For profitability and management accounting, the Product Costing module of the Controlling module is utilised to value the internal cost of materials and production. A specialised skill is product costing. Due to its complexity and high level of connection with other modules, pricing is frequently avoided. The goal of this 5-part blog is to make product costing simpler.
The next stage in learning the fundamentals of product costing after comprehending cost centre planning is activity rate calculation. Calculating the plan activity rates for each activity in each Cost Center in a Plant is the aim of the activity rate calculation process.
- Plans for cost centres are entered:
- KP06 Plan Costs
- Plan KP26 activity units.
We need to determine Activity Type Rates now that we have established our Cost Center funds and activity volumes. Internal actions that produce products are valued using activity type rates.
If you manually entered activity rates based on actual numbers from the previous year as opposed to total dollars and units planned. You can review activity rates in Transaction KSBT instead of reading most of this blog. It should be noted that you can employ a mixed strategy in which rates are planned for some activities/cost centres and calculated for others.
You can skip the next phase of plan allocations if you scheduled all costs in the production cost centres where they will be allocated. You will need to use plan assessments and/or distributions to assign costs if you scheduled costs where they would be spent in overhead cost centres. An entire blog might be dedicated to the specifics of assessments and distributions. The identity (principal cost factor) of the cost is maintained in distributions, which is the major distinction between assessments and distributions. Assessments employ secondary cost elements, which serve as cost carriers and obscure the identity of the core cost element, to transfer expenses. You have the option of using a hybrid method, only using Assessments or Distributions, or both. The transactions KSU7 and KSV7 are used to establish plan assessments and distributions, while the transactions KSUB and KSVB are used to carry them out.
Review the Cost Center Actual/Plan/Variance report, Transaction S ALR 87013611, after costs have been allocated. Make sure allocations deducted receiver cost centres and credited transmitting cost centres.
Execute the cost centre splitting plan next, which divides expenses between two activities based on activity quantity or another basis when a cost centre has multiple activity types. Since you cannot input a range, this is an ideal spot to use cost centre groups to quickly choose desired cost centres. Utilizing Transaction KSS4, cost splitting.
The Transaction KSPI is then used to calculate Activity Type Rates. You can adjust your cost centre plans and recalculate charges if rates are unfavourable. Rates are not final until you compute and publish product costs using them. It is expected that you will try multiple times at favourable rates because this is an iterative process.
Once the Activity Type Rates have been determined, you can review the rates in Transaction KSBT.
Say we are valuing our inventory in a cookie bakery using product costing. This will teach us to value our finished cookies, semi-finished frosting, and baking ingredients like eggs, milk, and sugar (raw materials). We must establish rates for each action, such as combining ingredients for baking, baking in the oven, and cooling cookies, in order to compute expenses. At an overhead cost centre, we budgeted for overhead expenses like our building rent, energy, and baker salaries. To incorporate those costs in the price of our products, we must allocate them to our manufacturing cost centre. Let’s imagine that a cost centre has some overhead expenses that ought to be divided into several activities before calculating costs. After dividing these costs, we determine activity rates. Now that we have a dollar per unit for things like setup, overhead, indirect labour, and direct labour, we can use that in product costing.
- To make choosing Cost Centers and Cost Elements in KSBT and KSPI as well as other Cost Center/Cost Element Reports easier, use Cost Center Groups and Cost Element Groups.
- You might discover that your rates are averaged over 12 months or that they do not exist for some months. The ‘Period Overview’ screen in Cost Center planning Transactions KP06 and KP26 should be carefully reviewed. Costs and units are displayed on this screen by each month.
- If the results are not what you want, you can reverse the assessments and distributions.
- The assessments and distributions in your plan should, in theory, correspond to your actual assessments and distributions.
The following blog in the series explains how the integration of product costing with production data like as BOMs (Bills of Material), Routings/Master Recipes, and Work Centers works.
If you missed it, click the link below to view it: