Practical ERP Cost Management (3): Process Costing and the Month-End Cost Close

The last part of this series, based on a practical ERP cost management course, covers process costing in a mass-production environment and the month-end cost close procedure.

The cost close is not a CO-only task. It is an integrated process that runs after the production, purchasing, sales and finance actuals have all been closed.

1. Process costing splits cost between finished units and work in process

Job costing suits cost tracking per production order. In mass production, only part of the input is completed and the rest remains in process, so the input cost has to be allocated between finished units and WIP.

Method Suited to Cost is split between
Job costing Cost tracking per production order Individual orders
Process costing Mass production Finished units and work in process

2. Beginning WIP and degree of completion

When beginning WIP exists, the weighted average method or the FIFO method can be applied. Equivalent units, which reflect the degree of completion of WIP, are the key to the cost split.

Item Description
Weighted average method Beginning WIP cost and current period cost are averaged
FIFO method Beginning WIP is completed first, then current period input
Equivalent units WIP quantity converted to finished units using the degree of completion

3. The month-end cost close depends on sequence and dependencies

After the operational close, the CO steps run in a fixed order. In SAP, the transactions below may be used at the corresponding steps.

Order Step SAP transaction (example)
0 Operational actuals closed (production, purchasing, sales, finance) —
1 Manufacturing overhead allocation KSV5, KSU5
2 Activity price calculation and revaluation KSII, CON2
3 WIP calculation KKAO
4 Production order settlement CO88H
5 Actual costing CKMLCP

4. The cost close is finished only after the exceptional transactions are checked

Besides the close of production, purchasing, sales and manufacturing expenses, the following transactions have to be checked. Any operational transaction that is missing leads to cost variances and inventory valuation errors.

Check item Type
Production close Regular close
Purchasing close Regular close
Sales close Regular close
Manufacturing expense close Regular close
Subcontracting Exceptional transaction
Transfer postings to other accounts Exceptional transaction
Physical inventory adjustments Exceptional transaction
Stock scrapping Exceptional transaction
Exceptional cost of goods sold types Exceptional transaction

5. Summary of practical cost management

Cost accuracy starts from consistency rather than from complex formulas. Every result should be traceable back to the source document and the quantity.

Element What has to be consistent
Master data Cost elements, cost centers, activity types, allocation bases
Source transactions Purchasing, production, inventory, sales, FI postings
Allocation logic Bases and paths for common cost
Close procedure Order and dependencies of the month-end steps
Traceability Each result traceable to source document and quantity

6. SAP actual cost analysis screen example

Material Price Analysis shows the price composition and the variances per material from a single-level and a multi-level point of view. In practice, do not stop at the final amount; trace the source of the variance step by step.

View What it shows
Single-level Price composition and variances of the material itself
Multi-level Variances rolled up from lower-level materials
Variance source Related step in this post
Purchasing Purchasing close (section 4)
Production Production close (section 4)
Allocation Overhead allocation, activity price calculation and revaluation (section 3, steps 1–2)
Settlement Production order settlement (section 3, step 4)

This is part 3 of a 3-part series on practical ERP cost management.

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