Basic Decisions in Cost Object Controlling 
Cost Object Controlling is based on the methods of standard costing. The system calculates the target cost by multiplying the confirmed quantity produced by the standard cost per unit. The resulting value is compared against actual cost for cost analysis purposes.
Absorption Costing and Variable Costing
Cost accounting in the system can be absorption costing or variable costing (also called direct costing ).
If you are using variable costing, when you define your cost components in Customizing for
Product Cost Planning
under
Basic Settings for Material Costing 
Define Cost Components Cost components with attributes 
in the detail screen you should only flag the variable part of the activity types as relevant to inventory valuation.With internal activity allocations the relevant cost centers are only credited with the variable part of the activity type prices even if they are made in a confirmation.You can pass the fixed part of the activity type prices to
Profitability Analysis
(CO-PA) at the end of the period.The variable portion of the cost of goods manufactured of sales are passed to
Profitability Analysis
when you invoice.Variances between the standard cost of goods manufactured and the actual cost of goods manufactured can be passed from
Cost Object Controlling
to CO-PA at the end of the period.
Inventory Valuation
The accounting view of the material master record has a price control indicator.
Standard Price
Materials whose price control indicator is set to S are valuated in Financial Accounting (FI) at standard price.
This is recommended for semifinished products and finished products.
The moving average price is shown as a statistical value in the material master record.
The standard price is normally calculated using a standard cost estimate for the material. The standard price can also be calculated in a mixed cost estimate .
Moving Average Price
When materials whose price control indicator is set to V are received from in-house manufacturing processes, they are initially valuated with a value you defined (such as the standard price). When you settle, the material stock account is debited with the variances. This results in a new moving average price.
Valuating semifinished products and finished products with the moving average price is not recommended. For more information, refer to the following sections:
Actual Costing
You can use the Actual Costing/Material Ledger component to calculate a periodic unit price for the previous period. You can use this price for statistical purposes or to revaluate your inventories.
Inventory Costing
If you do not want to use any of the above methods to valuate your inventories in the year-end closing, you can create inventory cost estimates in Product Cost Planning to determine the cost of goods manufactured for commercial and tax valuation, and use these cost estimates to valuate your inventories in the commercial balance sheet or tax balance sheet.
See also:
Document Product Cost Planning
Document Actual Costing/Material Ledger