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ERP Post Implementation Challanges Part 1 Understanding

COGM, COGS, Price Difference & Closing Stock Calculation


Author: Ranjit Simon John
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
art 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
Debit Credit
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

ERP Post Implementation Challenges Part 2 Reconciling GL, Raw


Material Consumption, Finished/Semi Finished Material Production,
Vendor Invoice
April 2, 2012 | 238 Views |

Ranjit Simon John


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In my previous blog ERP Post Implementation Challenges Part 1 I have explained the concept of COGM, COGS and
deriving the closing stock. In this blog I will be concentrating on the Reconciling GL, Raw Material Consumption, Semi
Finished / Finished Goods Production and Vendor Invoice.
Let me divide the topic into;

Reconciliation 1:
Opening Stock + Raw Material Receipt Raw Material Consumed = Raw Material Closing Stock

Reconciliation 2:
Receipt of Raw Material = Invoice received from Vendor

Reconciliation 3:
Raw Material Consumed = Raw Material Issued for the Production of Finished Good

= Raw Material Consumption GL

Reconciliation 4:
Raw Material Closing Stock = Stock GL of Raw Material

Now let us analyze each scenario;

Reconciliation 1: Opening Stock + Raw Material Receipt Raw Material Consumed = Raw Material Closing
Stock
As explained in my Previous Blog ERP Post Implementation Challenges Part 1 all material movements should be
considered for calculating the closing stock of material.
Reconciliation2: Receipt of Raw Material = Invoice received from Vendor
The Raw Material received should be matching with the invoice received from the vendors. I have done quite a lot of
research to generate report on the list of invoices received against a material.
Material Receipt (MB5B) with movement type 101+102 = Stock GL of Raw Material + Price Diff GL of Raw Material
with Type WE
To find the list of Invoice generated against the Raw Material:
There can be invoice and Credit/Debit notes posted against the material.
To generate Invoice list generated against the material:
We have to combine few tables for generating the report.
Execute SQVI and create a query with the following data.
Tables: RBKP, RSEG, LFA1
Joining Condition:
Tables RBKP-RSEG -> Joining Fields BELNR,GJAHR
Tables RBKP-LFA1 -> Joining Fields LIFNR

Figure 1.0

Figure 2.0
To generate Credit Note / Debit Note list generated against the material:
We have to combine few tables for generating the report.
Execute SQVI and create a query with the following data.
Tables: RBKP, RBMA, LFA1
Joining Condition:
Tables RBKP-RBMA -> Joining Fields BELNR,GJAHR
Tables RBKP-LFA1 -> Joining Fields LIFNR
Figure 3.0

Figure 4.0
Debit / Credit will be recorded as S or H
Reconciliation 3: Raw Material Consumed = Raw Material Issued for the Production of Finished Good = Raw
Material Consumption GL
Raw Material will be consumed for the production of Semi / Finished Good, which will be created against Process Order.
The total raw material consumed against a process order can be generated from transaction code KOB1.
Let me explain with an example:
Raw Material 1 (RM1) is used for the production of three Finished Good (FG1, FG2, FG3)
Material Process Orders Quantity Produced
FG1 10000035 67,981.00
FG2 11000035 343,842.00
FG3 12000035 61,601.00
Total Raw Material RM1 issued during the period is 106,136.00 TO. This is the quantity used for then production of
473,424.00 TO of FG1, FG2, FG3.

Figure 5.0

Table 1.0
(Report from MB51 movement Type 101 + 102)
From transaction KOB1 we will be able to equate the Finished Good Produced and Raw Material Consumed quantity.

Figure 6.0

Figure 7.0
Raw Material (RM1) Consumption GL should be updated with the value of 1,061,360.00
(Report from FBL3N Raw Material (RM1) Consumption GL + Raw Material (RM1) Price Difference GL)

Fugure 8.0
GL Entries Posted During the Process;

Raw Material Consumed for Production of Finished Good

Reconciliation 4: Closing Stock = Stock GL of Material


Generate Closing Stock report for Material from MB5B

Figure 9.0
Stock Report of Material From FBL3N

Figure 10.0
Generally We can reconcile opening, receipt, issue Closing by inputting values in the table listed below;
Issue To Issue To
Physical
Materia Mat Receipt Price Production Cost GL
Opening 0 Qty MIR7 Inventory Sales Clos
l (101+102) Revaluvation Order Center Consumption
Posting
261 + 262 201 + 202
A B C D E F G H I J K
(A+B+C
FG1 A B C D E F G H D+E+F+G+H J
(F+G+
1,683,916.8 670.2
54,700.53 7,539,313.34 256,027.28 7,543,679.84 0.00 0.00 7,800,377.40 161,430.24 1,828,84
0 8
Table 2.0

0 Quantity Execute Transaction MB5B. Sort Based on Movement Type

0 Quantity Included Price Revaluation & MIR7 entries

0 Qty of FG1 Entry:


0 Qty Other = 54,700.53 +

Price Revaluation = 256,027.28


0 Qty -> 310,727.81
Figure 11.0

Debit Credit
Raw Material Consumption XXX
Stock of Raw Material XXX
Stock of Finished Good 1 (FG1) XXX
COGM of Finished Good 1 (FG1) XXX
Table 3.0

Important Transaction Codes:


Transaction Code Description
MB5B Material Report
MB51 Material Report
FBL3N GL Report
FBL1N Vendor Report
KOB1 Production Report
MCBE Material Report
MC.A Material Report
MC+E Sales Report
SQVI Dynamic Query
Table 4.0