The change in stock for WIP is not created as a cost element because the amount is not credited to production order when WIP is created as it is a financial entry and the balance is already held in the order. The COGM account is defined in GBB / VKA and it is the account that should be credited when finished or semi finished goods are received in stock from the order. The change in stock account (BSV) is debited when the materials are issued to production or cost center. The change in stock account for raw materials is RM Consumption Account, for semi finished goods the same may be defined in the following way. Strategy 1: Define 1 single account as 'Increase / Decrease in SFG' and define it as COGM account in GBB / VBO as well as change in stock account in BSV. Strategy 2: Define 2 different accounts in GBB / VBO and BSV and group them at one place in your financial statement version so that the net change is always reported. Remember, WIP and Semi finished goods are not same from SAP point of view. The COGM account for WIP is maintained in OKG8 and do not create a cost element for the same. For Finished Goods maintain COGM account in GBB / VBO and nothing is to be maintained in BSV. I hope this clarifies. ERP Post Implementation Challanges – Part 1 Understanding COGM, COGS, Price Difference & Closing Stock Calculation Author: Ranjit Simon John After our Go-Live we had gone through various tough stages while trying to stabilise the system. Major challenge we faced was resistance from end users, lack of confidence on the new system by the external and internal stake holders. Finally after working so hard on the various points raised by the internal as well as external team, we succeeded. In this blog I would like to highlight the most important challenge we faced. Mainly they are two in number; 1) Clarity on COGM, COGS & Production Order Price Difference general ledger accounts. 2) Trying to equate the formula Opening Stock + Receipt – Issue = Closing Stock 1) COGM, COGS & Production Order Price Difference general ledger accounts. Let us start with COGM; There will be mainly two entries posted in Cost of Goods Manufactured; 1) During Production Order Confirmation 2) During Production Order Settlement First let me try to explain the GL entries posted during various stages starting from Raw Material receipt to Finished Good sales. The postings can be divided into various Parts; Part 1: Raw Material Receipt Step 1: Raw Materials are received. (Goods Receipt – MIGO_GR) Part 2: Vendor Payment Step 2: Invoice Receipt Step 3: Vendor Payment Part 3: Raw Material Issue to Production Step 4: Raw Material used for the production of Semi-Finished Good 1 Step 5: Semi Finished Good 1 used as raw material for the production of Semi Finished Good 2 Step 6: Semi Finished Good 2 used for the production of Finished Good Part 4: Finished Good received in Inventory Part 4: Step 7: Finished Good Receipt Part 5: Sales Step 8: Sales Delivery Step 9: Billing released from Accounts Step 10: Customer Payment Part 1: Raw Material Receipt GL Entries during Step 1: Raw Materials are received at Inventory Debit Stock of Raw Material XXX Raw Material GR/IR XXX Table 1.0 Part 2: Vendor Payment Credit GL Entries during Step 2: Invoice Receipt Debit Raw Material GR/IR Credit XXX Vendor Account XXX Table 2.0 GL Entries during Step 3: Vendor Payment Debit Vendor Account Credit XXX Bank Account XXX Table 3.0 Part 3: Raw Material Issued to Production GL Entries during Step 4: Raw Material used for the production of Semi Finished Good 1 Debit Raw Material Consumption Credit XXX Stock of Raw Material XXX Stock of Semi Finished Good 1 XXX COGM of Semi Finished Good 1 XXX Table 4.0 GL Entries during Step 5: Semi Finished Good 1 used as raw material for the production of Semi Finished Good 2 Debit Stock of Semi Finished Good 2 Credit XXX COGM of Semi Finished Good 2 XXX COGM of Semi Finished Good 1 XXX Stock of Semi Finished Good 1 XXX Table 5.0 GL Entries during Step 6: Semi Finished Good 2 used for the production of Finished Good Debit Stock of Finished Good Credit XXX COGM of Finished Good XXX COGM of Semi Finished Good 2 XXX Stock of Semi FInished Good 2 XXX Table 6.0 Part 4: Finished Good Received in Inventory GL Entries during Step 7: Finished Good Receipt Debit Stock of Finished Good Credit XXX COGM of Finished Good XXX COGM of Semi Finished Good 2 XXX Stock of Semi FInished Good 2 XXX Table 7.0 Part 5: Finished Good Sales GL Entries during Step 8: Sales Delivery Debit COGS Credit XXX Stock of Finished Good XXX Table 8.0 Live posting example during sales delivery. VL01N/VL02N. GL Entries during Step 9: Billing released from Accounts Debit Customer Account Credit XXX Finished Good Sales XXX Table 9.0 Live posting example during sales invoice release from accounts using VFX3. GL Entries during Step 10: Customer Payment Debit Bank Account Credit XXX Customer Account XXX Table 10.0 Now let us try to understand COGM, COGS and Production Order Price Difference Accounts; Finished and Semi Finished Material will be valuated at "Standard Price" for all COGM, COGS and Closing Stock calculation. 1.1) COGM: Cost of Goods Manufactured Transactions hitting COGM account are; a) Goods Produced b) Goods Issued to Production Order c) Reversal of Goods Produced d) Entries posted during settlement of Production Orders ( Variance) I have broken down the COGM entries for clear understanding. Please find the below screen shots. The above figure is divided into three sections; Section 1: Materials Produced Section 2: Materials Issued Section 3: Production Order Settlement The below attached image shows how the Production Order Settlement amount of 1,403,463.52 has been arrived. If ML is not activated we will not be able to apportion the total variance between stock, COGM and COGS. We follow the below mentioned procedure to split the variance. In the first column the total variance for each product has been entered. Second column we enter the total quantity produced for the material. So Total Variance / Production Quantity = Variance Per Ton. You have the quantity for Closing Stcok, COGM and COGS of the material. Multiply it with Variance per ton. Closing Stock Quantity * Variance Per Ton COGM * variance Per Ton COGS * Variance Per Ton 1.1.a) Goods Produced: When a finished or semi finished good is produced i.e after confirmation stock of the finished or semi finished good will be Debited and cost of manufacturing the finished or semi finished good will be Credited with document type "WA". (Refer Table 6.0) Entires will be posted against the particular material i.e with material number. Figu re 1.0 1.1.b) Goods Issued to Production Order: When a Semi finished good is issued against a production order Stock of the semi finished good is credited and cost of manufacturing the semi finished good is debited with document type "WA". (Refer Table 6.0) Entires will be posted against the particular material i.e with material number. Figur e 2.0 1.1.c) Reversal of Goods Produced: When a finished / semi finished good "A" Quantity is produced at "X" rate and reversed "B" Quantity at "Y" rate, the quantity will be reversed at "Y" rate and the difference in price "X - Y" will be posted in Price Difference and COGM account. GL entries posted will be; (For GL entries posted when Raw Material is Issued to Production of Semi Finished Good refer Table 4.0) Debit COGM of Semi Finished Good Credit XXX Stock of Semi Finished Good XXX Stock of Raw Material XXX Raw Material Consumption XXX Production Order Price Diff Account XXX Table 11.0 1.1.d) Entries posted during settlement of Production Orders ( Variance) During settlement of production order variance will be posted to Production Order Price Diff Account and COGM KIndly chek my blog "Understanding Production Order Variance Part - 1 " (http://scn.sap.com/community/erp/manufacturing-pp/blog/2012/03/13/understanding-production-order-variance-part-1). Note: There is no hard and fast rule for analysing COGM. Analyse COGM based on the analysis I have given above, if any other entries are posted we have to analyse those entries one by one. Let me try to explain COGM entry for one material. COGM entry posted for material "FG1" is 27,134.90 AED. Let me explain the entries. "FG1" produced is (Execute Transaction Code MB5B for movement type 101 + 102 ) 28,507,148.10 AED. "FG1" issued to production order is (Execute Transaction Code MB5B for movement type 261 + 262 ) 28,480,013.2 AED. COGM -> 28,507,148.10 - 28,480,013.2 = 27,134.90 1.2) COGS: Cost of Goods Sold For calculating Cost of Goods Sold materials will be va;luated at standard price maintained in the material master. Execute Transaction Code MB51 for movement type 601 + 602. Also consider price difference during sales reversal. Both the 601 & 602 values should match with COGS general ledger (If no price diference for sales reversal is there). MB5B 601 + 602 Report Figure 4.0 FBL3N COGS Report Figure 5.0 1.3) Production Order Price Difference Account KIndly chek my blog "Understanding Production Order Variance Part - 1 " (http://scn.sap.com/community/erp/manufacturing-pp/blog/2012/03/13/understanding-production-order-variance-part-1). 2.0) Closing Stock: Formual for closing stock; ( Opening Stock + Receipt ) - Issues = Closing Stock i.e Opening Stock + COGM = Closing Stock But in most of the cases if we apply the formula the closing stock will not match. All material movement has to be considered while calculating closing stock of material. Let us try to analys few Scenarios: Scenario 1: Material Stock Transfer Let us consider two materials RMOPCK2 and RMSRCK1 Material Opening Receipt Issue Closing FG1 276,120.06 116,157,464.09 115,882,172.88 814,101.12 FG2 0.00 7,868,063.25 7,616,416.50 0.00 Table 12.0 If we substitute the values in the formula the closing stock will not match. We need to consider all material movements. Material FG1 FG2 Opening Receipt 276,120.06 116,157,464.09 0.00 7,868,063.25 Issue Price Diff. (0 Qty) Material Transfer Closing 115,882,172.88 37,161.73 225,528.12 814,101.12 (251,646.75) 0.00 7,616,416.50 Table 13.0 Formula modified as below; ( Opening + Receipt + Price Diff. + Material Transfer ) - Issue = Closing Stock Sustituting the Valyues FG1 -> (276,120.06 + 116,157,464.09 + 37,161.73 + 225,528.12) - 115,882,172.88 = 814,101.12 FG2 -> (0.00 + 7,868,063.25 + 0.00 + (251,646.75)) - 7,616,416.50 = 0 Useful Transaction Codes: MB5B - Material Movement Report MB51 - Material Movement Report FBL3N - General Ledger Report In my previous blog "ERP Post Implementation Challenges’ - Part 1" I have explained the concept of COGM, COGS and deriving the closing stock. In this blog I will be concentrating on the Reconciling GL, Raw Material Consumption, Semi Finished / Finished Goods Production and Vendor Invoice. Let me divide the topic into; Reconciliation 1: Opening Stock + Raw Material Receipt - Raw Material Consumed = Raw Material Closing Stock Reconciliation 2: Receipt of Raw Material = Invoice received from Vendor Reconciliation 3: Raw Material Consumed = Raw Material Issued for the Production of Finished Good = Raw Material Consumption GL Reconciliation 4: Raw Material Closing Stock = Stock GL of Raw Material Now let us analyze each scenario; Reconciliation 1: Opening Stock + Raw Material Receipt - Raw Material Consumed = Raw Material Closing Stock As explained in my Previous Blog "ERP Post Implementation Challenges’ - Part 1" all material movements should be considered for calculating the closing stock of material. Reconciliation2: Receipt of Raw Material = Invoice received from Vendor The Raw Material received should be matching with the invoice received from the vendors. I have done quite a lot of research to generate report on the list of invoices received against a material. Material Receipt (MB5B) with movement type 101+102 = Stock GL of Raw Material + Price Diff GL of Raw Material with Type "WE" To find the list of Invoice generated against the Raw Material: There can be invoice and Credit/Debit notes posted against the material. To generate Invoice list generated against the material: We have to combine few tables for generating the report. Execute SQVI and create a query with the following data. Tables: RBKP, RSEG, LFA1 Joining Condition: Tables RBKP-RSEG -> Joining Fields BELNR,GJAHR Tables RBKP-LFA1 -> Joining Fields LIFNR Figure 1.0 Figure 2.0 To generate Credit Note / Debit Note list generated against the material: We have to combine few tables for generating the report. Execute SQVI and create a query with the following data. Tables: RBKP, RBMA, LFA1 Joining Condition: Tables RBKP-RBMA -> Joining Fields BELNR,GJAHR Tables RBKP-LFA1 -> Joining Fields LIFNR Figure 3.0 Figure 4.0 Debit / Credit will be recorded as "S" or "H" Reconciliation 3: Raw Material Consumed = Raw Material Issued for the Production of Finished Good = Raw Material Consumption GL Raw Material will be consumed for the production of Semi / Finished Good, which will be created against Process Order. The total raw material consumed against a process order can be generated from transaction code KOB1. Let me explain with an example: Raw Material 1 (RM1) is used for the production of three Finished Good (FG1, FG2, FG3) Material Process Orders Quantity Produced FG1 10000035 67,981.00 FG2 11000035 343,842.00 FG3 12000035 61,601.00 Total Raw Material RM1 issued during the period is 106,136.00 TO. This is the quantity used for then production of 473,424.00 TO of FG1, FG2, FG3. Figure 5.0 Table 1.0 (Report from MB51 movement Type 101 + 102) From transaction KOB1 we will be able to equate the Finished Good Produced and Raw Material Consumed quantity. Figure 6.0 Figure 7.0 Raw Material (RM1) Consumption GL should be updated with the value of 1,061,360.00 (Report from FBL3N Raw Material (RM1) Consumption GL + Raw Material (RM1) Price Difference GL) Fugure 8.0 GL Entries Posted During the Process; Raw Material Consumed for Production of Finished Good Reconciliation 4: Closing Stock = Stock GL of Material Generate Closing Stock report for Material from MB5B Figure 9.0 Stock Report of Material From FBL3N Figure 10.0 Generally We can reconcile opening, receipt, issue Closing by inputting values in the table listed below; Issu e To Cost Cent Physic Mat Issue To Receipt Producti Price 0 Qty ) ion 7 al Invent on Order 201 (101+102 Revaluvat MIR Mater Opening ial er + 261 + 262 202 ory GL Postin Consumpt g ion Sales Closing A B C D E F G H I J K (A+B+C+ D) - D+E+F+G FG1 A B C D E F G H 1,683,916 54,700. 7,539,313 256,027.2 670. 7,543,679 .80 53 .34 8 28 .84 0.00 0.00 0 Quantity - Execute Transaction MB5B. Sort Based on Movement Type 0 Qty of FG1 Entry: 0 Qty Other = 54,700.53 + Price Revaluation = 256,027.28 0 Qty -> 310,727.81 Figure 11.0 +H J J) 7,800,377. 161,430 1,828,847 Table 2.0 0 Quantity Included Price Revaluation & MIR7 entries (F+G+H+ 40 .24 .87 Debit Raw Material Consumption Credit XXX Stock of Raw Material XXX Stock of Finished Good 1 (FG1) XXX COGM of Finished Good 1 (FG1) XXX Table 3.0 Important Transaction Codes: Transaction Code Description MB5B Material Report MB51 Material Report FBL3N GL Report FBL1N Vendor Report KOB1 Production Report MCBE Material Report MC.A Material Report MC+E Sales Report SQVI Dynamic Query Table 4.0 Calculation of COGM and COGS Use You can use the Product Cost Planning functions to calculate the cost of goods manufactured (COGM) and cost of goods sold (COGS) for products such as materials and services. The costs may then be analyzed and used in business decisions (such as whether to make or buy). The cost of goods manufactured is composed of material and production costs, process costs and overhead (such as material and production overhead). The cost of goods sold consists of the cost of goods manufactured together with sales and administration overhead costs. Features The following graphic shows how the COGM and COGS are calculated using Product Cost Planning: To calculate the COGM and COGS for materials, you can execute a material cost estimate (with or without quantity structure). For further information, see the following: WIP I gonna try to explain it from bookkeeping point of view (simplified version). Basically you have 2 environments in the books: P&L and Balance Sheet. You start doing something during the month so you consume costs (materials, activity, OVH, etc.). If you finish and sale it till the end of the period the whole thing will go to your P&L. If not, all costs you consumed have to go to the stock (Balance Sheet). So, you have to credit a P&L account and debit a BS account. Normally you might want to credit the whole production order since virtually the whole thing went to the stock and nothing left on the shopfloor. And when you decide to continue your work, you take out the stuff from stock and do your work. Now, the problem with SAP that there is no standard mechanism which will reverse this WIP posting with the production order assigned. That is why the WIP posting happens beyond production order and that's why you can't create cost element. I fyou want to check what is in your WIP you can go to FBL3N and run a report for the P&L/WIP account which you will find in OKG8, where you configure these postings. The accounts for WIP should not be defined as cost element in CO to avoid that WIP is posted incorrectly into CO. A cost element requires account assignment to a cost object. So if you define the WIP account as a cost element you need to assign a cost object for this which will result in duplicate costs in CO Example: settlement of order 'XYZ': WIP was posted on account '1111' (Stock change -WIP). Since '1111' is also a cost element and the CO account assignment is order 'XYZ' again, we have an inconsistent scenario: cost which are already posted on the order now come in 'through the backdoor' again as additional cost. I believe SAP issues error message KQ119 (G/L account cannot be created as a cost element) in such cases. Dear Andy In product cost by order scenario the WIP or Variance calculation is dependent on order status. If the Order has a status of REL or PDLV, the system will calculate WIP and if the order status is DLV or TECO the system will calculate variance on this order. At the time of calculation of WIP or Variance no accounting entry i generated but when you settle the order at that time FI documents are passed in the books. Ans1- In product cost by order WIP or variance is calculated based on the actual cost debited to the order and value of GR made to the order. System does calculation by the formula GR value-(GI value+Activity value+ Overheads) Ans2- As I said at the time of calculation no FI entries are passed but at the time of settlement FI entries are generated. The method of calculation is the same as described in Ans1. Ans3- Entry at WIP settlement WIP (P&L) a/c Dr and WIP Offsetting(B/S a/c) Cr. Entry at variance settlement : Variance a/c dr/cr and COGM cr/dr. and if there is already a WIP posted for this order then at settlement WIP entry is reversed provided we have calculated WIP again the the month of settlement of variance Note for Anand: Dear Anand we need to calculate WIP again in the period when the order status is changed to DLV or TECO otherwise system will not pass reversal entry of WIP. Kindly test it in your IDES and let me know if you find something on the contrary