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SAP Subcontracting involves sending components to a vendor to manufacture an assembly for you. The vendor returns the completed assembly, and during goods receipt GR, the components are issued from subcontract inventory. Subcontracting is a purchasing process with the manufacturing ocurring at the vendor location.
Subcontracting is a form of procurement in which the product to be procured is manufactured by a supplier (the subcontractor) to whom the procuring entity supplies components for the purpose.
If a company only uses subcontracting, there is no on-site manufacturing involved, and no production or process orders, only purchase orders.
The question of how to add overhead is often asked in subcontracting. You typically add overhead to manufacturing orders via overhead costing sheets. No manufacturing orders are involved in subcontracting, so how do you add overhead? It depends on your overhead cost flow and the valuation variant cofiguration.
To guide you set up your SAP subcontracting and overhead correctly our ERPCorp SAP Experts are available to assist you analyze and understand your cost flows and valuation variant setup.
The special procurement type in the MRP 2 view identifies a subcontract material.
You maintain a material master view with Transaction MM02 or via menu path:
Logistics • Production • Master Data • Material Master • Material • Change • Immediately
Navigate to the MRP 2 tab to display the screen in Figure 1.
Figure 1: SAP Subcontracting Special Procurement Type 30
Right-click the Special procurement field and select Possible Entries to display a list of special procurement types as shown. MRP searches for a subcontract purchasing info record and creates a purchase requisition or purchase order for a subcontract vendor.
You create a subcontract purchase order with Transaction ME21N or by following menu path:
Logistics • Materials Management • Purchasing • Purchase Order • Create
Enter subcontract purchasing information to display the screen shown in Figure 2.
Figure 2: SAP Subcontract Purchase Order Line Item
You indicate that the material is to be procured by subcontracting by entering item category L (third column) when you create the purchase order line item. When you press Enter after entering a subcontract item category, two new icons appear in the Material Data tab of the item details as shown in Figure 3.
Figure 3: SAP Subcontract Components and Explode BOM in Material Data Tab
Click the Components icon on the right to display a screen that allows you to enter the subcontract components you send to the vendor for processing into finished goods. You can create a bill of material (BOM) for the subcontract components to automatically populate this screen.
You monitor stocks issued to a subcontract vendor with Transaction ME2O. From this screen, you determine the status of subcontract stock. The components you provided to the subcontractor are managed as stock provided to vendor. You carry out a transfer posting from unrestricted stock to the stock of material provided to vendor. Components in a subcontract order that are consumed can only be debited from the stock of the material provided to the particular supplier.
You post the GR for the end product with reference to the subcontract order item. At GR, a consumption posting for the components is made from the stock of material provided to vendor. For each GR item, the system copies the components with their quantities as goods issue items. If the vendor consumed a different quantity than you planned in the purchase order, you adjust the component quantity at GR.
Business function LOG_MM_OM_1 triggers the creation of a CO production order to mirror the purchase order item to give you more transparency into subcontracting costs. CO production orders are like production orders but without a BOM or a routing for costing purposes only. They are typically created with Transaction KKF1 with reference to an order type, material, and plant.
Now that we’ve reviewed the subcontracting process, let’s examine delivery costs.
You can read more about outsourced manufacturing in this blog by Ross Christoph
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An activity type identifies activities provided by a cost center to manufacturing orders. The secondary cost element associated with an activity type identifies the activity costs on cost center and detailed reports
An allocation structure allocates the costs incurred for a sender by cost element or cost element group, and it is used for settlement and assessment. An assignment maps a source cost element group to a settlement general ledger account.
While there can only be one cost center standard hierarchy, you can create as many alternative hierarchies as you like. You create an alternative hierarchy by creating cost center groups
Automatic account assignment allows you to enter a default cost center per cost element within a plant with Transaction OKB9.
Availability control enables you to control costs actively by issuing warnings and error messages when costs are incurred.
A bill of material (BOM) is a structured hierarchy of components necessary to build an assembly. BOMs together with purchasing info records allow cost estimates to calculate material costs of assemblies.
You use the controlling area currency for cost accounting. You specify the controlling area currency when defining the controlling area in customizing for Controlling . You can assign more than one company code with different currencies to a controlling area.
A cost center is master data that identifies where the cost occurred. A responsible person assigned to the cost center analyzes and explains cost center variances at period end.
A cost component identifies costs of similar types, such as material, labor, and overhead costs by grouping together cost elements in the cost component structure.
Cost component groups allow you to display cost components in standard reports. In the simplest implementation, you create a cost component group for each cost component and assign each group to a corresponding cost component. You assign cost component groups as columns in cost estimate list reports and costed multilevel BOMs.
The cost component split is the combination of cost components that makes up the total cost of a material. For example, if you need to view three cost components (material, labor, and overhead) for your reporting requirements, the combination of these three cost components represents the cost component split.
You define which cost components make up a cost component split by assigning them to a cost component structure. Within the cost component structure, you assign cost elements and origin groups to cost components.
Each cost component is assigned to a cost component view. When you display a cost estimate, you can choose a cost component view, which filters the cost components displayed in the cost estimate.
Cost elements are included as part of a general ledger account. Primary cost elements identify external costs, while secondary cost elements identify costs allocated within controlling, such as activity allocations from cost centers to manufacturing orders.
A cost estimate calculates the plan cost to manufacture a product or purchase a component. It determines material costs by multiplying BOM quantities by the standard price, labor costs by multiplying operation standard quantities by plan activity price, and overhead by costing sheet configuration.
A costed multilevel BOM is a hierarchical overview of the values of all items of a costed material according to the material’s costed quantity structure (BOM and routing). You display a costed multilevel BOM on the left side of a cost estimate screen. You can also view a costed multilevel BOM separately with Transaction CK86_99.
Costing BOMs are assigned a BOM usage of costing and are usually copied from BOMs with a usage of production. You can make adjustments to costing BOMs if you require them to be different from production BOMs. With system-supplied settings, standard cost estimates search for costing BOMs before production BOMs.
The costing lot size should be set as close as possible to actual purchase or production quantities to reduce lot size variance. Unfavorable variances may result if you create a production order for a quantity that is less than the costing lot size. You need setup time to prepare equipment and machinery for production of assemblies, and that preparation is generally the same regardless of the quantity produced. Setup time spread over a smaller production quantity increases the unit cost. This also applies to externally procured items because vendors typically quote higher unit prices for smaller quantities.
A costing run is a collective processing of cost estimates, which you maintain with Transaction CK40N.
A costing sheet summarizes the rules for allocating overhead from cost centers for cost estimates, product cost collectors, and manufacturing orders. The components of a costing sheet include the calculation base (group of cost elements), overhead rate (percentage rate applied to base), and credit key (cost center receiving credit).
The costing type determines if the cost estimate can update the standard price.
The costing variant contains information on how a cost estimate calculates the standard price. For example, it determines if either the purchasing info record price is used for purchased materials, or an estimated price is manually entered in the Planned price 1 field of the Costing 2 view.
The currency type identifies the role of the currency such as local or global.
Demand management involves planning requirement quantities and dates for assemblies, as well as defining the strategy for planning and producing/procuring a finished product.
Dependent requirements are caused by higher-level dependent and independent requirements when running MRP. Independent requirements, created by sales orders or manually planned independent requirement entries in demand management, determine lower-level dependent material requirements.
Detailed reports display cost element details of manufacturing orders and product cost collectors. You can drill down on cost elements to display line-item reports during variance analysis.
You maintain distribution rules in settlement rules in manufacturing orders and product cost collectors.
As of SAP S/4HANA release 2022, event-based processing is available, where goods movements and confirmations represent events that trigger the calculation of overhead according to the costing sheet. Then, depending on the status of the order, this triggers either the posting of a journal entry for the work in process (WIP) or the cancellation of any existing WIP and the calculation of production variances.
External processing of a manufacturing order operation is performed by an external vendor. This is distinct from subcontracting, which involves sending material parts to an external vendor who manufactures the complete assembly via a purchase order.
A goods issue is the movement (removal) of goods or materials from inventory to manufacturing or to a customer. When goods are issued, it reduces the number of stock in the warehouse.
GR/IR is the SAP process to execute the three-way match- purchase order, Material Receipt, as well as vendor invoice. You use a clearing account to record the offset of the Goods Receipt (GR) and Invoice Receipt (IR) postings. As soon as completely processed, the postings in the cleaning account balance.
An internal order monitors costs and revenue of an organization for short- to-medium-term jobs. You can carry out planning at a cost element and detailed level, and budgeting at an overall level with availability control.
Long-term planning allows you to enter medium- to longer-term production plans, and simulate future production requirements with long-term MRP. You can determine future purchasing requirements for vendor RFQs, update purchasing info records, and transfer planned activity requirements to cost center accounting.
Margin Analysis is the refined version of Account-based COPA. The Universal Journal combines financial and managerial accounting and directly records all dimensions, including custom fields. Margin Analysis provides consistent financial information without any reconciliation needs along with a financial audit trail. All innovations developed for the Universal Journal are immediately available within Margin Analysis. A consistent approach ensures common usage of ledgers, currencies, valuations, predictions, and simulations, as well as their availability in planning and reporting.
Master data is information that stays relatively constant over long periods of time. For example, purchasing info records contain vendor information such as a business name, which usually doesn’t change.
A material master contains all the information required to manage a material. Information is stored in views, each corresponding to a department or area of business responsibility. Views conveniently group information together for users in different departments, for example, sales and purchasing.
A process order is a manufacturing order that is used in process industries. A master recipe and materials list are copied from the master data to the order. A process order contains operations that are divided into phases. A phase is a self-contained work-step that defines the detail of one part of the production process using a primary resource.
In process manufacturing, only phases are costed, not operations. A phase is assigned to a subordinate operation and contains standard values for activities, which are used to determine dates, capacity requirements, and costs.
A procurement alternative represents one of a number of different ways of procuring a material. You can control the level of detail in which the procurement alternatives are represented through the controlling level. Depending on the processing category, there are single-level and multilevel procurement alternatives. For example, a purchase order is single-level procurement, while production is multilevel procurement.
A production order is used for discrete manufacturing. A BOM and routing are copied from master data to the order. A sequence of operations is supplied by the routing, which describes how to carry out work-steps.
An operation can refer to a work center at which it is to be performed. An operation contains planned activities required to carry out the operation. Costs are based on the material components and activity price multiplied by a standard value.
Product drilldown reports allow you to slice and dice data based on characteristics such as product group, material, plant, cost component, and period. Product drilldown reports are based on predefined summarization levels and are relatively simple to setup and run.
Production variance is a type of variance calculation based on the difference between net actual costs debited to the order and target costs based on the preliminary cost estimate and quantity delivered to inventory. You calculate production variance with target cost version 1. Production variances are for information only and are not relevant for settlement.
A production version determines which alternative BOM is used together with which task list/master recipe to produce a material or create a master production schedule. For one material, you can have several production versions for various validity periods and lot-size ranges.
When raw materials are valued at the standard price, a purchase price variance will post during goods receipt if the goods receipt or invoice price is different from the material standard price.
A profit center receives postings made in parallel to cost centers and other master data, such as orders. Profit Center Accounting (PCA) is a separate ledger that enables reporting from a profit center point of view. You normally create profit centers based on areas in a company that generate revenue and have a responsible manager assigned.
Costing-based profitability analysis enables you to evaluate market segments, which can be classified according to products, customers, orders (or any combination of these), or strategic business units, such as sales organizations or business areas concerning your company’s profit or contribution margin.
Transaction ME20 ia a subcontract stock overview and requirments list. You enter a material or vendor and you will see the stocks and the requirements. Based on this info you can create deliveries to supply stock to the vendor as needed.
A purchasing info record stores all of the information relevant to the procurement of a material from a vendor. It contains the Purchase Price field, which the standard cost estimate searches for when determining the purchase price.
A purchase order is a legal contract which binds the supplier to supply materials or services and the purchaser to pay after receiving the materials or services.
A purchase requisition is a request or instruction to Purchasing to procure a quantity of a material or service so that it is available at a certain point in time. There is no legal requirement to carry out the purchase until a purchase order is created. You can record the purchase requisition in commitment management because it may lead to actual expenditure in the future.
The procurement type in the MRP 2 view defines the material as assembled in-house, purchased externally, or both:
The special procurement type can be used to override the procurement type.
The Special Procurement Type field found immediately below the procurement type in the MRP 2 view is used to more closely define the procurement type. For example, it may indicate if the item is produced in another plant and transferred to the plant you are analyzing. Special procurement type 30 indicates the material is procured by subcontracting.
A standard hierarchy represents your company structure. A standard hierarchy is guaranteed to contain all cost centers or profit centers because a mandatory field in cost and profit center master data is a standard hierarchy node.
The standard price in the Costing 2 view determines the inventory valuation price if price control is set at standard (S). The standard price is updated when a standard cost estimate is released. You normally value manufactured goods at the standard price.
You supply component parts to an external vendor who manufactures the complete assembly. The vendor has previously supplied a quotation, which is entered in a purchasing info record with a category of subcontracting.
Target costs are plan costs adjusted by the delivered quantity. For example, if the quantity delivered to inventory is 50% of the plan quantity, target costs are calculated as 50% of the plan costs.
The valuation variant is a costing variant component that allows different search strategies for materials, activity types, subcontracting, and external processing. For example, the search strategy for purchased and raw materials typically searches first for a price from the purchasing info record and then Planned Price 1.
Variance analysis involves comparing actual with target costs and dividing the balance into variance categories.
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John Jordan is a seasoned SAP consultant with 20+ years of experience in SAP S/4HANA Controlling. As Lead SAP S/4HANA Controlling Consultant at ERP Corp, he specializes in seamless transitions to SAP S/4HANA, focusing on Product Costing, Material Ledger, and Margin Analysis.
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