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Expense Analysis and Splitting inManufacturing Cost Centers
Introduction
In SAP cost center works as a cost responsibility center, where
all the expenses andcosts are stored and analyzed for the purpose
of management decision making. Thecost could be fixed or variable
in nature. The difference between variable and fixedcosts can be
made in various ways in product costing in CO module. Fixed
costsrepresent the static costs incurred by the organization, which
dont change on thebasis on volume of manufacturing activities,
which remain constant irrespective ofproduction activities, e.g.
rent for the premises, salaries of office staff etc. On theother
hand, variable cost varies based on the level of production
activities; ifproduction activities increase then variable costs
also increase like electricityconsumed, raw material cost etc.
However all the variable costs dont vary in directproportion to
quantity of goods produced.
In this document will try to define how expense analysis and
splitting of cost is donein manufacturing cost centers.
From controlling prospective, fixed costs remain constant
regardless of operatingactivities, but if this factor changes,
variable costs will fluctuate. Basically rawmaterial costs
represent variable cost, but in this document main focus will be
givento distinguishing between fixed and variable activity
cost.
The segregation between fixed and variable cost is optional and
is derived from theconfiguration and master data in cost center
accounting and overhead accounting.
Activity Price:
There are different methods that could be used in cost center
accounting to determinethe activity price. The simple way is to
manually enter Fixed and Variable Activitycost (KP26). However
there are other methods used in Cost center Planning andBudgeting
that automatically calculate the fixed and variable activity price.
Here thefocus will be given on Planning and Budgeting activity and
automatic calculation ofplan activity rate in cost center. This
method aggregates planned costs by costelement and capacity by plan
units to calculate the activity price. Activity independentcosts
are segregated among different activities based on Splitting
Structure, whileactivity dependent costs are directly used for the
purpose of variable activity ratecalculation.
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Fixed Activity Cost:
In product costing all those costs, which dont vary based on the
activities inmanufacturing will represent fixed cost. In a
manufacturing cost centers there may betwo or more activities
performed. To calculate the activities rate, the fixed costs
aredistributed to various activities on the basis of Splitting
Structure defined for costcenter.
Variable Activity Cost:
Variable activity cost are those costs which directly depend
upon the activity andfluctuate based on increase or decrease in
manufacturing activities. In SAP variableactivity costs are
directly linked to the respective activity.
Activity Prices: Fixed and Variable Split
In Cost Center Accounting dividing the cost between Fixed and
Variable requiresappropriate split to be made in the cost entered
for the activity. The process isdescribed below:
i. Variable cost would be planned at activity level and expenses
should bemaintained at cost element in the manufacturing cost
center by assigning activityand cost element combination. In other
words, the expenses should be planned onactivity type at the time
of primary cost planning (KP06). Then the variableactivity rates
are calculated on total cost planned for activity divided by
totalquantity of activity planned at that cost center (i.e.
capacity in KP26).
ii. Fixed cost would be planned independent of activity type.
These costs aremaintained in KP06 at cost element level on
manufacturing cost center. Then thefixed costs are distributed on
various activity types on the basis of splittingstructure defined
at OKEW. In Splitting Structure we define the rules, how thefixed
cost will be distributed to activities. For the purpose of this
document, wecalculate the split of fixed cost on the basis of
Capacity maintained in KP26.
To illustrate the scenario in more details, I have taken a
hypotheticalexample.
Supposed there is a manufacturing cost center Engine Plant, in
an Automobileindustry, having two activities Cutting and
Maintenance for the purpose ofcreating engine parts. Before
starting any batch of material to process, the machineneeds to be
maintained to be ready for the process, for which it required to
usecleaning oil to clean the machine and then the next process
start i.e. cutting the ironpiece into the desired engine part.
Assume Cleaning oil cost as variable cost for the purpose of
Maintenanceactivity, which is a manual process, and Electricity
cost as variable cost for the
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purpose of Cutting activity, which is automatic process. Other
costs are assumedto be fixed for the purpose of activity price
calculation.
There are three planned fixed expenses in engine plant,
Depreciation on Machine &Equipment, Depreciation on Building
and Salary. The variable cost for Cuttingactivity (defined as RRRR
in SAP) is Electricity charges and for Maintenanceactivity (defined
as SSSS in SAP) is Oil cost.
Cost center: Engine Plant
Activity ExpensesGL
Account
FixedCost(USD)
VariableCost(USD)
Depreciation onMachine 600001 10000Depreciation onBuilding
600002 20000Salary 600003 15000
Cutting(RRRR) Electricity charges 600004 14000Maintenance(SSSS)
Oil cost 600005 15000
Maintain the Plan Activity and Capacity for the different
activities on cost centerEngine Plant
Configuration of Splitting Structure
For the purpose of splitting of fixed cost to the different
activities assigned to costcenter, we need to define a Splitting
Structure. It includes the rules which should befollowed to
distribute the fixed cost to different activities. For the purpose
of Planningand Budgeting this is an important configuration.
Transaction: OKEW (Assign the new cost center to the splitting
structure)
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Specify Cost center and Fiscal year
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Press
Double click on splitting structure for Manufacturing cost
center (FF).
Here the splitting is defined that all the cost elements on
manufacturing cost centerwill be distributed to activities on the
basis on Plan Capacity.
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Master data requirement Activity type (TransactionKL01)
Here we can define the manufacturing activities Cutting and
Maintenance in SAP.
Here activity type RRRR represents Cutting activity. The
activity unit is defined asHour. For the purpose of assigning an
activity to a manufacturing cost center so thatit can be used in
price calculation, the cost center categories should be F
i.e.manufacturing and production cost center.
Price indicator 2 indicates that to calculate Activity Plan
price, system will usecapacity.
Define Plan Activity (transaction KP26):
Assume that the total capacity of Cutting (RRRR) and Maintenance
(SSSS) are 700and 300 hours respectively. For the purpose of
splitting fixed cost on differentactivities, maintain the rules as
Capacity, so the splitting rule will follow plancapacity ratio of
(7:3) to distribute fixed costs to Cutting and Maintenance
activities.
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In KP26 maintain the capacity as 700 Hours and 300 Hours for
Cutting (RRRR) andMaintenance (SSSS) activities.
Define Plan Expenses in KP06 as fixed and variabledepending on
activity.
KP06 is used for the purpose of primary expenses planning in
cost center accounting.Here we can define both activity dependent
and activity independent cost. For thepurpose of activity dependent
cost (i.e. variable cost), need to define expenses onactivity at
cost element level. In the screen below variable costs are:
Expenses on Activity RRRR (i.e. Cutting) at Cost element 600004
(i.e.Electricity charges)
Expense on Activity SSSS (i.e. Maintenance) at Cost element
600005 (i.e. OilCost)
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Plan Cost Split KSS4
For the purpose of splitting fixed cost among different
activities on manufacturingcost center, we need to run Plan Cost
Split, which will distribute the fixed cost todifferent activities
assigned to a cost center in KP26 transaction based on the
ruledefined in splitting structure. Here for the purpose of
simplicity we have defined thesplitting rule based on capacity to
distribute all fixed cost. The splitting rule isdefined in OKEW
transaction.
Run transaction KSS4, then the below screen will appear, select
the below details:
Cost center/ Cost center group (for which we want to use Plan
cost splitting) Version Period/ Financial Year (generally full
Budget year is selected)
First execute the Plan Cost splitting with test run, if no
errors occur then executewithout test run.
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Total Plan fixed cost of 45000 has been distributed to two
activities Cutting (RRRR)and Maintenance (SSSS) based on 7:3 ratio,
i.e. on the basis of Capacity maintained inKP26. Plan cost split
only distributes Fixed Cost to activities.
Plan Activity Price calculation KSPI
After Plan cost split, the next step if Plan price calculation.
Plan price calculationbasically helps to calculate Plan Activity
Rate. The activity rate could be in twoparts, i.e. Fixed Activity
rate and Variable Activity rate.
Fixed Activity rates are calculated based on Plan Cost (Fixed)
Split, during KSS4,divided by Capacity.
Variable Activity rate are calculated based on Variable Cost,
assigned to activity atthe time of Primary cost planning (KP06),
divided by Capacity.
Total Activity rate include both Fixed and Variable activity
rate. Its calculated bydividing total cost by capacity.
Run transaction KSPI, then select the below details: Cost
center/ Cost center group (for which we want to calculate Plan
activity rate) Version Period/ Financial Year (generally full
Budget year is selected)
First execute the Plan Price calculation on test run. If no
errors occur then executewithout test run.
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Report for Activity rate (KSBT): Through transaction KSBT, we
can see the Plan andActual activity rate for the cost center. In
the below screen variable, fixed and totalactivity rate have been
displayed for activity Cutting and Maintenance for costcenter
Engine Plant.
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How the system is calculating the cost is explained in details
in the below table.Activity rate can be cross reconciled with the
Activity Type Price Report in the abovescreen.
Plan Cost AnalysisTotal
Activity Cutting Maintenance UnitA:- Capacity 1000 700 300
HoursB:- Variable Cost 29000 USD
i. Electricitycharges 14000 USD
ii. Oil cost 15000 USDC:- Fixed Cost 45000 USDD:- Fixed cost
Split(Split based onCapacity) (7:3) 31500 13500 USDE:- Total Cost
(B+D) 74000 45500 28500 USDF:- Variable Activityrate (B/A) 20 50
USD/HG:- Fixed Activityrate (D/A) 45 45 USD/HH:- Plan Activityrate
(F+G) 65 95 USD/H
Cost Center Report
There are different cost center reports that can be used for the
purpose of analyzingthe plan and actual expense in SAP. In the cost
center report below, we can see theentire plan cost details. Here
details of expense can be analyzed at cost element (GLaccount)
level.
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At cost center Engine Plant total debit amount is 74,000 /-,
which includes bothFixed and Variable cost. Total cost transferred
to activities Cutting andMaintenance is 45,500 USD and 28,500 USD
respectively.
Actual expenses splitting for manufacturing costcenters
Till now this document explains the process of differentiating
between Plan FixedCost and Plan Variable Cost and how the SAP can
be used to differentiate betweenPlan Fixed and Plan Variable cost
in manufacturing activities.
Now we will look the actual expenses splitting between Fixed and
Variable cost. Foractual expense analysis, we need to understand
two different concepts, first theposting of documents at GL
accounts to represent actual expense, and the secondtransfer of
actual cost from cost center to production or process order.
1. Posting of Actual Expenses at GL accounts: Accounting
documents areposted only when there are events with financial
impact. So to record the financialimpact of event, we need to
create journal entries in accounting. These documentsin SAP could
be stored through FB50 or FB01 etc. In the same way, the
actualexpenses in manufacturing cost centers are also recorded
through accountingdocuments. Actual expenses are recorded at GL
account level we dont definewhether the expenses are activity
dependent or activity independent in nature. Atthe time of actual
cost split to differentiate between actual fixed and actual
variable
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cost, system checks the rule defined at the time of Plan
splitting. It considers theGL account expense as variable expense
if it has been assigned as variable/ activitydependent expense at
Primary cost planning in KP06.
2. Transfer of Actual Cost from Cost Center to Process Order:
This processis called secondary allocation, i.e. movement of costs
within controlling moduleonly. Here no Finance documents are
created. Transfer of actual cost from costcenter to process or
production order happened when the plant controllersconfirm the
completion of activity at order. The costs which get transferred
fromcost center to process order basically represent planned cost
calculated at actualactivity (i.e. plan activity rate calculated at
KSPI multiplied by actual activities atprocess order) because at
this time we dont have actual activities rates calculated.The
actual activity rates are calculated at the time of monthly period
end closingactivities, when all the actual expenses are posted on
manufacturing cost centerdirectly or get transferred from support
cost centers.
For illustration of actual expense analysis journal entries have
been posted andactivities have been confirmed at process order
level. Expenses for amount of18,548.75 /- have been posted and 150
hours of Cutting activities and 100 hours ofMaintenance activities
have been confirmed at manufacturing cost center EnginePlant. The
cost center reports are below:
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After Activity confirmation the activity costs are calculated as
(Actual Activity* PlanCost)
The cost of 150 Hours of RRRR Cutting activity is 9750 CHF (150
Hour *65CHF/Hour)
Similarly the cost of 100 Hours of SSSS Maintenance activity is
9500 CHF (100hours *95 CHF/Hour)
So it can be said that at the time of activity confirmation on
process order, systemcalculates the cost of actual activity at Plan
activity rate.
Actual Cost Splitting (KSS2) and Actual Activity
Pricecalculation (KSII)
Enter transaction KSS2 and specified the below details before
executing thetransaction:
Cost center/ Cost center group Period and Fiscal year (generally
the month should be selected for which period
end closing activities should be closed)
Execute the transaction on test run first. If no errors are
encountered then executethe transaction without test run.
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Actual price calculation KSII
Now the Actual Activity Price
At the time of actual cost split, in order to differentiate
between actual fixed andactual variable cost, the system checks the
same rule defined at the time of Plan costsplitting. It considers
the GL account expense as variable expense if it has beenassigned
as variable/ activity dependent expense at Primary cost planning in
KP06.
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Finding of Actual Expenses Analysis and Splitting:
a. Actual expenses splitting works on the basis on Plan cost
splitting.b. Actual expenses are divided into two parts, i.e. Fixed
and Variable.c. All those GL accounts, which are planned as
variable at the time of Primary cost
planning are considered as variable at actual expenses also. If
any accountingdocuments are posted on these accounts by assigning
same manufacturing costcenter, then system considers this as
activity dependent cost and calculates actualvariable activity
rate.
d. Actual activity variable rates are calculated by dividing
variable cost by actualactivities confirm at process or production
orders.
e. On the other hand expenses posted on other GL accounts are
considered as Fixedin nature. Fixed expenses are distributed to
different activities assigned to costcenter on the basis on Plan
Capacity. In this example total fixed cost of 18016.25has been
distributed to Cutting RRRR and Maintenance SSSS activities on
thebasis of capacity ratio (7:3) maintained in KP26.
f. Actual activity fixed rates are calculated by dividing fixed
costs on activity by actualactivities confirm at process or
production orders.
Conclusion
With the help of this document, we have learnt how we can manage
the plan andactual expenses in fixed and variable part. Deciding
whether expenses will bedependent on activity or independent of
activity will be a management decision,which can vary from industry
to industry and company to company. Once we decidethe nature of
expenses, we can use the above concept to distribute the expense
on
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fixed and variable activity rate, which could be further used in
product costing as partof product cost.
Here the example given is for one manufacturing cost center to
illustrate the concept.This can be applied on multiple
manufacturing and support cost centers and can beused for the
purpose of overhead management as well.