process are written off to the P&L.

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.

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