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Understanding production order from finance point of view.
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Let's start with how to read a production order in sap.
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BOM, Routing and costing sheet is going to be used in production cost calculation.
RA key: Result analysis key is used for WIP calculation and posting.
Variance key: variance key is used for analysis of production variance. Production variance is broken down in
variance category for analysis purpose. Variance key defines the list of variance categories for analysis purpose.
As per above production order, we will be producing 5 quantity of finished product. Below is our cost projection,
this cost expectation can also be referred as planned cost or target cost.
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Above picture showing target cost for producing 5 quantity of finished good.
But during actual production, raw materials consumed quantity might be different than planned quantity. Similarly,
activities actual quantity might be different from planned quantity. Hence actual cost of production will be
different from planned/ target cost of production.
Production order confirmation
As per production order, 5 quantities of finished goods are to be produced. I am assuming that production is going
for couple of days. At the end of every day, production manager is supposed to update below information in sap:
What quantity of finished goods is produced?
Which raw material and in what quantity is consumed while producing the said quantity of finished good?
Which activity andOnline
how much is performed
training is availablewhile
for allproducing
modules the said quantity
of SAP. Phone:
of+91
finished good?
7262000918
Updating above information in production order is referred as production order confirmation.
Once order confirmation is saved, sap calculates cost involved (by valuating raw materials consumed and activities
performed as per actual costing variant).
Suppose, production manager confirms below:
Finished goods produced 2 kg
Ram materials consumed: Milk (3L), sugar (1kg), carrot (3kg), ghee (.4kg) and dry fruit (.4kg)
Activity performed: Cutting (1 hour), heating (3 hours)
As a result of above confirmation, below accounting document gets posted.
Accounting document for Ram material consumption (GL account picked from OBYC configuration)
Below controllingOnline
document is created
training whenfor
is available activity is confirmed:
all modules of SAP. Phone:
+91 7262000918
Below is the financial document posted when 2 kg of finished goods is confirmed/ produced.
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Once above confirmation is performed in system, sap will calculate and update actual cost. Till now actual cost is
incurred only for producing 2 quantities of finished good.
Now let's check the cost in production order.
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+91 7262000918
Online training is available for all modules of SAP. Phone:
+91 7262000918
For overhead calculation, we need to perform transaction KGI2
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Overhead cost is calculated as per costing sheet. Overhead cost should be added in cost of production. Below
financial document gets posted
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Cost element 1015 used for posting above document is maintained in costing sheet.
Now suppose month end has come and this production order is still under production process and not yet
completed. (Out of 5 ordered quantities, till now only 2 quantities is produced)
At month end, balance sheet needs to be finalized. Balance sheet needs to report real position of the company’s
assets and liabilities as on date. Hence how do we handle this production order which is still under process and
not yet completed?
Inventory which is produced is reported under balance sheet as inventory under current asset. In-process
production order is reported under balance sheet as work in progress (WIP). Hence sap should have functionality
to report WIP for production order which is not completed.
In SAP, WIP is handled in two steps
Step 1: Calculation of WIP
Online amount
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WIP Amount = total debit in production order – total credit in production order
For WIP calculation, T code is KKAX
When KKAX is executed, sap calculates debits and credits posted on production order and calculates WIP amount.
Step 2: Posting accounting entry of WIP (T code is CO88)
For posting above accounting entry system needs accounts (WIP and Change in WIP) and amount (WIP amount).
Hence we need to tell sap two things:
1. How WIP amount is calculated?
- Out of so many cost components (raw material, overhead, activity cost etc.), which cost is to be capitalized
(considered for WIP calculation)?
- Out of cost (which is considered for WIP calculation), what portion is to be capitalized and what portion is not
to be capitalized?
- We need to maintain GL account for WIP and GL account for change in WIP.
Maintaining above information in sap can be referred as configuration for WIP.
In our example WIP of production order should be (121.6) a shown below
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Let’s execute KKAX for WIP amount calculation:
Online training is available for all modules of SAP. Phone:
+91 7262000918
Now, let’s post accounting entry for WIP by executing CO88
Online training is available for all modules of SAP. Phone:
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Click on below link for detailed understanding of WIP configuration:
http://techconcepthub.com/understanding-configuration-needed-for-wip-in-sap-with-example/
Now let’s suppose production continued in next month and has completed. Production manager confirms in sap
that all 5 goods are produced and also confirms the quantity of ram material consumed along with activity hours
consumed.
Hence production manager does production order confirmation for remaining 3 quantities in sap.
Hence, for producing total 5 quantities of goods, below is the cost involved.
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Same reflects in SAP as shown in below screenshot:
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Overhead cost in production order is not revised automatically.
In order to recalculate overhead cost, we need to execute KGI2 again
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If you are interested in knowing what document got posted as a result of executing KGI2, then below document
is posted only in controlling. No accounting entry is posted in finance.
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For this production order, production has completed. Like last month, this month also we need to perform WIP
calculation. But since production for the order is already completed, hence there is no WIP or zero WIP.
In order to have zero WIP, already posted WIP has to be reversed.
Below screenshot after executing KKAX for WIP calculation:
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WIP calculation is done. But we have not yet done WIP posting using CO88.
Earlier when CO88 was executed, WIP document was posted in finance. But now CO88 execution will result in
1. Reversal of earlier WIP document: Net WIP has to be zero hence earlier posted WIP has to be nullified by
posting reversal.
2. Posting of production order variance: Earlier difference between debits and credits on the production order
was treated as WIP. But now since production is completed hence this difference is treated as production
variance. But before posting of production variance using CO88, we need to perform production variance
calculation using KKS2.
Online training is available for all modules of SAP. Phone:
+91 7262000918
Let us perform production order variance calculation (T code: KKS2)
