Hone Your Manufacturing Cost Understanding for Better Decision Making

by Birgit Starmanns, Senior Director, SAP America (September 2009)

When a product is manufactured, an accounting entry is automatically made each time that a posting is made in the production process. Some of these postings take place in FI, while others are posted only in CO. Follow the flow of these accounting entries and understand the reconciliation process between FI and CO.

Key Concept

A controlling object is part of the organizational hierarchy of Managerial Accounting (CO). Each controlling object captures the detailed costs associated with entities such as cost centers, profit centers, orders, projects, and cost objects. A cost object is a type of controlling object that captures costs associated with a value-added process. Production orders capture these value-added costs in a discrete, make-to-stock manufacturing process.

Understanding the cost of manufacturing a product is an important factor in many other business decisions, as these costs affect profitability and margin calculations. It is important to understand that the way product costs are captured is intertwined with the manufacturing strategy of a product.

In a make-to-stock environment, for example, products are standardized and no options or variants are possible. For example, a computer CD drive is typically sold with no choices allowed — each drive that is manufactured is exactly the same and costs the same to produce. Alternatively, in a make-to-order environment, the customer may be given choices. A desktop computer may allow options such as upgrading the processor or hard drive, choices that influence the cost to manufacture a product because different components are required.

To obtain accurate information about the cost of manufacturing a product, the product costing (CO-PC) module captures information from related processes within SAP ERP, including financials and logistics information from production, materials management, and sales and distribution.

I’ll focus on tracing each step in a manufacturing process and analyzing the postings that are made in both Financial Accounting (FI) and Managerial Accounting (CO). I’ll use a make-to-stock process as an example and cover the FI and CO postings made in one accounting period with the assumption that the product is not yet finished at the end of that period.

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