actual costing process

Case Study: Improving the Actual Costing Process at Aselsan

© 2012 Wellesley Information Services. All rights reserved.

Sibel Kaplan and Mesut KaramanAselsan

In This Session …

• Learn the concept of actual costing and walk through the main steps of period-end closing

• Get insight into how a large scale electronic company applied material ledgermaterial ledger

• Learn how to run material ledger cockpit faster• Understand several reasons for unexpected price fluctuations• Find out what methods the company used to rework its materials

and the consequences of these methods from both logistics and costing perspectives

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• Hear how Aselsan copes with undesirable outcomes of partial delivery from production orders and negative consumption

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What We’ll Cover …

• Aselsan’s SAP journey • General operation structure of the company and our

customization approach D t i ti f th i di it i f t i l • Determination of the periodic unit prices for materials

• Some struggles during period-end closing • Wrap-up

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Aselsan with Numbers

• Established in 1975• A leading military electronic company in Turkey• 4,169 employees (2,348 engineers 1,597 R&D engineers)p y ( g g )• $900 million sales in 2011 – export to 39 different countries• The ratio of R&D expenses that is financed by company’s

own resources to its sales is 7%• Aselsan’s vision: Be in the top 50 defense companies in the

world by creating national and original high technologies

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• Aselsan ranked 80th according to annual sales in Defense News in 2011

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Aselsan’s Participations

• Participations – Domestic MIKES 96%Roketsan 15%Mikroelektronik 85%AselsanNET 95%

• Participations – International Aselsan Bakü 100%IGG Aselsan Integrated Systems 49%

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IGG Aselsan Integrated Systems 49% Kazakhstan Aselsan Engineering (KAE) 49%

Organization

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Aselsan’s SAP Journey

MRP II ERP IIBPM

09/2009

MANMAN

R/3 (PS CS FM

BW, BPS12/2005

Portal02/2008

Cockpit11/2008

AP

670 80 90 00 10

R/3 (FI, CO, MM, SD, PP, WM)

01/2005

R/3 (PS, CS, FM, CM)

07/2005

SSM09/2011

SA CRM07/2012





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Activity Fields of the Company

• More than 200 ongoing projects with contract basesResearch and Development, Initial Design

Hardware DesignSoftware DesignMechanical DesignOptical Design

ProductionIncluding fixed assets production

I t ti Integration SubcontractingModernization After-sales services

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Sales Trend and Its Distribution

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Production Orders Trend

35,000

Production Order Volume

10,000

15,000

20,000

25,000

30,000

10

0

5,000

,

2005 2006 2007 2008 2009 2010 2011

Materials Volume

• # of materials (with unique KALNRs) monitored via SAP, as of year endings

500,000

Materials Volume

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

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0

50,000

100,000

50,000

2005 2006 2007 2008 2009 2010 2011

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General Operation Structure of the Company and Our Customization Approach• Production Characteristics of Aselsan

Production orders which stay open for a long period of time Heavy integration needsField tests of military electronics’ steps are defined in the Field tests of military electronics steps are defined in the production orders’ route

Consuming all the materials to production orders at first operationTotal settlement of costs instead of periodic settlementMake-to-stock strategy, with the support of project stock applicationDynamic production environment due to change in military y p g yconfiguration needsFrequently revised Bill of Materials and RoutesAlways considering the option of “Buy” or “Produce”Being in partnership with considerable amount of suppliers

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General Operation Structure of the Company and Our Customization Approach (cont.)• The Needs

Capturing huge production volume and production typeBeing able to monitor WIP accounts with actual values due to

id bl t f d ti d hi h t l ti considerable amount of production orders, which stay lasting for a long period of timeFollowing major A and B-type stocks under each project identityBeing able to handle production variance analysis Being ready for the possible inflationary environmentsg y p yTimely and accurate “material standard and actual” unit prices in order to prepare competitive offers in governmental and non-governmental bids

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General Operation Structure of the Company and Our Customization Approach (cont.)• The Solutions

Applying Material Ledger function in SAP R/3Using “Full Settlement” in production orders instead of “P i di S ttl t”“Periodic Settlement”Defining proper BOM (Bill of Materials) and Routes for production ordersUsing “make-to-stock” approachProject stock usage

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General Operation Structure of the Company and Our Customization Approach (cont.)• The Solutions (cont.)

Why we did not prefer the other type of manufacturing scenarios, such as:

E i t O dEngineer-to-OrderMake-to-Order

Our production pattern is described as hybrid styleHigh-tech military electronic products are basically produced to stock, and then are assembled according to customers’ preferencespThus, we preferred to use make-to-stock approach, with the support of “project system”Each project resembles a unique customer order

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General Operation Structure of the Company and Our Customization Approach (cont.)• Useful Tips

If you have long lasting production orders and want to record your WIP values with actuals, material ledger is a helpful toolWh t t f ll t k d j t t ti When you want to follow stocks under project segmentation, cost rollup cannot be performed for those types of stocks

It is beneficial to update those kinds of stocks’ standard unit prices via user-defined SAP programs

Slightly different version of MR21Copy the periodic unit price (PUP) of anonymous stocks to py p p ( ) ystandard price of project stocks

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General Operation Structure of the Company and Our Customization Approach (cont.)• Useful Tips (cont.)

Logistics units are always hurried in terms of timely delivery and production speed. They are exposed to miss some transactions or working hour confirmations transactions or working hour confirmations. It is always better to set control points for logistic operations in terms of creating reliable CO reporting

For example: Not allowing full delivery of finished products to stocks from production orders as far as the lacking components are not withdrawn from sub-production orders

t kor stocksBalance between logistic modules and CO modules is crucial

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General Operation Structure of the Company and Our Customization Approach (cont.)• Competing Objectives

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In This Section …

• Steps of period-end closing• How to run material ledger cockpit faster

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Steps of Period-End Closing

• Announcing warning note and closing calendar, by which the final dates for logistic, accounting, and HR operations are set, for all SAP users concerning the period that is going to be closedPredefined regular accounting records are run via recurring • Predefined regular accounting records are run via recurring documents

• The expenses related with acquisition of materials (wages of purchasing departments, insurances, …) are distributed over the materials which are bought during the period that is going to be closedC t l h d i di t ib t d t t ith t t

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• Central overhead is distributed over cost centers with respect to their statistical indicators (e.g., electricity is distributed according to square meter of cost centers)

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Steps of Period-End Closing (cont.)

• Distribution Scheme in Aselsan

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• Straightforward steps are conductedDistributions between cost centersActual cost splitting (KSS2)Actual activity unit price calculation (KSII)

Four types of activity are usedDirect LaborIndirect LaborAmortizationO h d

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OverheadWork in process calculation (KKAO)Cost settlement (CO88)Material costing cockpit is initialized

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• In order to avoid coping with big price differences, it is important to have proper planned activity unit prices

For this reason, it is suggested to apply budgeting process for cost centers and to calculate planned activity unit prices prior cost centers and to calculate planned activity unit prices prior to closing first month operations

• In addition to proper planned activity unit prices, it is good to run cost rollup regularly to have updated standard material prices

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In This Section …

• Steps of period-end closing• How to run material ledger cockpit faster

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How to Run Material Ledger Cockpit Faster

• Parallel processing • Exclude the materials that do not have any stock or movements

from the period-end closingImplement SAP Notes 918903 and 1120562Implement SAP Notes 918903 and 1120562Make an entry in the table CKMLMVADMIN (kkey = period_status_05)

• Set deletion indicator to production orders that are completed to speed up the period-end closing (Transaction = CO78 preprocessing step of archiving)C cles ma slo do n the m lti le el settlement

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• Cycles may slow down the multi-level settlement• Do not run long-lasting background jobs while the cockpit steps

are run• The time required to run the material ledger cockpit decreased by

50%





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In This Section …

• Partial delivery and price limiter logic• The cycle concept and rework process• Other “not distributed” and “not allocated” price differences

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Partial Delivery and Price Limiter Logic

• “Not distributed” variancesVariances that are not considered to calculate periodic unit price (PUP)Sh i li b “ l ti i t ” li i Shown in a line above “cumulative inventory” line in transaction CKM3Price limiter logic (stock coverage check) The quantity that the variance is based on > cumulative inventoryMaterial ledger will only use the proportion of the variance that g y p prelates to the cumulative quantity to calculate the actual cost The rest of the variance will be “not distributed”

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Partial Delivery and Price Limiter Logic (cont.)

• Differences from order settlement = 70.755,41• Cumulative quantity = 26

Price limiter quantity = 27• Price limiter quantity = 27Cumulative delivery of PO 1 = 15Cumulative delivery of PO 2 = 12

• Not Distributed = 2.620,57

12

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• During the material costing cockpit run and after the multi-level price determination step, it is useful to run “CKMVFM-Value Flow Monitor”

• In the extract created by CKMVFM, if you carefully analyze the y , y y yextract, some materials have “price limiter quantity”

You will have a chance to distribute some price differences that were left as “Not distributed” by removing the “price limiter quantity”

• While removing price limiter quantity, it is crucial not to cause big unit price fluctuations in material’s actual unit price

• Post the not distributed price differences of project stocks to assets for not delivered projects and to cost of goods sold (COGS) for delivered projects

Do the same posting process for anonymous stocks with respect to MRP controller (=project)

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• CKMVFM lists all “not distributed” and “not included/not allocated” variances

• Set the “Price Limiter” quantity to zero after analysis of the variances for each material

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The “not distributed” variances are distributed to the cumulative inventory by y ysetting the “Price Limiter” quantity to zero

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Close Production Order Technically on Time

34Do not be late to set status TECO

In This Section …


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The Cycle Concept

• Cycles in the quantity structure occur if specific materials are included in a level in the production process from which the same material is transferred at a higher levelRework orders and transfers between project stocks lead to many • Rework orders and transfers between project stocks lead to many cycles in our system

• In multi-level price determination, an iteration process is used to calculate cycle

• The variances are rolled up from the input to the output again and again in the iteration process until they converge to zero and the fi l lt i bt i d

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final result is obtained• The variances rolled up consist of beginning inventory’s price

differences, differences from order settlement, and multi-level differences of the real materials that are not part of the cycle

The Cycle Concept (cont.)

• The convergence speed is determined by dividing consumption quantity in the cycle by cumulative stocks

• As the ratio is close to 1, the speed is lowTh l th l th bi th t t l lti l l • The slower the cycle converges, the bigger the total multi-level variances may grow

• Trace iteration via program CKMLMV_ITERATION_TRACE while multi-level price determination is running

• Analyze the cycles created for costing period via program ZNEW_CYCLE_ANALYSER (install via SAP Note 892873)

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With cycle:Cycle variance: Beginning inventory’s price diff. + diff. from order settlement + multi-level diff of other material = (-6 216 69 + 57 87 + diff. of other material ( 6.216,69 + 57,87 + 8,34) / 18 = -341,69Convergence speed = 1/18Multilevel price diff. for real material = -361,77PUP = 11,511.76

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Without cycle • Add rework cost to material Add rework cost to material • No movement from and to rework order

PUP = 11,513,98 ≈ PUP(cycle) = 11,511.76

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• Why does cycle create such a big problem for us? When the total rolled up variances are relatively big and the convergence speed is low, the variances calculated by cycle are very big and seem to arise from nothingWhen all struggles, like partial delivery, negative consumption, and cycle occur simultaneously in a period, the price differences enlarge

It is hard to assure audits The governmental R&D incentives are obtained for some projects. Therefore, it is important to distribute price differences to projects correctlyto projects correctly.Produce or buy decisionPeriodic fluctuationThe cycle is cut off and creates “not included’ variances when it does not converge

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The Cycle Concept (cont.)Partial delivery and cycle• Price limiter quantity 26/31• Set price limiter quantity 0• PUP = 124.528,23

If partial delivery and no cycle• Price limiter

quantity 3/29• Realize huge price

difference inCKMVFMCKMVFM

• Not set pricelimiter quantity 0

• PUP would be42.449,39

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• Rework orders are production orders that have the same material as input and output

They have no predefined BOMWh d fi it lit i t i d t th “t t” ti f

Designing Rework Process

When deficit quality is ascertained at the “test” operation of production order, a new step for rework operation is added

• Rework order is needed when a design change is necessary for material. It is more like an engineering change order.

• Check methods to follow the rework process without creating cycles and consequences of these methods from logistics and

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costing perspectives

Designing Rework Process (cont.)

Methods Costing perspective Logistics perspectiveIf production order is still open for material and delivery from the production order is made in

No cycle occurs A new type of operation is needed to separate design change from the production order is made in

recent period, the delivery of material can be reversed and rework operation can be added

design change from regular rework operation

If the need for the design change is determined while

No cycle occurs. Cost for design change is

Material requirements planning is as expected

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change is determined while producing upper-level material, rework order can be created and settled to the production order of upper-level material

for design change is passed to upper-level material.

planning is as expected

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Designing Rework Process (cont.)

Methods Costing perspective Logistics perspective

An internal order can be used to collect rework cost. The i t l d i ttl d t

No cycle occurs The rework material is kept in a separate

h Th internal order is settled to an account and then transfers cost from account to material. The rework material is not consumed to the internal order.

warehouse. The material requirements planning is not acceptable.

Open rework order with a new Cycles occur; The material

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WBS used only for rework however, other struggles don’t occur simultaneously. Periodic unit price is correct.

requirements planning for WBS is incorrect

In This Section …


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• The system uses a fallback strategy during price determination to avoid a negative periodic unit price

• The fallback strategy is active by default for single-level price determination

Negative Periodic Unit Price (PUP) for Materials

determination• It must be activated for multi-level price determination• It is beneficial to check the postings of these materials

It might be appropriate to reverse the problematic postings and post them in a correct wayIt might be appropriate to use transaction MR22 (debit/credit

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g pp p (material)In the next period, it might be appropriate to remove the manual posted value

Negative Periodic Unit Price (PUP) for Materials (cont.)

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MR22

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Not Included/Not Allocated Price Differences

• Total price and exchange rate differences that could not be allocated to single-level consumption either by multi-level price determination or the revaluation of consumption Shown in its own line below the “cumulative inventory” line in • Shown in its own line below the “cumulative inventory” line in transaction CKM3

Negative consumptionWIP production/productionMulti-level price determination is not carried for upper-level product in BOM – Goods receipt from production order with missing components

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Negative Consumption — New Movement Type

Avoid negative consumptions in following periods

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WIP Production/Production

04/2011 Reverse of consumption movement06/2011 Consumption movement01/2012 Production of upper material If the movement in 04/2011 was not made the If the movement in 04/2011 was not made, the movement in 06/2011 would be for WIP production, and price differences would be allocated

Avoid negative consumptions in previous periods

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Goods Receipt from Production Order with Lacking Components

Production PlannedDeliveryQuantity

Total Delivery Quantity

Last delivery period

Req. Quan.

Quan. Withd.

1 6 6 05/2011 12 121 6 6 05/2011 12 12

2 7 6 04/2011 14 14

Don’t have goods receipts from production order with lacking components

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1

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Additional Resources

• https://websmp109.sap-ag.de/notes *SAP Note 908776 – Not included/not allocated and not distributedSAP Note 579216 Fallback strategy in material price SAP Note 579216 – Fallback strategy in material price determinationSAP Note 980475 – Period-end closing processes too many materials

• http://help.sap.com/saphelp_470/helpdata/en/4c/013f188c7a11d38ab40000e83234f3/frameset.htm

Act al costing/material ledgerActual costing/material ledger• Subbu Ramakrishnan, Manufacturing Finance with SAP ERP

Financials (SAP PRESS, April 2009). • Janet Salmon, Controlling with SAP – Practical Guide (SAP

PRESS, August 2011). 53* Requires login credentials to the SAP Service Marketplace

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7 Key Points to Take Home

• Analyze your business processes in depth and choose the right tools and customization approach in SAP

• Catch the right balance between costing and logistics modules• There is always space to make material ledger work faster• There is always space to make material ledger work faster• If you do not have smooth and well-defined processes material

ledger might create undesired price fluctuationsFortunately, there are some fine tunings in order to come up with reliable actual material unit price

• Do not underestimate the power of planning in terms of BOM, routes, planned activity unit prices, and material standard unit , p y p ,price

• If actual WIP is required, material ledger is the best solution• If necessary, analyze the processes that create the cycle and

redesign the processes to suppress the cycle’s effect

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Your Turn!

aselsana company of Turkish Armed Forces Foundation

How to contact us:Sibel Kaplan: [email protected]

Mesut Karaman: [email protected]

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Continue the conversation! Post your questions in the Financials Forum on Insider Learning Network*

*bit.ly/FinancialsForum

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DisclaimerSAP, R/3, mySAP, mySAP.com, SAP NetWeaver®, Duet®, PartnerEdge, and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG in Germany and in several other countries all over the world. All other product and service names mentioned are the trademarks of their respective companies. Wellesley Information Services is neither owned nor controlled by SAP.

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actual costing process

Documents

aselsan copes

large scale electronic

costing perspectives1

actual costing process

concept of actual costing

annual sales

end closing

material ledgermaterial