Product Cost by Period or Product Cost by Order? 
You can manage your job costs at the level of products. There are two different methods:
The Product Cost by Period method is recommended for products that have relatively high design stability and are manufactured over an extended period of time. If you are manufacturing your products in a repetitive manufacturing environment, you always use Product Cost by Period. Product Cost by Period may also be appropriate in order-related production or process manufacturing environments. A prerequisite for successful use of the Product Cost by Period method is that you are focusing on manufacturing a product over an extended period of time.
In Product Cost by Period you normally collect the costs on product cost collectors.
If you cannot (or do not want to) assign costs to particular product cost collectors, you can use a cost object hierarchy. You can then collect costs at levels above that of the product, such as product groups or areas of responsibility.
Product Cost by Order is recommended in lot-based production environments. Typical applications of Product Cost by Order are in order-related production or batch-based process manufacturing. The production process is based on manufacturing orders where the focus of production and cost analysis is on a particular quantity (production lot size).
Prerequisites
You choose the method (Product Cost by Period or Product Cost by Order) in the settlement rule (among other parameters).
In Product Cost by Period, the settlement rule must specify settlement type PER (periodic).
To do this, you enter the following in Customizing for Product Cost by Period under Define Default Values for Order Types:
For product cost collectors, you enter default rule STR (with strategy for tracing factor determination).
For manufacturing orders, you enter default rule PP2 (Production Material Periodic Settlement).
On the basis of these default rules, when you create an order the system generates a settlement rule with settlement type PER (periodic).
In Product Cost by Order, the settlement rule must specify settlement type FUL (full settlement).
To do this, go into Customizing for Product Cost by Order under Define Default Values for Order Types and enter default rule PP1 (Production Material Full Settlement). When you create an order for the order type with default rule PP1, the system generates a settlement rule with settlement type FUL (full settlement).
Features
Product Cost by Period
In Product Cost by Period, you always manage the costs of your cost objects by period.
Sequence of Steps in Product Cost by Period
* The product cost collector is debited by posting actual costs that are assigned to the product cost collector. For example, this can be done by withdrawing materials from inventory or through internal activity allocations.
** The cost object is debited when the finished materials are received into inventory.
*** The variances in the illustration contain the scrap variance.
The product cost collector is valid over an extended period of time. The validity period can extend across more than one fiscal year.
In Product Cost by Period the work in process is calculated at target costs. In repetitive manufacturing, you must enter reporting point backflushes or, for manufacturing orders, confirmations for the operations. Confirmed quantities that are not scrap are valuated at target costs when the WIP is determined.
In Product Cost by Period, variances are calculated by period, so there can be both work in process and variances on an object at the same time. To determine the total variance, the actual values confirmed in the period are compared against the target values. The work in process is deducted from the difference between the actual values and the target values to determine the variance.
Product Cost by Order
In Product Cost by Order, you normally manage the costs of your cost objects by lot.
Sequence of Steps in Product Cost by Order
* The production order is debited by posting the actual costs assigned to the production order. For example, this can be done by withdrawing materials from inventory or through internal activity allocations.
** The production order is debited when the finished materials are received into inventory.
The production order is created to produce a particular quantity of product. Once this quantity has been received into inventory, you want to check the costs of that quantity.
In lot-based cost controlling, the work in process is calculated at actual cost. The work in process is calculated as the difference between the debit and credit of an order as long as the order does not have the status DLV (delivered).
In Product Cost by Order, variances are not determined until the order has the status DLV (delivered) or TECO (technically completed). When the order has that status, the system no longer interprets the difference between the debit and the credit as work in process but as a variance.
In Product Cost by Order, orders never have work in process and variances at the same time.
Activities
Decide whether you want to use lot-based or period-based cost controlling.
Create the order type for manufacturing orders in Customizing for Production, or create the order type for product cost collectors in Customizing for Product Cost by Period.
Check or create the default values for each order type and plant. In this step, you specify the default rule and the results analysis key.
More Information
For general information on control parameters in Cost Object Controlling, refer to the following section:
Control Parameters in Cost Object Controlling
For information on the calculation of work in process, refer to the following sections:
Work in Process in Product Cost by Period
Work in Process in Product Cost by Order
For information on variance calculation, refer to the following sections: