Since no manufacturing process is perfect, there will always be some percentage of assemblies or components that does not meet the required production quality. Management accountants are concerned with how the cost of this scrap is reflected in the cost of goods manufactured. They are also interested in how scrap affects production costs and variances at month-end.

Many companies know how much scrap is routinely involved in the production of their assemblies and finished goods. R/3 provides a method of entering these known scrap amounts as planned scrap in logistics master data. Several potential advantages result in areas such as costing, production, and procurement.

SAP online documentation describes how the process of scrap works, without providing examples that can be easily followed from a costing perspective. I’m going to give you a short demo on the costing process with no planned scrap. You can then refer back to this scenario for comparison purposes when examining the effects of planned scrap on costing.

I’ll examine the effect of planned scrap on planned costs in standard cost estimates. I’ll then follow the production process and postings to a product cost collector¹ before and after material movements occur, to illustrate the effect of scrap on the actual costing process.

The scenarios I’ll present are based on an analysis of postings to a product cost collector in a repetitive manufacturing environment. The same logic applies to analyzing cost objects in other production environments, such as production orders in discrete manufacturing, or process orders in process industries.

Costing Process with No Planned Scrap

My first example (Figure 1) shows a cost estimate (transaction code CK11) with no assembly scrap entered in the material requirements planning (MRP) 1 view of the material master of the finished good.

The cost estimate is based on the production BOM (bill of material), in this case, and routing. Scrap is not taken into account in this cost estimate, and therefore is not included in the cost of goods manufactured.

Now, let’s examine the postings to a product cost collector resulting from goods issues, goods receipts, and activity confirmations. After the cost estimate is released, manufacturing and backflushing take place. Backflushing is the process of automatically posting goods issues for components or subassemblies when confirming production yield and activity consumption for the finished good. Goods issues for components and activity confirmations debit the cost collector, while finished good receipts result in credit postings.

In this scenario, the planned quantity of a finished good is confirmed as yield, and 10 percent of the finished good quantity is confirmed as scrap using transaction code MFBF (menu path Logistics>Production> Repetitive Manufacturing> Backflush>REM Backflush).

The total scrap costs appear in the scrap column of the cost collector analysis report, transaction code KKBC_PKO.

Before activation of the scrap variance category², the scrap costs would have appeared in the variance column, added together with any other production variances. After activation of scrap variance, R/3 separates scrap variances from production variances and shows them in two separate columns in the cost collector report (Figure 2). With the scrap variance activated, you’ll need to add the variance and scrap columns to calculate the total variance.

You’ll notice, also, that the difference between the actual debits and credits shown in the bottom row of the actual column ($5,359.27) equals the total variances—i.e., the sum of the bottom row of the variance and scrap columns ($0 + $5,359.27 = $5,359.27).

Total variance (addition of variance and scrap columns) is equal to the amount of scrap you backflushed, since scrap was not planned. This variance is due to a quantity variance, since it resulted from an unplanned quantity posted as scrap.

Figure 1

Costed BOM with no assembly scrap

Figure 2

No planned assembly scrap — scrap posted

Costing Process with Planned Scrap

In my second example, let’s see how the costing process can be changed by using planned scrap.

The production-planning department is normally responsible for setting up scrap quantities in logistics master data. This department knows the quantities of components and activities typically consumed to produce a given quantity of an assembly.

Assembly scrap is the percentage of an assembly or finished good that does not meet required production quality. Assembly scrap is entered in the MRP 1 view of the material master via transaction code MM02 (menu path Logistics>Production> Master Data>Material Master> Material>Change>Immediately). (See Figure 3.) It is used to increase the lot size of an assembly. MRP increases the planned quantity of the assembly to be produced by the amount of the assembly scrap percentage entered.

Planned assembly scrap affects the calculated standard cost estimate. The cost estimate in Figure 4 has been created (transaction code CK11) with 10 percent planned assembly scrap entered in the MRP 1 view of the material master of the finished good. The cost estimate quantities of all components and activities are increased by 10 percent compared with the costed BOM in Figure 1.

Since all quantities are increased by 10 percent, the gross values for all items are also increased by 10 percent. Thus, planned assembly scrap entered in the material master is included in the cost of goods manufactured by increasing the standard price of the finished good, when the standard cost estimate is released to the costing view in the material master.

Figure 3

MRP 1 view of material master — assembly scrap

Figure 4

Costed BOM with 10 percent assembly scrap

Comparing Cost Collectors

Now let’s analyze any effect of standard cost estimate changes on postings and variance calculations on a product cost collector. I’ll examine postings to a cost collector before and after the planned quantity of scrap is backflushed with transaction code MFBF. Comparing the two cost collectors will help you to understand and analyze the scrap postings and variances.

Before Posting

Before scrap is posted, cost estimate quantities, and hence values, are increased by 10 percent as shown in the target (adjusted plan) cost³ column of the cost collector analysis report (transaction code KKBC_PKO), in Figure 5. Production BOM quantities, however, are not increased due to planned assembly scrap.

The production quantity (lot size) planned by MRP is increased by assembly scrap. For example, MRP plans to produce 11,000 if there is a requirement of 10,000 of a finished good with 10 percent planned assembly scrap. MRP then expects a goods receipt into inventory of 10,000 and an additional 1,000 posted as scrap.

If there is no posting to scrap, there will be a favorable variance of 10 percent in the variance column, since the product has been produced without any actual scrap (10 percent assembly scrap was planned).

Figure 5

Planned assembly scrap — before scrap posting

After Posting

After scrap is posted, actual costs are increased by 10 percent due to the quantity of 1,000 posted to scrap, as shown in Figure 6. Target costs are unaffected, since the quantity of goods delivered to inventory is unchanged. The quantity delivered to inventory is shown at the bottom of the cost collector analysis reports in Figures 5 and 6.

This has the effect of reducing the total production variance previously shown in Figure 5, since actual costs now include the costs of 10,000 products added to inventory, plus the costs of 1,000 products posted to scrap, as planned.

Remember, total variance is shown in the bottom row of the Actual column. The blank cell shown in Figure 6 indicates the total variance is zero. This is also confirmed by the addition of the bottom row of the variance and scrap columns (-$5,895.20 + $5,895.20 = $0), also zero, as expected.

Where scrap has been planned and not yet posted, total variance will be equal to the planned scrap value of $5,359.27. In the case where scrap has been planned and actually posted, total variance will be zero as shown in the Actual column in Figure 6.

Target costs are based on the requirements of a cost estimate quantity of 11,000. When backflushed scrap quantity equals planned scrap quantity, any differences between target and actual costs can only be due to other production variances. All amounts posted to scrap appear in the scrap column, allowing analysis of scrap postings independent of other production variances.

Use of planned scrap in logistics material data can result in the following benefits:

• Planned scrap is included in cost of goods manufactured.

• Assembly scrap increases the lot size of the assembly or finished good in MRP due to quality requirements. This can result in more accurate production planning of assembly quantities.

• MRP plans for the additional requirements of components.

Figure 6

Planned assembly scrap — after scrap posting

² Without scrap variance activated, any amounts appearing in the variance column are always total variances. To see scrap costs appear separately from production variance, in the scrap column, activate the scrap variance category via transaction code OKV1.

³ Four conditions must be met for target costs to appear in the target column: variance key in run schedule header/production/process order; goods receipt of assembly or finished good; released standard cost estimate; and variance calculation executed.

John Jordan

John Jordan is a freelance consultant specializing in product costing and assisting companies gain transparency of production costs resulting in increased efficiency and profitability. John has authored bestselling SAP PRESS books Product Cost Controlling with SAP and Production Variance Analysis in SAP Controlling.

You may contact the author at jjordan@erpcorp.com.

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