Product Costing-Overhead inclusion in Inventory standard cost without PPV

[Former Member]

Dear Friends,

I have a requirement to include overhead cost in standard price of the material where only component is material cost which is purchased from oustide and sold without any operation so there is no routing or production order. It would be possible to load ovrehead cost along with material cost to include it in standard price of the material. But when overehead is included in standard price, when ever material is purchased, the difference between standard price and PO price will be posted as Purchase price variance. The overhead portion included in the standard price will distort value of Purchase price variance (PPV). Is there any option available in SAP which can allow loading overhead cost in standard cost of the material without affecting PPV value?

Thanks and regards,

Pinky

[ajaycwa1981 · Accepted solution]

Hi Pinky

That would not be possible. ONce you calculate std cost, you tell the system that inventory is to be valuated at this price.. Any PO price different than this will call for PPV.... You cant avoid this

In your case, since you are saying, you simply buy and sell the materials, why are you valuating them at Std cost.. Your price control should be V, so that inventory is valuated at actuals

And whatever overhead you incur to sell the product, should ideally be allocated as an overhead in COPA using assessment cycle KEU5.. Or else, you can use a costing sheet in COPA, do step-up your COGS by a certain % to account for the overheads... HOwever, I would personally not recommend this.... Reason being, Absorbing overheads in this way, will always lead to over or under absorption

I would prefer Price control V and then KEU5 as said above

Ajay M

[ajaycwa1981 · Accepted solution]

Hi

Also, you can keep price control V and still run CK11N for statistical purposes. This way, it wont result in PPV during GR from Purchase order and still apply overhead to the product.

If the RMC and overhead are separate cost components, you can map them to separate value field in COPA..

Map VPRS (Mvg Avg Price in this case) to a separate value field. This way, you wil be able to differentiate between COGS based on MAP and COGS based on Std cost inclusive of overhead

Ajay M

[Former Member]

Hello Pinky,

I have read through the entire thread but finally which solution did you implement. I need to implement the same scenario for my client. Any ideas is highly appreciated.

Thanks,

Sr

[Former Member]

Hi SR,

Management evaluated the options but finally decided not to go for an automatic system option so we did not go ahead with this process change.

Regards.

[Former Member]

This is a very interesting approach. I noticed that a fundamental decision was made early on that is somewhat different than what we made. In your approach you wish to bump up the value upon receipt of the purchased parts to absorb the overhead. In our approach we want inventory to stay at cost for purchased items, but when consumed to orders, add overhead to the order in the period consumed. So, there seems to be 3 points (maybe more) in which to add the increased overhead.

1-Upon receipt of purchased items.

2-Upon consumption of purchased item

3-Upon sale of delivered parent part

We opted for the middle ground of option 2. Our thinking is that when consumed, it must be pulled from stock and moved around. Also, this seems like the middl-ground view. Option 1 applies all the overhead and resulting absorption credit (income) upon receipt. Option 3 records the OH absorption after there are no more movements to occur.

I also liked option 2 because it seemed easier to implement for me. It is entirely the responsibility of Accounting to set up the costing sheet as well as to run the actual costing sheet transaction each month or more often if desired. We automated the costing sheet transaction so the orders get hit with the OH debit and material planning cost center group gets the OH credit.

I am not saying any method is right or wrong mind you. Just choices to be made.

David

[Former Member]

Nice list of the options.

I don't know why option 1 was chosen here; that was made 6 months before I arrived, but I can guess.

The first plant up in this company, in legacy, had been a make to order/moving average environment. Cost of Sales was determine, by Inventory at begining of month + receipts - consumption =COS

There was no Raw material, WIP or FG accounts. Major inventory accounts were Equipment, Software, etc

Valuation classes were set toidentify EQ, Soft Etc.

therefore all goods issues (purchased material or in house assemblies) debit the same consumption account.

The costing sheet has nothing to work with to allow OH only on purchased materials at time of consumption.

So we addit at time of GR.

Each company to their own, I suppose

Althea

[Former Member]

We have this situation at our plant. To correctly post the overhead, our SAP consultants used a Condition (RUE1) on the purchase order pricing. RUE1 value is maintained through Purchasing conditions > other. Via a user exit, when the PO is created, it goes to the Standard cost, calculates the value of the OH condition (% * Standard price) and saves that value in the PO pricing. there are entrie OBYC to specify the OH offset account. When a GR is posted, STandard cost is posted as inventory; PO price is posted as unvouchered; RUE1 value is posted as OH Offset; PPV only will post if the PO price has changed since standards were set.

We are now calculating the overhead on the material through Raw Material costing and have the two values split as Cost Components.

althea

[Former Member]

Hi Althea,

Thanks for your reply. Do you mean to say that overhead is loaded into standard cost through user exit in PO when PO condition is added? What if standard cost estimate for the material is already set during that month?

Regards,

Pinky

[Former Member]

Dear Pinky,

We had a similar scenario and we followed this approach.

1) To load overhead in standard cost estimate, we used additive cost estimate approach i.e. CK74n. Hence when we run CK11n, in addtion to price from PIR / Planned price 1, overhead cost through additive cost estimate is also added to it to obtain total standard cost = PIR +Overhead.

2) Create an accrual condition type and accrual account key in MM pricing procedure. In this way, there is a credit entry to the GL account represented by accrual account key. Hence the PPV represents the true value.

3) For the accrual condition type, you can create a condition record such that its value is same as Addtiive cost estimate. You can use the user exit to automatically populate its value from KEKO and KEPH table.

Hope this helps.

Thanks and Regards

Chetan.

[ajaycwa1981]

Hi Chetan

What will be the acounting entries in this case, assuming 5 rs is PIR value and 2 rs is Ovh loaded from CK74N

Regards

Ajay M

[Former Member]

Hi Ajay,

Assume PO is also created for Rs 5. The accounting entry is as follows

Dr Inventory account Rs.7 (BSX with standard cost)

Cr GR/IR Rs 5 (WRX with PO price)

Cr Overhead absorbtion Rs 2 (Accrual key with condition record of accural condition type)

Regards

Chetan.

[ajaycwa1981]

Hi Chetan,

The only diff I see in this case is that instead of PRD account, we are triggering Ovh Offset a/c.. I believe this is a P&L account only,.. And the only time system would trigger PRD is if the PO value is diff than 5.. Am i right?

I guess the owner of this thread does not want inventory to be at 7.. she wants it at 5

Ajay M

[Former Member]

Dear Ajay,

Even though both are P&L accounts there is big difference. PPV will now represent actual purchase variance. It will not be distorted due to overheads.

Also as per the first statement by Pinky, overhead needs to be included in standard price and it should be part of inventory valuation.

Regards

Chetan.

[Former Member]

Two separate steps to get oh into COST and onto the PO

We use Raw material costing sheet to add the MAterial OH to the valid PIR price creating a material componenet and a material OH component. (standard functionality,no user exit, just need good Purchasing data)

When a PO is created there is a user exit that prices RUE1 condition with the Value of the OH for the Std cost.

Ex:

this year OH rate is 15.25%

RUE1 condition = 13.232%

PIR = 100

Std = 115.25

PO = 100

RUE1 (on Pricing conditions = 115.25*.13232 = 15.25

GR Posting

Dr inventory = 115.25

Cr GRIR = 100.00

Cr OH offset = 15.25

[Former Member]

Hi Chetan,

Thanks for the details. Just want to make it clear if PO price is $ 8, then PPV will be posted as $1 (difference between Std price $ 7 and PO price $8) or as $3(difference between material cost $5 included in standard cost and PO price). Can you pl. clarify this?

With regards,

Pinky

[Former Member]

Hi PInky,

trying to clarify:

8 is PO price

7 is std price (which is 6 material + 1 OH)

You have to configure in the posting of overhead to another accoutn (we call it OH offset) - sorry I have forgotten what this configuration is.

so at GR you will see these posting:

debit to invnetory = 7

credit to GR/IR = 8 (this is AP clearing)

credit to OH offset = 1

debit to PPV = 2 (PPV balances the GR entry 7 -8 -1 *2*)

hope this helps