SAP Product Costing Interview Questions and Answers
#1. What is ‘Cost Object’?
Ans. ‘Cost Object,’ also known as a CO Account Assignment Object, in SAP denotes a unit to which you can assign objects. It is something like a repository in which you collect costs, and, if necessary, move the costs from one object to another. All the components of CO have their own cost objects such as cost centres, internal orders, etc.
The cost objects decide the nature of postings as to whether they are real postings or statistical postings. All the objects that are identified as statistical postings are not considered cost objects (for example, profit centres).
#2. What is ‘Cost Element’?
- ‘Cost Elements’ represent the origin of costs. There are two types of cost elements:
- Primary Cost Elements
- Secondary Cost Elements
#3. Why do You Need ‘Cost Element Accounting’?
Ans. Cost Element Accounting’ (CO-OM-CEL) helps you to classify costs/revenues posted to CO. It also provides you the ability to reconcile the costs between FI and CO. CO-OM-CEL provides the structure for assignment of CO data in the form of cost/revenue carriers called cost elements or revenue elements.
#4. Explain Cost Center Accounting?
Ans. ‘Cost Center Accounting’ deals with the difficult task of managing ‘overheads’ within your organization. Since overhead costs are something that you cannot directly associate with a product or service, which can be difficult to control, cost centre accounting provides you with the necessary tools to achieve this.
#5. What is ‘Activity-Based Costing’?
Ans. ‘Activity-Based Costing,’ popularly known as ABC, helps you to view overhead costs from the point of business processes. The result is you will be able to optimize costs for the entire business process. As a single business process, activity-based costing will cut across several cost centres and will give you an enhanced view of the costs incurred.
#6. What is ‘Product Cost Controlling’ (CO-PC)?
- ‘Product Cost Controlling’ (CO-PC) deals with estimating the costs to produce a product/service. CO-PC is divided into two major areas:
- Cost of materials
- Cost of processing
- With CO-PC, you can calculate:
- Cost of goods manufactured (COGM)
- Cost of goods sold (COGS)
- CO-PC is tightly integrated with Production Planning (PP) and Materials Management (MM), in addition to FI. The functionality helps to:
- Calculate Standard Costs of manufactured goods
- Calculate the Work-in-Progress (WIP)
- Calculate the Variances, at period-end
- Finalize settlement of product costs
- Note that CO-PC deals only with production costs as it deals only with the production.
#7. What is ‘Profitability Analysis’ (CO-PA)?
Ans. ‘Profitability Analysis’ (CO-PA) helps you determine how profitable (denoted by the ‘contribution margin’) your market segments are. The analysis is on the external side of the market. You will be able to define what segments, such as customer, product, geography, sales organization, etc., of the market are required for analyzing ‘operating results/profits.’ With multi-dimensional ‘drill-down’ capability, you have all the flexibility you need for reporting.
#8. How is ‘Profit Center Accounting’ (EC-PCA) Different from CO-PA?
Ans. Unlike CO-PA where the focus is on external market segments’ profitability, ‘Profit Center Accounting’ (EC-PCA) focuses on profitability of internal areas (profit centers) of the enterprise. Profit center accounting is used to draw internal balance sheets and profit & loss statements. You may use EC-PCA in place of business area accounting.
Both CO-PA and EC-PCA serve different purposes and are not mutually exclusive. You may need them both in your organization.
#9. Explain ‘Integration of CO’ with its Components and Other SAP Modules?
- The CO module is integrated with FI, AA, SD, MM, PP, and HR:
- FI is the main source of data for CO. All expenses, posted in FI, flow to CO through the ‘primary cost elements’ to the appropriate ‘cost centers.’ Similarly, postings in Asset Accounting (such as depreciation) are also passed on to CO.
- Revenue postings in FI would result in postings in CO-PA and also in EC-PCA.
- The SD, MM, and PP modules have many integration points in CO. Goods issue (GI) to a controlling object or goods receipt (GR) from a ‘production order’ are some examples of integration. These modules are tightly integrated as consumption activities, cost of goods issued, overhead charges, material costs, etc., which are passed on to production objects such as PP production order or sales order. The WIP (Work-in-Progress) and the variances, at period ends, are settled to CO-PA, CO-PCA, and also to FI. Revenues are directly posted when you generate billing documents in SD if the sales order is a cost object item.
- The HR module generates various types of costs to be posted in CO. Planned HR costs can also be passed on for CO planning.
#10. What is ‘Primary Cost Element’?
Ans. ‘Primary Cost Elements’ represent the consumption of production factors such as raw materials, human resources, utilities, etc. Primary cost elements have their corresponding GL accounts in FI. All the expense/revenue accounts in FI correspond to the primary cost elements in CO. Before you can create the primary cost elements in CO, you first need to create them in FI as GL accounts.
Note that SAP treats revenue elements also as primary cost elements in CO processing. The only difference is that all the revenue elements are identified with a negative sign while posting in CO. The revenue elements correspond to the revenue accounts in FI and they fall under the cost element category, category 01/11.
#11. What is the ‘Secondary Cost Element’?
Ans. ‘Secondary Cost Elements’ represent the consumption of production factors provided internally by the enterprise itself and are present only in the CO. They are actually like cost carriers and are used in allocations and settlements in CO. While creating these elements, you need to mention the cost element category, which can be any of the following:
- Category 21, used in internal settlements
- Category 42, used in assessments
- Category 43, used in internal activity allocation
#12. What is ‘Cost Element Category’?
Ans. All the cost elements need to be assigned to a ‘Cost Element Category,’ to determine the transactions for which you can use the cost elements.
- Category 01, known as the ‘general primary cost elements,’ is used in standard primary postings from FI or MM into CO.
- Category 22 is used to settle order/project costs, or cost object costs to objects outside of CO (such as assets, materials, GL accounts, etc.).
#13. Differentiate Between ‘Real’ and ‘Statistical Postings’ in CO?
Ans. The CO account assignment objects decide the type of postings allowed. They can be real or statistical postings.
- ‘Real Postings’ allow you to further allocate/settle those costs to any other cost object in CO, either as ‘senders’ or as ‘receivers.’ The objects that are allowed to have real postings include:
- Cost Centers
- Internal Orders (Real)
- Projects (Real)
- Profitability Segments
- PP—Production Orders (make-to-order)
- ‘Statistical Postings,’ on the other hand, are only for information purposes. You will not be able to further allocate/settle these statistical costs to other cost objects. Examples of such objects include:
- Statistical (Internal) Orders
- Statistical Projects
- Profit Centers
#14. How do You Define ‘Number Ranges’ in CO?
Ans. You will be required to define, for each of the controlling areas, the ‘Number Ranges’ for all transactions that will generate documents in CO. Once done for a controlling area, you may copy from one controlling area to other controlling areas when you have more than one such area.
To avoid too many documents, SAP recommends grouping multiple but similar transactions and then assigning number ranges to this group. Further, you may create different number ranges for plan and actual data. As in FI, the number ranges can be internal or external. The document number ranges in CO are independent of fiscal years.
#15. How Does ‘Master Data’ Differ from ‘Transaction Data’ in CO?
- The ‘Master Data’ remains unchanged over a long period, whereas ‘Transaction Data’ are short-term. The transaction data are assigned to the master data.
- Though you normally create the master data from transactions, note that you will be able to create these records from the configuration side as well. When you need to create a large number of master data, you may use the ‘collective processing’ option to create related master records in one step. SAP puts master data in ‘groups’ for easy maintenance.
- In the case of master data of cost center/cost elements/activity types, once they are created, you will not be able to change the date. SAP calls this feature the ‘time dependency’ of master data. If necessary, you can extend the ‘time’ by creating a new one and attaching it to the existing objects. In the case of resources, the master data are time-dependent and the system will allow you to delete these objects. Statistical Key Figures (SKF) are not time-dependent; once defined they are available in the system forever.
#16. How do you Automatically Create ‘Cost Elements’?
Ans. You will be able to create ‘cost elements’ automatically by specifying the cost element, the cost element interval, and the cost element category for the cost elements. All these are achieved by creating default settings. The creation of cost elements is done in the background.
The primary cost elements can be created only when you have the corresponding GL accounts in the chart of accounts of the Company Code. Even though the GL account names are used as the names of the primary cost elements thus created by the system, you have the option of changing these names in CO. All the secondary cost elements are created in CO; the name of these cost elements comes from the cost element category.
#17. Explain ‘Controlling (CO)’ in SAP?
Ans. SAP calls managerial accounting ‘Controlling’ and the module is commonly known as ‘CO.’ The CO module is, thus, primarily oriented towards managing and reporting cost/revenue and is mainly used in ‘internal’ decision-making. As with any other module, this module also has configuration set-up and application functionality.
The controlling module focuses on internal users and helps management by providing reports on cost centers, profit centers, contribution margins and profitability, etc.
#18. What are the Important ‘Organizational Elements of CO’?
- The important organizational structure of controlling includes:
- Operating Concern (the top-most reporting level for profitability analysis and sales and marketing controlling).
- Controlling Area (central organization in ‘controlling,’ structuring internal accounting operations).
- Cost Centers (lower-most organizational units where costs are incurred and transferred).
#19. What is the ‘Controlling Area’? How is it Related to a Company Code?
Ans. A ‘Controlling Area’ is the central organizational structure in ‘controlling’ (CO) and is used in cost accounting. The controlling area, as in the case of a Company Code, is a self-contained cost accounting entity for internal reporting purposes. The controlling area is assigned to one or more Company Codes to ensure that the necessary transactions, posted in FI, are transferred to controlling for cost accounting processing.
- One controlling area can be assigned one or more Company Codes.
- One chart of accounts can be assigned to one or more controlling areas.
- One or more controlling areas can be assigned to an operating concern.
- One Client can have one or more controlling areas.
- Outline ‘Company Code—Controlling Area’ Assignments.
- There are two types of assignments possible between the Company Code and a controlling area:
- One-to-one: Here, one Company Code corresponds to one controlling area.
- Many-to-one: More than one Company Code is assigned to a single controlling area.
#20. What are the ‘Components of Controlling’?
Ans. There are three major submodules in CO and each of these submodules has many components as detailed below:
- Cost Element Accounting
- Cost Controlling
- Cost Center Accounting
- Internal Orders
- Activity-Based Costing
- Product Cost Controlling
- Profitability Analysis
- Profit Center Accounting
#21. Why do You Need ‘Cost Element Accounting’?
Ans. ‘Cost Element Accounting’ (CO-OM-CEL) helps you to classify costs/revenues posted to CO. It also provides you the ability to reconcile the costs between FI and CO. CO-OM-CEL provides the structure for assignment of CO data in the form of cost/revenue carriers called cost elements or revenue elements.
#22. Explain ‘Cost Center Accounting.’
Ans. ‘Cost Center Accounting’ deals with the difficult task of managing ‘overheads’ within your organization. Since overhead costs are something that you cannot directly associate with a product or service, which can be difficult to control, cost center accounting provides you with the necessary tools to achieve this.
#23. What is ‘Activity-Based Costing’?
Ans. ‘Activity-Based Costing,’ popularly known as ABC, helps you to view overhead costs from the point of business processes. The result is you will be able to optimize costs for the entire business process. As a single business process, activity-based costing will cut across several cost centers and will give you an enhanced view of the costs incurred.
#24. What are the important Terminologies in Product Costing?: Results Analysis Key?
Ans. This key determines how the Work in Progress is calculated
- Cost Components
- The break up of the costs which get reflected in the product costing eg. Material Cost, Labour Cost, Overhead etc
- Costing Sheets
- This is used to calculate the overhead in Controlling
- Costing Variant
For All manufactured products the price control recommended is Standard Price. To come up with this standard price for the finished good material this material has to be costed. This is done using Costing Variant. Further questions down below will explain this concept better.
#25. What are the configuration settings maintained in the costing variant?
Ans. Costing variant forms the link between the application and Customizing since all cost estimates are carried out and saved with reference to accosting variant. The costing variant contains all the control parameters for costing. The configuration parameters are maintained for costing type, valuation variants, date control, and quantity structure control. In costing type we specify which field in the material master should be updated. In valuation variant we specify the following) the sequence or order the system should go about accessing prices for the material master (planned price, standard price, moving average price, etc).b) It also contains which price should be considered for activity price calculation and .c) How the system should select BOM and routing.
#26. How does SAP go about costing a Product having multiple Bill of materials within it?
Ans. SAP first costs the lowest level product, arrives at the cost and then goes and costs the next highest level and finally arrives at the cost of the final product.
#27. What does the concept of cost roll-up mean in product costing context?
Ans. The purpose of the cost roll-up is to include the cost of goods manufactured of all materials in a multilevel production structure at the topmost level of the BOM(Bill of Material) The costs are rolled up automatically using the costing levels.1) The system first calculates the costs for the materials with the lowest costing level and assigns them to cost components.2) The materials in the next highest costing level (such as semi-finished materials) are then costed. The costs for the materials cost first are rolled up and become part of the material costs of the next highest level.