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 Dr 65000 BSX Inventory Posting (needs

finished the cost elements

Consumption of Cr 65000 BSV Change in stock account

Semi

Contract Dr 60000 (Subcontracting FRL External activity (needs the

Expenses Charges) cost elements

GR/IR Semi Cr 60000- (Subcontracting WRX GR/IR Clearing Account

finished Charges/PO price)

Consumption of Dr 5000 (ROH Mat Price) GBB- Offestting entry for

Raw Mat VBO inventory posting (needs

the cost elements)

Stock – Raw Cr 5000 (ROH Mat Price) BSX Inventory Posting

Materials

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.