Subcontracting in Purchasing SAP MM

Subcontracting:

Subcontracting is one of the manufacturing strategy by which a company decides to outsource some or all of its production operations to a vendor. In SAP, Subcontracting is one of the special procurement type in the SAP MM.

Subcontracting can be defined as the processing of the material by the external supplier to get the final products.

In this process, a manufacturing company provides raw materials/ components to a subcontracting vendor. The vendor in turn process these components to turn them into end products. This final product is then used by the manufacturing company to carry out the rest of the operations.

The process involved given below:

1. We order the final product using a subcontract order. The components that the vendor needs to be manufacture or process the final product are specified in the purchase order. The individual component items can either be: entered manually or copied from the existing Bill of Material
2. In Inventory Management, the components are posted to the stock of material provided to vendor. The components are supplied to the vendor.
3. The vendor performs its service and delivers the ordered material (the final products). The consumption of the components is posted.
4. If, after the goods receipt has been posted, the vendor informs you that a larger or smaller quantity of the components was actually consumed than planned in the purchase order, you must make an adjustment.
5. The vendor charges for his or her service. The invoice is posted in Invoice Verification.

Process of Subcontracting:

1. Create Subcontracting Info Record (T. Code – ME11) Optional.
2. Create Subcontracting Purchase Order (T. Code – ME21N) with Item Category “L”. Maintain Components manually or Explode BOM in the Item at Material Data Tab in the Purchase Order
3. Issue material to Subcontracting Vendor (T. Code – MIGO or MB1B) with reference to Purchase Order using Movement Type 541. No Accounting Document generates here.
4. If we are using T. Code – ME2O for issuing components to vendor, then system will create Outbound Delivery. And then Go To Change Delivery (T. Code – VL02N) to do PGI, which will generate Goods Issue document using Movement Type – 541.
5. Create Goods Receipt (T. Code – MIGO) with reference to Purchase Order using Movement Type 101 for final product and 543 for Components
6. Create Invoice Receipt (T. Code – MIRO) for Subcontractor.

Process of Subcontracting with Challan (CIN):

1. Material Master should be available in system for both Finished and Raw Materials (T. Code – MM01). Components must have stock in the system
2. Maintain Subcontractor Vendor (T. Code – XK01)
3. Maintain Excise Rate Maintenance (T. Code – J1ID). Chapter Id, Material and Chapter Id, Assessable Value, Cenvat Determination, Vendor Excise Details
4. Create Subcontracting Purchase Order (T. Code – ME21N) with Item Category “L”. Maintain Components manually or Explode BOM in the Item at Material Data Tab in the Purchase Order
5. Issue material to Subcontracting Vendor (T. Code – MIGO or MB1B) with reference to Purchase Order using Movement Type 541. No Accounting Document generates here.
6. Create Subcontracting Challan (T. Code – J1IF01) with reference to Material Issued Document.
7. Create Goods Receipt (T. Code – MIGO) with reference to Purchase Order using Movement Type 101 for final product and 543 for Components. Refer the Challan here and assign it with GR
8. Reconcile Challan (T. Code – J1IFQ) with reference to Goods Receipt and reconcile the quantity.
9. Create Invoice Receipt (T. Code – MIRO) for Subcontractor Vendor.

Accounting Entries

• At the time of Goods Receipt

          Inventory (Finished Goods) A/C                            Dr

          GR/ IR Clearing A/C                                                               Cr

         Subcontracting Charges A/C                  Dr

        Subcontracting Stock in Change A/C                     Cr

        Consumption of Component A/C                            Dr

       Inventory of Component A/C                                  Cr

• At the time of Invoice Receipt

        GR/IR Clearing A/C                                Dr

         Vendor Payable A/C                                               Cr

Subcontracting with GST

After GST Implementation, there is a change in the Subcontracting Configuration and Process.

As per GST law, we can run Subcontracting process in one of the following ways:

• With Challan
• Without Challan (with Invoice)

Subcontracting Configuration for GST

• Assign Sales Organization, Distribution Challan and Division should be maintained for Supplying Plant from which the components are to be delivered. Table view – V_001W_IV, T. Code – SM30
• New Billing Type define – ZSN SC Challan (No Taxes), ZSP – SC Invoice (with Taxes)
• Maintain View J_1IG_V_SUBINV through Code – SM30 – Company Code, Sales Type, Billing Type, Billing Class – ZSN for Create Challan and ZSP for Create Invoice
• Use the existing SD Pricing Procedure or define a new Pricing Procedure for Subcontracting process
• Set up “Delivery to Billing Type” Copy Control. Copied with Billing Type “FX” and Sales Order “OR”

Steps for Subcontracting Process:

• Material Master should be available in system for both Finished and Raw Materials (T. Code – MM01). Components must have stock in the system. Extend the Sales View for the Raw Materials or Components
• Create Customer (T. Code – XD01) with necessary details as per Subcontractor Vendor
• Maintain Subcontractor Vendor (T. Code – XK01) and assign Customer in the Vendor Master data.
• Maintain Sales Condition Record for Material Pricing (T. Code – VK11)
• Create Subcontracting Info Record (T. Code – ME11) (Optional)
• Create Subcontracting Purchase Order (T. Code – ME21N) against Subcontracting Vendor with Item Category L. This will activate the “components” button in the Material data tab in the Item of the Purchase Order. Explode BOM or maintain the components manually and with zero tax
• Enter Transfer Posting with reference to Subcontracting Purchase Order through (T. Code MIGO)using 541 Movement type. This will issue the material to the Subcontractor. No Accounting Document generate at the time of Transfer Posting. This will update the stock of the material in the Stock Provided to Vendor in Stock Overview
• Create Subcontracting Challan with reference of Material Issue Document through T. Code -J1IGSUBCON. Then create Challan using “With Challan”, this will generate the Billing Document (ZSN – SC Challan Document in SD). No taxes have been maintained in the Challan Document. Any changes can be done in the Billing Document by using T. Code – VF02.
• When Vendor sends the materials, we post the Goods Receipt in the system using T. Code – MIGO with reference to Subcontracting PO having Movement Type 101 for final or end products and Mov. Type 543 for Components. Consumption of Components material from the Vendor Stock and Stock update for the Final Products.

Accounting Entries:

BSX – Stock A/C for Assembly/ Semi-Finished  – Dr.                          11000

BSV – Change in Subcontracting Stock    Cr.          11000-

FRL – Subcontracting Charges     Dr.          10000

WRX – GR/IR Clearing (Semi-Finished) A/C           Cr.          10000-

BSX- Stock A/C for Components                                Cr.          1000

GBB-VBO Consumption A/C for Components     Dr.          1000

Stock – Semi finished	Dr	65000	BSX	Inventory Posting (needs the cost elements
Consumption of Semi	Cr	65000	BSV	Change in stock account
Contract Expenses	Dr	60000 (Subcontracting Charges)	FRL	External activity (needs the cost elements
GR/IR Semi finished	Cr	60000- (Subcontracting Charges/PO price)	WRX	GR/IR Clearing Account
Consumption of Raw Mat	Dr	5000 (ROH Mat Price)	GBB-VBO	Offestting entry for inventory posting (needs the cost elements)
Stock – Raw Materials	Cr	5000 (ROH Mat Price)	BSX	Inventory Posting

If the material having Standard Price (S), then Price Difference A/C will also comes in picture.

This depends on Configuration: SPRO->MM->Inventory Management and Physical Inventory-> Goods Receipt-> Price Difference for Subcontract Orders at Goods Receipt

In this step, you configure for each valuation area whether price differences are generated for a Subcontract order at the time of the goods receipt if the manufactured material is managed at Standard price and the standard price varies from the receipt value (externally performed service+value of components+delivery costs)

Example:

Semi finished 400 (Standard Price), Subcontracting Charges 250 and Components 100

-> Without Price Differences

Stock A/C Semi-finished       Dr       400+       BSX

Stock Change                       Cr       400-        BSV

Ext. Service A/C                    Dr       250         FRL

GR/IR Clearing A/C              Cr        250-        WRX

Components Stock A/C        Cr        100          GBB-VBO

Comp. Consumption A/C      Dr         100-        BSX

-> With Price Differences

Stock A/C Semi-finished       Dr       400+       BSX

Stock Change                       Cr       350-        BSV

Price Difference                    Cr         50-         PRD

Ext. Service A/C                    Dr       250         FRL

GR/IR Clearing A/C              Cr        250-        WRX

Components Stock A/C        Cr        100          GBB-VBO

Comp. Consumption A/C      Dr         100-        BSX

• Reconcile Challan with reference to goods receipt material document through T. Code – J1IGRECON. Select Manual and enter the Challan No. and Save the Data.
• Post Invoice Receipt for Subcontracting Vendor for the service charges paid to the Subcontractor through T. Code – MIRO with reference to Subcontracting PO

Accounting Entries:

GR/IR Semi Finished Clearing A/C             Dr.          60000

IGST or SGST/CGST Taxes A/C                    Dr.          5400, 5400 (CGST/SGST) or 10800 (IGST)

Vendor A/C        Cr.          70800

Scrap in Subcontracting

There are two cases of handling the scrap in Subcontracting Process

Taking back the scrap from Subcontractor or not taking the scrap generated from Subcontractor.

In first case, maintain the Scrap material as By-products in negative value in the BOM or PO. Then take the material in the stock while doing Goods Receipt using 545 Movement Type for Scrap. This material updated int he “Stock Provided to Vendor.” Then do Goods Receipt to update the stock in the Unrestricted using 542 Mov. Type.

In second case, define that the Scrap % in material master & BOM. Then do the subsequent adjustment through MIGO.

Accounting Entries for Scrap:

Stock A/C for Scrap      Dr      (BSX)

Consumption from Subcon. Stock/ Inv. Change A/C        Cr     (GBB-VBO)

Cancel Challan

According to SAP Notes 2459411 – GST IN: Cancel challan created using “Create Challan” Option in J1IGSUBCON

Q. How to cancel pro forma invoice (Challan) created using “Create Challan” option in T. Code – J1IGSUBCON?

Ans: 1. Go to T. Code – VF02 and enter the pro forma invoice number

2. Go to “Billing Document” menu and click on “Complete”

3. For this challan, J_1IG_SUBCON-STATUS field will be updated as “R”

Important Notes:

*Challan Status in the SAP system

F      Fully Reconciled

P      Partially Reconciled

C      Challan Created

D     Document Reversed

R    Challan Reversed

I      Invoice Created

S      Invoice Reversed

*Company can sends Material directly to the Subcontractor without payment to tax

*Company can sends material to Subcontractor without bringing them in the premises and can still avail the credit of tax paid on such inputs or capital material

*Inputs or Capital materials sends to a Subcontractor need to be returned within 1 yr or 3 yrs, respectively, on the date on which materials send to Subcontractor.

*Subcontractor can sends to another job-worker for processing, dispatch the goods to any of the place without payment of tax, remove the goods on payment of tax within India and without payment of tax for export outside India.

*the input or capital goods shall be send to the Subcontractor under the cover of the Challan issued by the Company

*the responsibility of keeping proper account for the inputs and capital should be lie under the principal

*Under Sec. 19 of the CGST Act, 2017 provides that the Company shall be entitled to take the credit of input tax paid on material send to the Subcontractor for job work. The principal can take the credit when the material send to Subcontractor, need not to wait till the material to be return from Subcontractor.

*Under Sec. 143(5) of the CGST Act, 2017, waste generated at the premises of the job-worker may be supplied directly by the registered job-worker from his plac of business on payment of tax or such waste may be cleared by the principal, in case the job-worker is not registered.

*Transitional Provision- Inputs, as such, or partially processed inputs which are sent to a Subcontractor prior to introduction of GST under the provisions of existing law (Central Excise) and if such goods are returned within 6 months from the appointed day (the day on which GST will be implemented) no tax would be payable. If such goods are not returned within prescribed time, the input tax credit availed on such goods will be liable to be recovered. For the purpose of these provisions during the transitional period, the manufacturer and the job-worker are required to declare the details of such goods sent/ received for job-work in prescribed format GST TRANS-1, within 90 days of the introduction of GST.