What is Actual Costing?

Actual Costing

Actual costing is a Cost Accounting System that uses actual cost, direct-cost rates and actual quantities used in production to determine the cost of specific products.

It gives visibility at the source of the costs(cost objects) in terms of the costs incurred for Material, Labor, Process( Machine Hours), R&M,Quality etc., which aggregates into the cost of the product. This will help to reduce costs since granular visibility of costs are available which in turn will help to reduce wastages and enhance profitability.

  • Actual Cost of materials
  • Actual Cost of labor
  • Actual overhead costs incurred, allocated using the actual quantity of the allocation base experienced during the reporting period

What is Actual Costing in SAP

Actual Costing in SAP is a methodology devised to calculate the actual cost of production of Semi finished  and Finished Goods.

It overcomes the limitations of standard cost and moving average price which are as follows:

  • Variances are posted to the price difference  account and not inventory and cannot be posted to subsequent production levels under the standard costing system.
  • Valuation of material consumption depends on timing of goods issue and variances are posted to price difference rather than inventory under moving average price system.
  • Actual Costing in SAP overcomes the limitations of the above two methods by
  • Valuation of material movements and consumption at a standard price for controlling purposes through the month and eventually valuating the above materials at a monthly weighted average actual price (periodic unit price) at the end of the month.
  • Semi finished and finished goods are evaluated at periodic unit price by posting of price variances in relevant consumption and inventory accounts at month end by rolling up of the variances.

Business Requirement 

Standard Cost does not give correct information in a dynamic purchasing scenario where raw material costs and variable costs are changing frequently.

  • Where the production process involves output of Semi finished goods  which are further used to manufacture finished goods, actual cost is ideal since the variances generated at each level are taken to the next higher level to arrive at Actual Cost.
  • This has a direct impact on pricing decisions in a competitive environment where there is constant pressure to reduce prices through cost reduction and control.
  • Consistent and complete alignment of Inventory Valuation and Cost of Goods sold with Financial Accounting.

Business Decisions become more informed on solid costing data rather than estimations

Actual Costing – Advantages

  • Actual cost of finished/semi-finished products are available
  • Comparison of actual cost and standard cost is possible to track variances and fine tune the budgeting exercise.
  • In future if transfer pricing requirement arises then it can be easily activated as Actual costing material ledger is already enabled and costs can be valuated at company, profit centre and group levels
  • Actual cost of semi finished and finished product can be generated in terms of variable and fixed cost detail through the concept of cost component which facilitates marginal costing analysis- usage of excess capacity if any and make or buy decisions
  • Contribution and Profitability Analysis (COPA) product-wise is possible since actual costs and actual revenue are tracked in SAP. This leads to optimisation of  product mix.

Costing & Profitability Analysis (COPA) – Advantages

Profitability Analysis across multidimensional facets like

  • Customers
  • Distribution Channel
  • Geographical Markets- Countries, Regions, Domestic, Export
  • Organisational Structures like Regions, Divisions, Territories
  • Product
  • Product Groups
  • Plant

– Identify profitable customers and products across markets and distribution channels.

– Focus on the identified customers and products to increase contribution.

Standard Costing Vs Actual Costing

Standard CostingActual Costing
MeaningThe estimated costs of a product pertaining to material, labor, and other overhead costs.The Actual Cost is the realized cost and is not based on the estimates of the same.
Accounting TreatmentStandard Cost cannot be included in the financialstatements of a companyActual Costs are shown as an expense in thefinancial statement
Reading the CostsThese costs are recorded at the beginning of theyear when the budget is plannedThese costs are incurred & realized during theentire year and recorded in the same manner.
Accuracy of DataCaptureIn case of deviations in actual expenses ascompared to standard, the inventory valuation does not change but shown as Variancein actual expenses as compared to standard, would lead to actual costs and actual inventory valuation
Visibility of IssuesMethod of cost using standard costs provides better visibility and chances to improve the performance, only if the variances are analyzed in detailActual Costs automatically provides a ready platform to analyze variances cost component wise since variances are mapped back to individual cost components

S/4HANA provides optional Actual costing with Material Ledger that is provided to arrive at Actual Costing

  1.  Material Ledger & Actual Costing in S/4HANA

Under standard costing, the stock or inventory is valued at any pre-determined or pre-established cost and any variances are expensed as manufacturing variances. These costs are added up to the costs of products going for production, and, hence, are used to establish the price of the finished goods. Under actual costing, these costs are actual manufacturing costs and as well show the final production cost .

§ Material Ledger is a must in S/4HANA, Objective is, Actual Costing and Parallel Currencies valuation

§ Any Organization records inventory on its balance sheet, it will need a sub-ledger for inventory postings, which provide more granular detail about inventory transactions

  1. Material Ledger & Actual Costing in S/4HANA
  • The inventory “Sub-ledger” already existed in the SAP ERP system in the form of the inventory valuation tables xBEW(H), such as tables, EBEW, EBEWH, MBEW, MBEWH, OBEW, OBEWH, QBEW and QBEWH
  • SAP enhanced these tables in SAP S/4HANA just as it did with the Universal Journal
  • SAP leveraged the existing functionality of the ML to create a cohesive sub-ledger for inventory valuation in the SAP S/4HANA
  • The actual Costing functionality is still optional (and this is what causes the most confusion). Material Ledger captures all price variances (like purchase price variances, production variances etc) and allows (as optional period end Actual costing activity) revaluation of ending inventories at period end and releases it as standard price (generally) for next period.
  1. Implementation of Actual Costing
  • Feasibility Study

A detailed study, pre-requisites to understand SAP system to activate Actual costing.

  • Configuration / Business Process changes to achieve Actual Costing

Small changes required in Production, Materials, Finance and Controlling Modules will be done. SD module will be leveraged to arrive at COPA in multi-dimensions of Product, Product Groups,customers ,Regions etc. 

  • Gap Analysis

In-case gaps to arrive at Actual Costing, Geschaft Formulae fixes these gaps

  •  Actual Costing Run

Achieving results of Actual Costing and deriving COPA to arrive at multi dimensional Profitability Analysis

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