ERP Post Implementation Challanges – Part 1 Understanding COGM, COGS, Price Difference & Closing Stock Calculation

http://scn.sap.com/community/erp/financials/blog/2012/03/20/post-implementation-challenges-part-1

After our Go-Live we had gone through various tough stages while trying to stabilise the system.
Major challenge we faced was resistance from end users, lack of confidence on the new system by the external and internal stake holders. Finally after working so hard on the various points raised by the internal as well as external team, we succeeded.
In this blog I would like to highlight the most important challenge we faced. Mainly they are two in number;

          1) Clarity on COGM,  COGS & Production Order Price Difference general ledger accounts.

          2) Trying to equate the formula

          Opening Stock + Receipt – Issue = Closing Stock
1) COGM,  COGS & Production Order Price Difference general ledger accounts.
Let us start with COGM;
There will be mainly two entries posted in Cost of Goods Manufactured;

1)    During Production Order Confirmation

2)    During Production Order Settlement

First let me try to explain the GL entries posted during various stages starting from Raw Material receipt to Finished Good sales.
The postings can be divided into various Parts;
Part 1: Raw Material Receipt  
               Step 1: Raw Materials are received. (Goods Receipt – MIGO_GR)
Part 2: Vendor Payment
               Step 2: Invoice Receipt
               Step 3: Vendor Payment
Part 3: Raw Material Issue to Production
               Step 4: Raw Material used for the production of Semi Finished Good 1

                               Step 5: Semi Finished Good 1 used as raw material for the production of Semi Finished Good 2

                               Step 6: Semi Finished Good 2 used for the production of Finished Good

                  Part 4: Finished Good received in Inventory

Part 4:                      Step 7: Finished Good Receipt

                 Part 5: Sales

                                Step 8: Sales Delivery

                                Step 9: Billing released from Accounts

                                Step 10: Customer Payment

               

Part 1: Raw Material Receipt  

                 GL Entries during Step 1: Raw Materials are received at Inventory

	Debit	Credit
Stock of Raw Material	XXX
Raw Material GR/IR		XXX

Table 1.0

Part 2: Vendor Payment

           GL Entries during Step 2: Invoice Receipt

	Debit	Credit
Raw Material GR/IR	XXX
Vendor Account		XXX

                    Table 2.0

           GL Entries during Step 3: Vendor Payment

	Debit	Credit
Vendor Account	XXX
Bank Account		XXX

Table 3.0

                Part 3: Raw Material Issued to Production

GL Entries during Step 4: Raw Material used for the production of Semi Finished Good 1

	Debit	Credit
Raw Material Consumption	XXX
Stock of Raw Material		XXX
Stock of Semi Finished Good 1	XXX
COGM of Semi Finished Good 1		XXX

Table 4.0

GL Entries during Step 5: Semi Finished Good 1 used as raw material for the production of Semi Finished Good 2

	Debit	Credit
Stock of Semi Finished Good 2	XXX
COGM of Semi Finished Good 2		XXX
COGM of Semi Finished Good 1	XXX
Stock of Semi Finished Good 1		XXX

Table 5.0

GL Entries during Step 6: Semi Finished Good 2 used for the production of Finished Good

	Debit	Credit
Stock of Finished Good	XXX
COGM of Finished Good		XXX
COGM of Semi Finished Good 2	XXX
Stock of Semi FInished Good 2		XXX

Table 6.0

Part 4: Finished Good Received in Inventory
GL Entries during Step 7: Finished Good Receipt

	Debit	Credit
Stock of Finished Good	XXX
COGM of Finished Good		XXX
COGM of Semi Finished Good 2	XXX
Stock of Semi FInished Good 2		XXX

Table 7.0

Part 5: Finished Good Sales
GL Entries during Step 8: Sales Delivery

	Debit	Credit
COGS	XXX
Stock of Finished Good		XXX

Table 8.0

Live posting example during sales delivery. VL01N/VL02N.

GL Entries during Step 9: Billing released from Accounts

	Debit	Credit
Customer Account	XXX
Finished Good Sales		XXX

Table 9.0

Live posting example during sales invoice release from accounts using VFX3.

GL Entries during Step 10: Customer Payment

	Debit	Credit
Bank Account	XXX
Customer Account		XXX

Table 10.0

Now let us try to understand COGM, COGS and Production Order Price Difference Accounts;
Finished and Semi Finished Material will be valuated at "Standard Price" for all COGM, COGS and Closing Stock calculation.
1.1) COGM: Cost of Goods Manufactured
Transactions hitting COGM account are;
a) Goods Produced
b) Goods Issued to Production Order
c) Reversal of Goods Produced
d) Entries posted during settlement of Production Orders ( Variance)

I have broken down the COGM entries for clear understanding. Please find the below screen shots.

The above figure is divided into three sections;
Section 1: Materials Produced
Section 2: Materials Issued
Section 3: Production Order Settlement

The below attached image shows how the Production Order Settlement amount of 1,403,463.52 has been arrived.

If  ML is not activated we will not be able to apportion the total variance between stock, COGM and COGS. We follow the below mentioned procedure to split the variance.

In the first column the total variance for each product has been entered. Second column we enter the total quantity produced for the material. So Total Variance / Production Quantity =  Variance Per Ton.

You have the quantity for Closing Stcok, COGM and COGS of the material. Multiply it with Variance per ton.

Closing Stock Quantity * Variance Per Ton
COGM * variance Per Ton
COGS * Variance Per Ton

1.1.a) Goods Produced:
              When a finished or semi finished good is produced i.e after confirmation stock of the finished or semi finished good will be Debited and cost of  manufacturing the finished or semi finished good will be Credited with document type "WA". (Refer Table 6.0)
Entires will be posted against the particular material i.e with material number.

                                                                       Figure 1.0

1.1.b) Goods Issued to Production Order:
When a Semi finished good is issued against a production order Stock of the semi finished good is credited and  cost of  manufacturing the semi finished good is debited with document type "WA". (Refer Table 6.0)
Entires will be posted against the particular material i.e with material number.

                                                                        Figure 2.0
1.1.c) Reversal of Goods Produced:
When a finished / semi finished good "A" Quantity is produced at "X" rate and reversed "B" Quantity at "Y" rate, the quantity will be reversed at "Y" rate and the difference in price "X - Y" will be posted in Price Difference and COGM account.
GL entries posted will be;
(For GL entries posted when Raw Material is Issued to Production of Semi Finished Good refer Table 4.0)

	Debit	Credit
COGM of Semi Finished Good	XXX
Stock of Semi Finished Good		XXX
Stock of Raw Material	XXX
Raw Material Consumption		XXX
Production Order Price Diff Account		XXX

Table 11.0

1.1.d) Entries posted during settlement of Production Orders ( Variance)
During settlement of production order variance will be posted to Production Order Price Diff Account and COGM
KIndly chek my blog "Understanding Production Order Variance Part - 1 " (http://scn.sap.com/community/erp/manufacturing-pp/blog/2012/03/13/understanding-production-order-variance--part-1).
Note: There is no hard and fast rule for analysing COGM. Analyse COGM based on the analysis I have given above, if any other entries are posted we have to analyse those entries one by one.
Let me try to explain COGM entry for one material.
COGM entry posted for material "FG1" is 27,134.90 AED.
Let me explain the entries. "FG1" produced is (Execute Transaction Code MB5B for movement type 101 + 102 ) 28,507,148.10 AED.
"FG1" issued to production order is (Execute Transaction Code MB5B for movement type 261 + 262 ) 28,480,013.2 AED.
COGM -> 28,507,148.10 - 28,480,013.2 = 27,134.90
1.2) COGS: Cost of Goods Sold
For calculating Cost of Goods Sold materials will be va;luated at standard price maintained in the material master.
Execute Transaction Code MB51 for movement type 601 + 602. Also consider price difference during sales reversal.
Both the 601 & 602 values should match with COGS general ledger (If no price diference for sales reversal is there).

                                                                        MB5B 601 + 602 Report

                                                                                  Figure 4.0
                                                                           FBL3N COGS Report

                                                                               Figure 5.0
1.3) Production Order Price Difference Account
KIndly chek my blog "Understanding Production Order Variance Part - 1 " (http://scn.sap.com/community/erp/manufacturing-pp/blog/2012/03/13/understanding-production-order-variance--part-1).
2.0) Closing Stock:
Formual for closing stock;
( Opening Stock + Receipt ) - Issues =  Closing Stock
i.e Opening Stock + COGM = Closing Stock
But in most of the cases if we apply the formula the closing stock will not match. All material movement has to be considered while calculating closing stock of material.
Let us try to analys few Scenarios:
Scenario 1: Material Stock Transfer
Let us consider two materials RMOPCK2 and RMSRCK1

Material	Opening	Receipt	Issue	Closing
FG1	276,120.06	116,157,464.09	115,882,172.88	814,101.12
FG2	0.00	7,868,063.25	7,616,416.50	0.00

Table 12.0

If we substitute the values in the formula the closing stock will not match. We need to consider all material movements.

Material	Opening	Receipt	Issue	Price Diff. (0 Qty)	Material Transfer	Closing
FG1	276,120.06	116,157,464.09	115,882,172.88	37,161.73	225,528.12	814,101.12
FG2	0.00	7,868,063.25	7,616,416.50		(251,646.75)	0.00

Table 13.0

Formula modified as below;
( Opening + Receipt + Price Diff. + Material Transfer ) - Issue = Closing Stock
Sustituting the Valyues
FG1 -> (276,120.06 + 116,157,464.09 + 37,161.73 + 225,528.12) - 115,882,172.88 = 814,101.12
FG2 -> (0.00 + 7,868,063.25 + 0.00 + (251,646.75)) - 7,616,416.50 = 0
Useful Transaction Codes:
MB5B - Material Movement Report
MB51 - Material Movement Report
FBL3N - General Ledger Report
Also Refer: http://help.sap.com/erp2005_ehp_06/helpdata/EN/7e/cb7ead43a311d189ee0000e81ddfac/frameset.htm
                 "ERP Post Implementation Challanges - Part - 2 Reconciling GL, Raw Material Consumption, Finished/Semi Finished Material Production, Vendor Invoice"