Prerequisites

The price control indicator in the master record of the finished product is set to S. The standard price is 1,400.

Process Flow

Fig. 1-1: Balance Sheet and Income Statement Before Production

The figure shows the starting situation.

Income Statement:

The income statement does not contain any entries.

Balance sheet:

On the assets side, the balance sheet shows current assets of 1,600. This consists of 800 for raw materials and 800 for cash. On the liabilities side, the balance sheet shows liabilities and equity in the amount of 1,600.

Fig. 1-2: Postings in Financial Accounting Affect Cost Accounting

Posting made in Financial Accounting :

Business transaction (1) that generated a posting

A finished product is manufactured based on a production order. Raw materials are withdrawn in Materials Management (MM) for the production order. These raw materials are necessary to manufacture the finished product.

When the goods issue is posted in MM, the system automatically generates a posting in FI.

Business background:

Costs for material usage can usually be traced directly to the cost object that used the material. Costs that can be traced directly to a cost object are called direct costs . Direct costs can be transferred directly from Financial Accounting to Cost Object Controlling

Posting record:

Expense for Raw Materials is debited with 800 and Raw Materials Inventory is credited with 800.

Effects on Cost Object Controlling:

Actual costs of 800 are allocated to the cost object (in our example, the production order). This allocation uses the primary cost element. The primary cost element number is the number of the expense account under which the expense was posted in FI (for example, in IDES account number 400000 Expense for Consumption of Raw Materials is defined as a primary cost element. Costs for the withdrawal of raw materials whose consumption is posted to expense account 400000 are allocated to the production order using cost element 400000).

Business transaction (2) that generated a posting

Personnel expense is incurred in Financial Accounting . In our example, the expense is incurred at the time of payment. The funds used to pay the employees are transferred from the bank account by means of direct debit.

Business background:

It is not usually possible to assign personnel costs directly to a cost object. (There are some exceptions to this, such as labor costs in single-product companies). Costs that cannot be assigned directly to cost objects are called indirect costs or overhead costs . Overhead costs are first transferred to Cost Center Accounting . Overhead costs are assigned to the cost centers in accordance with a method appropriate to your company. For more information, see Cost Center Accounting

Posting record:

Personnel Expense is debited with 800 and Bank is credited with 800.

Effects on Cost Center Accounting:

Cost centers are charged with the costs incurred.

Effects on Cost Object Controlling:

None

Business transaction (3) that generated a posting

Costs are allocated from Cost Center Accounting to the production order for the following possible reasons:

Confirmations were entered in production, and activity allocations have taken place on the basis of the confirmations.

Template allocation was executed.

Actual overhead was calculated.

Business background:

Since the overhead cannot be traced directly to the cost objects, it is assigned by Cost Center Accounting . Overhead can be assigned to cost objects in different ways. For more information, refer to the document Cost Center Accounting.

Posting record:

None

Effects on Cost Center Accounting:

Cost centers are credited by the amount of allocated costs.

Effects on Cost Object Controlling:

The production order is debited with the actual costs incurred. The debit is made using a secondary cost element that exists only in Controlling (CO).

The total actual overhead (expense postings) allocated from Cost Center Accounting (CO-OM-CCA) or Activity-Based Costing (CO-OM-ABC) to the cost object is not usually known until the end of the period. For this reason, the actual values cannot be determined until the close of the period. During the period, therefore, the cost objects are debited with planned costs. The period-end closing process in Cost Object Controlling can then debit the cost object with the difference between the planned and actual costs.

This simplified example does not take this into account.

The production order now receives actual costs of 1,600.

Fig. 1-3: Business Transactions in Production and Cost Object Controlling Affect Financial Accounting

Business transaction (4) that generated a posting

The finished product is transferred to the warehouse. A goods receipt takes place in MM. When the goods receipt is posted in MM, the system automatically generates a posting in FI.

Business background:

Expense was posted in FI during production. The expense entered a value-added process. The finished product embodies this added value. The finished product is capitalized in the balance sheet. Since the finished product is valuated at the standard price (price control indicator S), this capitalization is made at standard price. In addition, an inventory increase is posted to the inventory change account (plant activity account). The increase in inventory affects the earnings.

Posting record:

Inventory is debited with 1,400 and Inventory Change is credited with 1,400.

Account determination:

The system uses the following transaction keys for this posting in automatic account determination in MM:

Transaction key BSX to determine the material stock account

Transaction key GBB and account grouping code AUF to determine the inventory change account

Effects on Cost Object Controlling:

The production order is credited with the standard price. This credit uses the cost element that corresponds to the inventory change account. This cost element is a primary cost element (for example, in IDES, account number 895000 Finished Goods Inventory Change is defined as a primary cost element. Credits of production orders resulting from delivery of the finished products to finished goods inventory are updated to the production order with cost element 895000).

Business transaction (5) that generated a postingSince production is completed, the production order should be credited in full. The credit is effected by settling the production order.

Business background:

Since the amount charged to the production order (1,600) is more than the amount credited (1,400), a difference of 200 remains on the production order. This difference is settled to Financial Accounting during the period-end closing process in Cost Object Controlling .

Posting record:

Expense from Price Differences is debited with 200 and Inventory Change is credited with 200.

Account determination:

The system uses the following transaction keys for this posting in automatic account determination in MM:

Transaction key PRD to determine the price difference account

If the amount debited to the production order is greater than the amount credited, the system debits the Expense from Price Differences account (such as account 231500 in IDES) and credits the Inventory Change account (such as 895000). In this case, an expense posting is compared against the posting of an inventory increase.

If the amount debited to the production order is less than the amount credited, the system debits the Inventory Change account (895000) and credits the Income from Price Differences account (such as 281500). In this case, an income posting is compared against the posting of an inventory decrease.

Transaction key GBB to determine the inventory change account

You can settle the balance to the same inventory change account that was posted to for the goods receipt. In this case, the system uses the following setting for automatic account determination in MM: Transaction key GBB, account grouping code AUF (both for goods receipts and settlement).

If you want to post to a different inventory change account than that used for the goods receipt, use the following setting of automatic account determination: transaction key GBB, account grouping code AUA. If account grouping code AUA exists, account grouping code AUF is ignored when you settle. Account grouping code AUF is still used for the goods receipt posting.

Effects on Cost Object Controlling:

The production order then has a balance of zero.

Effects on income statement:

The postings Debit Expense from Price Differences and Credit Inventory Changes and Debit Inventory Changes and Credit Revenue from Price Differences have no effect on profit. However, the profit has already been affected by the previous postings (such as with goods issues).

Effects on balance sheet:

The inventory value is not affected by the settlement of the price difference. The finished product is still valuated at standard price.

Fig. 1-4: Effects on Financial Accounting of Business Transactions Delivery to Customer and Invoice to Customer

Business transaction (6) that generated a posting

The material is withdrawn from inventory and delivered to the customer.

Posting record:

Inventory Change from Sale of Finished Products (Cost of Sales) is debited and Inventory is credited.

Effects on Cost Object Controlling:

Cost Object Controlling is not affected in:

Make-to-stock production

Sales-order-related production with a valuated sales order stock without Product Cost by Sales Order

In Product Cost by Sales Order with a valuated sales order stock, the sales order item is charged with the standard cost of goods manufactured of sales (for detailed information, see Product Cost by Sales Order: Scenario ).

Effects on income statement:

The posting of the inventory change reduces the revenue. For materials with price control indicator S, the inventory change is posted at standard price (standard cost of goods manufactured of sales).

Business transaction (7) that generated a posting

The goods delivered to the customer are invoiced.

Posting record:

Current Assets is debited and Sales Revenues (such as 800000 Sales Revenues - Domestic in IDES) is credited

Effects on Cost Object Controlling:

Cost Object Controlling is not affected in:

Make-to-stock production

Sales-order-related production with a valuated sales order stock without Product Cost by Sales Order

In Product Cost by Sales Order with a valuated sales order stock, the sales order item is charged with the actual revenue

Effects on income statement:

The posting of the revenue increases the revenue.

Fig. 1-5: Balance Sheet and Income Statement After Production, Settlement, Delivery, And Billing; Income Statement After Period Accounting

Income Statement:

The income statement shows the following values:

Debit

Credit

The difference between expense and revenue results in a positive balance of 400, which in turn results in a profit being reported in the income statement.

Balance sheet:

(4) The asset side of the balance sheet shows current assets of 2,000. These current assets equal the value of the accounts receivable. On the liabilities side, the stockholders’ equity is increased by 400 due to the profit.

The balance increases by 400.

Summary:

Since production costs were higher than planned, the additional expenditure negatively affects the operating profit. This means that the profit decreases by the amount by which the actual costs charged to the production order exceed the standard price.

The actual costs charged to the production order affect net income just as the posting of the inventory change at the time of the goods receipt. Since the actual expense was 200 higher than expected, the operating profit is 200 lower than it would have been if production had been at standard cost.

The net income will only be correctly affected by the debit and credit of the production order if a posting that has no effect on net income is made when the production order is settled.

If you were to make a posting that affects net income when settling the price differences, the additional expenditure would not reduce the profit. The profit would be reported as higher.

Example:

Posting at settlement: Inventory is debited with 200 and Inventory Change is credited with 200

Result:

In the income statement, the inventory increases by 200. The additional inventory would continue to be 200, but it would have no offsetting expense from the price differences. The revenue of 2,000 would be added to the additional expenditure on the revenue side. The revenue of 2,200 would be offset by a total expenditure of 1,600. The profit would be 600.

In the balance sheet, the finished goods inventory is 200 (1,400 when received into inventory plus 200 at settlement less 1,400 for delivery to the customer). The asset side of the balance sheet would show a total of 2,200 (accounts receivable of 2,000 plus inventory of 200).

(Note: If valuation were at the standard price, the total inventory value divided by the inventory quantity should equal the standard price. With this posting, this would no longer be the case).

Fig. 1-6: Balance Sheet and Income Statement After Production, Settlement, Delivery, And Billing; Income Statement After Cost-of-Sales Accounting

Prerequisites

The price control indicator in the master record of the finished product is set to V. The standard price is 1,400.

The initial situation and the debit of the production order correspond to the above explanation (see figures 1-1 and 1-2 and accompanying description). This example begins at the point where the production order is credited.

The balance sheet and the income statement are shown in this example after the business transactions Delivery of Internally Manufactured Products to Inventory and Settlement of Production Order . The effects on delivery and billing will not be discussed again explicitly. It should be noted that when the product is shipped to the customer, the posting Debit Inventory Change and Credit Inventory would be at the moving average price. In this example, the income statement is based on the period accounting method.

Process Flow

Fig. 2-1: Business Transactions in Production and Cost Object Controlling Affect Financial Accounting

Business transaction (4) that generated a posting

The finished product is transferred to the warehouse. A goods receipt takes place in MM. When the goods receipt is posted in MM, the system automatically generates a posting in FI.

Business background:

Expense was posted in FI during production. The expense entered a value-added process. The finished product embodies this added value. The finished product is capitalized in the balance sheet. The preliminary capitalization is at the standard price. In addition, an inventory increase is posted to the inventory change account (plant activity account). The increase in inventory affects the earnings.

Posting record:

Inventory is debited with 1,400 and Inventory Change is credited with 1,400.

Effects on Cost Object Controlling:

The production order is credited with the standard price. The debit uses the cost element that corresponds to the inventory change account.

Business transaction (5) that generated a posting

Since production is completed, the production order should be credited in full. The credit is effected by settling the production order. Business background:

Since the amount charged to the production order (1,600) is more than the amount credited (1,400), a difference of 200 remains on the production order. This difference is settled to Financial Accounting during the period-end closing process in Cost Object Controlling .

Posting record:

Inventory is debited with 200 and Inventory Change is credited with 200. The posting on the inventory change account affects the revenue.

Effects on Cost Object Controlling:

The production order then has a balance of zero.

Effects on income statement:

The posting to the inventory change account has a positive effect on the profit.

Effects on balance sheet:

The inventory value is affected by the settlement of the order balance. On the basis of the data updated to the inventory account, the system calculates a new moving average price of 1,600.

Fig. 2-2: Balance Sheet and Income Statement After Production and Settlement

Income Statement:

The income statement shows the following values:

Debit

Credit

Balance sheet:

(4) The asset side of the balance sheet shows current assets of 1,600. These current assets equal the value of the finished products at the moving average price. On the liabilities side, the balance sheet continues to show liabilities and equity in the amount of 1,600.

Summary:

The costs incurred in production that exceed the planned amount by 200 are posted as expense increases that affect the net income at the time they were incurred. When the order balance is settled, an inventory increase that affects the net income is posted. These postings offset each other, however, so they have no effect on the profit.

The finished product is capitalized in the balance sheet at the moving average price. All costs that are relevant to inventory valuation are capitalized.