Product cost calculation in SAP
The term “product cost calculation” or product cost accounting is a business method for determining and summarizing product cost information (cost units). In this, the costs of individual items of manufactured and sold products are recorded. Therefore, the synonym cost unit accounting is often used. The calculation is essential for the valuation of new products. If market prices are already available, the calculation can be used to check the extent to which a product can be sold at all in a cost-covering or profitable manner.
Why is it necessary to calculate product costs?
Young companies in particular neglect important factors in the costing of products, which can threaten their existence in the long term. Thus, due to the overall pricing, it must be possible to cover not only the direct costs of a product, but also the overhead costs of the company and to realize a correspondingly appropriate profit. Both products and services can be planned. A number of factors must therefore be taken into account when calculating prices.
In pricing, therefore, attention must be paid to three functions in particular:
- The coverage of costs
- The competitiveness
- A sufficient profit margin
In order to meet all these requirements, the focus is on three factors in particular:
- The willingness to pay
- The product cost
- The profit margin
- First, the target group’s willingness to pay must be determined. This means finding the prices of a product that the customer is also willing to pay. This is usually done with the help of professional service providers or market research methods. Simple surveys to voluntary customers are a good way to get the desired data, even with a smaller budget.
- The next important step is to correctly determine the product costs. Generally, there are two different types of costs. These are the direct costs, which can be assigned directly to the product, and the overhead costs, which must be allocated proportionally to the products, since these cannot be assigned directly to a product, such as fixed costs.
- The final step is to determine the profit margin. Here, the production costs plus the markup customary in the industry must be used as a basis.
The problem of product costing
In the context of product costing, a number of typical mistakes are made time and again. For example, it is not uncommon for demand to be overestimated. However, lower unit numbers mean that overhead costs are spread over fewer units. At a certain point, the product slips into the loss zone. This can be remedied by estimating sales volumes as realistically and conservatively as possible.
Another controlling error is not taking market risks into account when calculating sales. These risks include, for example, bad debt losses or new competitors who are aggressive in their pricing. This can lead to the need to increase the company’s discounts.
When it comes to pricing, too much attention may also be paid to the company’s own costs. The benefit for the customer must also be worked out. At the same time, however, care must be taken not to offer the product too cheaply. Of course, on the other hand, products must not be too expensive. This situation can arise, among other things, if a product is equipped with too many functionalities. Especially innovation- and technology-driven companies are affected by this. The high number of features leads to a price that the customer no longer wants to pay. Here, it can make sense to slim down the product in its basic configuration and offer additional features as an extra option.
However, a major risk in product costing is an unstructured approach or subjective pricing.
Time and purpose of the calculation
The following figure shows which calculations are applied at which point in the product lifecycle in SAP and which function is used for this purpose.
Basically, four different costing methods can be used in SAP. These are applied depending on the phase in the product life cycle in which the product is located. A distinction is made between the following variants:
Base object costing
- Material cost estimate without quantity structure
- Material cost estimate with quantity structure
- Ad hoc cost estimate
The sample cost estimate (rough cost estimate) is usually used to establish an initial rough guide value for the costs, even if no exact data is available yet. It is only a rough estimate of the expected costs. A characteristic of the variant is that the individual components of the costs must be determined manually.
Material costing without quantity structure (unit costing) is used between the first product idea and market maturity and is the next step after a promising sample cost estimate. Here, too, data from production is not yet included, but is either entered manually or derived automatically from existing master data.
Before a material cost estimate with quantity structure (product cost estimate) can be carried out, all essential material and production data must be available. Based on this master data, the costing is performed automatically. Manual entry of additives is no longer possible in this form.
The ad-hoc calculation is another possibility to quickly perform a cost simulation, because it can be performed completely without an object reference. It is mainly used for a quick and rough estimation of planned projects.
In product costing, master data is included. Relevant master data from production are bills of material, work centers, routings, rate routings and master recipes. Master data such as cost centers, activity types and business processes from Overhead Cost Controlling are also included in the costing structure. The results of product costing can also be used simultaneously for other components in SAP. For example, it is also possible to transfer the results to the material master as a standard price and to use this to perform material valuation.