Structure Consumption Accounts to Reflect the True Cost of Sales

  • by Paul Ovigele, ERP Financials Consultant
  • September 2, 2010
Learn the configuration settings that determine which accounts are posted to when performing the various transactions on a production order (e.g., goods issue, confirmation, goods receipt, work in process, overhead, and variance calculation). Then see how to structure these accounts in their financial statements to reflect the true cost of goods sold.
Key Concept
Several profit and loss accounts are updated when transactions on a manufacturing order are made. Some of these accounts are primary cost elements (i.e., linked to the general ledger), some are secondary (i.e., exist only in managerial accounting [CO]), and some are neither primary nor secondary cost elements (i.e., they are set up only in the general ledger). It is important to understand how these accounts are derived and how to position them in your financial statement version.

Many companies are not used to SAP’s concept of using consumption accounts to track production activity in the profit and loss (P&L) statement. The relationship of these accounts to cost of sales can also be confusing. In most legacy systems, production activity is reflected mainly on the balance sheet (at least until the product is produced and variances arise) by way of journal entries.

However, in SAP systems, the accounting entries are posted automatically to inventory as well as to P&L accounts when you perform goods issues and receipts on a production order. Also, the allocation of activities and calculation of overhead are not posted to the general ledger. Because of this, it is sometimes difficult for accountants to analyze their financial statements with respect to what happened in the production process and what should be reflected in the cost of goods sold section.

I’ll help you understand where these accounts are configured, how they relate to the production process, and how you can structure them in your financial statements so that your P&L accounts properly reflect your true cost of sales. I will base this article on the make-to-stock product cost by order component, but it is applicable to the other types of production as well. The screenprints in my example are from an SAP ERP Central Component (SAP ECC) 6.0 system, but the article applies to SAP R/3 systems as well.

Paul Ovigele

Paul Ovigele is the founder of ERPfixers, an online micro-consulting platform ( He has worked as an ERP financials consultant since 1997 in both North America and Europe, specializing in implementing the FI and CO modules along with their integrated areas for companies in industries such as consumer goods, chemicals, logistics, pharmaceuticals, apparel and entertainment. Paul has delivered numerous training sessions to finance professionals at both the functional and managerial levels, and he has presented at various SAP financials conferences around the world.

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