Introduction

A cost responsibility centre, or cost centre, in SAP is where all costs and expenses are maintained and analysed for management-related decision-making. The price might be either fixed or changeable. In the CO module’s product costing, variable and fixed costs can be distinguished in a number of ways. The term “fixed costs” refers to an organization’s fixed expenses that don’t alter based on manufacturing activities and are constant regardless of production activities, such as rent for the facility, office staff pay, etc. On the other hand, variable costs are dependent on the intensity of production operations; as such, if raw material costs and electricity consumption rise, so do variable costs. But not every variable cost varies in direct proportion to the output of commodities.

In this text, we’ll try to explain how the cost-splitting and expenses analysis processes work in manufacturing cost centres.

From a controlling perspective, fixed costs are unaffected by operating activities and stay constant, but if these factors vary, variable costs will change as well. Although raw material costs primarily represent variable costs, the main emphasis of this document will be on the distinction between fixed and variable activity costs.

The configuration and master data configured in cost centre accounting and overhead accounting are the foundation for the optional fixed and variable cost segregation.

Activity Cost:

The activity price can be calculated in cost centre accounting using a variety of techniques. Manually entering “Fixed” and “Variable” Activity Costs is the most straightforward method (KP26). On the other hand, there are various techniques used in cost centre planning and budgeting that figure out the fixed and variable activity pricing automatically. Here, emphasis will be placed on budgeting and planning activities, as well as on the automatic determination of the plan activity rate in the cost centre. To determine the activity price, this method aggregates planned costs by cost component and capacity per plan unit. Activity dependent costs are employed directly for the computation of variable activity rates, whereas activity independent costs are divided up across various activities depending on the Splitting Structure.

Cost of a Fixed Activity:

All costs that are included in a product’s pricing but don’t change depending on the activities involved in manufacturing are considered fixed costs. There may be two or more activities carried out in a manufacturing cost centre. To compute the activities rate, the fixed costs are dispersed to various activities on the basis of Splitting Structure set for cost centre.

Cost of Variable Activities:

Variable activity costs change according to the type of activity and rely on whether industrial operations are increasing or decreasing. Variable activity costs in SAP are directly associated with the relevant activity.

Fixed and variable activity prices are split.

The cost entered for the activity must be appropriately split in Cost Center Accounting to account for Fixed and Variable costs. The steps are explained below:

  • By assigning an activity and cost element combination, variable costs would be scheduled at the activity level and spending at the cost element in the manufacturing cost centre. In other words, while budgeting the primary costs, the expenses should be based on the Activity type (KP06). The variable activity rates are then determined by dividing the total activity cost by the total activity planned for that cost centre (i.e. capacity in KP26)
  • Independent of the type of activity, fixed costs would be planned. These expenses are kept up to date in KP06 at the manufacturing cost center’s cost element level. Then, according to the splitting structure established by OKEW, the fixed costs are allocated among the different activity kinds. We specify the guidelines for how the fixed cost will be allocated to the Activities in the splitting structure. For the purposes of this document, take into account the fixed cost split based on the capacity kept in KP26.
I’ve used a fictitious example to more precisely describe the scenario.

Assume there is an automobile industry manufacturing cost centre called “Engine Plant” that performs the two tasks of “Cutting” and “Maintenance” in order to produce engine parts. The machine must first be “Maintained” to be prepared for the procedure, which calls for the use of cleaning oil. Once the machine has been cleaned, the following phase, which involves “cutting” the iron piece into the necessary engine part, may begin.

Assuming that the cost of cleaning oil will be a variable cost for the human process of “maintenance” and that the cost of electricity will be a variable cost for the automatic process of “cutting.” To calculate activity prices, other costs are assumed to be fixed.

Information on data utilisation Three major fixed expenses in the engine plant—depreciation on machinery and equipment, depreciation on buildings, and salary—are included for testing purposes. Electricity costs and oil costs are the variable costs for the activities “Cutting activity” (let “RRRR” in SAP) and “Maintenance activity” (let “SSSS” in SAP).

 


  Cost center:                                   Engine Plant
  Activity  Expenses

  GL Account

  Fixed Cost  (USD)  Variable Cost (USD)
  Depreciation on Machine  600001  10000
  Depreciation on Building  600002  20000
  Salary  600003  15000
  Cutting (RRRR)  Electricity charges  600004  14000
  Maintenance (SSSS)  Oil cost  600005  15000

 

Maintain the “Engine Plant” cost center’s plan for activity and capacity for various activities.

Structure Splitting Configuration

Splitting structure must be defined in order to divide fixed costs among the various activities assigned to each cost centre. It outlines the procedures to be followed in allocating the fixed costs among the various activities. This arrangement is crucial for planning and budgeting purposes.

Indicate the Cost centre and the Fiscal year.

Click <Enter>

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Double-click on the Manufacturing Cost Center Splitting Structure (FF).

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Here, the splitting is specified as the distribution of all manufacturing cost centre cost elements to activities based on plan capacity.

Matrix data demand Type of activity (Transaction KL01)

Here, we may describe how SAP handles cutting and maintenance for industrial activities.

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Cutting activity is represented by activity type “RRRR” here. Hour is the unit of activity definition. The cost centre categories should be “F,” which stands for manufacturing and production cost centre, in order to allocate an activity to a manufacturing centre so that it can be employed in a recipe.

Price indicator “2” indicates that the system will use capacity to determine the price of the Activity Plan.

Plan activity definition (transaction KP26):

Assumed to be a total of 700 and 300 hours for cutting (RRRR) and maintenance (SSSS), respectively. The splitting rule will adhere to the plan capacity ratio of (7:3) to distribute fixed costs to Cutting and Maintenance activity since the rules were kept as “Capacity” for the purpose of splitting fixed costs on different activities.

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For cutting (RRRR) and maintenance (SSSS) work, KP26 maintained the capacity as 700 hours and 300 hours, respectively.

Depending on the activity, define fixed and variable plan expenses in KP06.

For primary expense planning in cost centre accounting, KP06 is utilised. Both activity-dependent and activity-independent costs are defined here. Expenses on Activities must be defined at the cost element level in order to be considered Activity Dependent (also known as Activity Variable Cost). The variable costs in the screen below are:

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  • Cost element: Expenses on Activity (RRRR, i.e. Cutting) (600004 i.e. Electricity charges)
  • Cost element for Expense on Activity (SSSS, i.e. Maintenance) (600005 i.e. Oil Cost)
Split-cost planning KSS4

Run Plan Cost Split in order to split fixed costs among various manufacturing cost centre activities. This will divide fixed costs among various activities allocated to the same cost centre as KP26 transaction according to the splitting structure’s stated rules. Here, the splitting run was defined for simplicity’s sake based on its “capacity” to spread all fixed costs. The OKEW transaction defines the splitting rule.

Run transaction KSS4, and the screen below will appear. Select the information below:

  • Cost center/Group Cost centre (for which we want to use Plan cost splitting)
  • The Version
  • Time Frame/Financial Year (generally full Budget year is selected)

If there are no issues, run the plan cost dividing on test run first before running it “without test run.”

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The whole fixed cost of the plan, $45,000, has been divided into two activities—cutting (RRRR) and maintenance (SSSS)—based on a 7:3 ratio, or according to the capacity kept in KP26. Only Fixed Costs are distributed to activities under a plan cost split.

Price computation for a Plan Activity KSPI
The next phase is Plan price computation after Plan cost splitting. Calculating plan prices essentially aids in determining “Plan Activity Rate.” Fixed and variable activity rates are two possible divisions of the activity rate.

  • Plan Cost (Fixed) Split is used in KSS4 to calculate Fixed Activity rates, which are then split by Capacity.
  • Variable Activity Rate is determined by dividing Variable Cost by Capacity, which was assigned to an activity at the time of Primary Cost Planning (KP06).
  • Both fixed and variable activity rates are included in the total activity rate. By dividing total cost by capacity, it is determined.

Run transaction KSPI, then choose the details shown below:

  1. Cost-centering and cost-centering groups (for which we want to calculate Plan activity rate)
  2. The Version
  3. Time Frame/Financial Year (generally full Budget year is selected)

If there are no issues, do the Plan Price Calculation on a test run first before running it “Without test run.”

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Report for Activity rate (KSBT): The transaction KSBT allows us to view the cost center’s Plan and Actual Activity rates. Fixed and total activity rates for the activities “Cutting” and “Maintenance” for the cost centre “Engine Plant” are shown in the screen variable below.

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The table below provides a detailed explanation of the cost calculation method used by the system. The Activity type Price Report on the screen above can be cross-referenced with the Activity rate.

 


  Plan Cost Analysis

Total     Activity  

Cutting  

 Maintenance  

Unit  

  A:- Capacity

1000  

700  

300  

Hours  

  B:- Variable Cost

29000  

USD  

                i. Electricity            charges

14000  

USD  

                ii. Oil cost

15000  

USD  

  C:- Fixed Cost

45000  

USD  

  D:- Fixed cost Split            (Split based on                    Capacity)

(7:3)  

31500  

13500  

USD  

  E:- Total Cost (B+D)

74000  

45500  

28500  

USD  

  F:- Variable Activity          rate (B/A)

20  

50  

USD/H 

  G:- Fixed Activity rate      (D/A)

45  

45  

USD/H  

  H:- Plan Activity rate      (F+G)

65  

 95  

USD/H  


 

Report on Cost Centers

There are various cost centre reports that can be utilised to compare SAP’s planned and actual expenses. The whole Plan cost data are shown in the cost centre report that is shown below. Here, cost element (GL account) level analysis of the expense data is possible.

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Total negative for the cost centre “Engine Plant” is 74,000/-, which includes both fixed and variable costs. Cutting and maintenance activities received a total cost transfer of 45,500 USD and 28,500 USD, respectively.

Actual cost centre splitting for manufacturing

This document has so far explained the distinction between plan fixed costs and plan variable costs. How to distinguish between plan fixed and plan variable costs in any manufacturing operations using SAP.

We’ll now examine how actual costs are divided into fixed and variable costs.

For actual expense analysis, it’s important to comprehend two distinct ideas: first, that actual spending is represented by documents posted to general ledger accounts, and second, that actual expense is transferred from a cost centre to a production or process order.

1. Actual expense posting to general ledger accounts: Accounting documents are only uploaded when events occur that have a financial consequence. Therefore, accounting journal entries must be made in order to document the event’s financial impact. These SAP papers could be kept in FB50, FB01, etc. The actual costs incurred by manufacturing cost centres are similarly documented in accounting records. Actual costs are documented at the GL account level; however, we do not specify whether these costs are activity dependent or independent. The same rule established at the time of plan splitting is checked by the system at the time of actual cost split to distinguish between actual fixed and actual variable costs. If a GL account expense was designated as variable or activity dependant during primary cost planning in KP06, it will be treated as such.

2. Transfer of Actual Cost from Cost Center to Process Order: This process, which only involves cost transfer within the controlling module, is referred to as secondary allocation. No financial documents are produced here. When the plant controllers check that the activity was completed at order, the actual cost was transferred from the cost centre to the process or production order. Because we now lack computed actual activities rates, the costs that are transferred from cost centre to process order essentially represent Plant Cost calculated at Actual Activity (i.e. Plan Activity Rate derived at KSPI multiplied by Actual Activities at process Order). The actual activity rates are determined when the monthly period is closed out and all actual expenses are transferred from support cost centres to manufacturing cost centres or immediately reported there.

I have passed a few FB50 entries and Activity confirmations at Process order level for the purposes of this document and to clarify the actual expenditure analysis. For testing purposes, I have confirmed 150 hours of cutting operations and 100 hours of maintenance activities at manufacturing cost centre “Engine Plant,” and I have passed accounting documents for an amount of 18,548.75 /-. Below are the cost centre reports:

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Following confirmation of the activity, the cost of the activity is determined as (Actual Activity* Plan Cost).

9750 CHF (150 Hours * 65 CHF/Hour) is the cost of 150 hours of “RRRR Cutting” work.

Similar to the previous example, the cost of 100 hours of “SSSS Maintenance” work is 9500 CHF (100 hours * 95 CHF/Hour).

Therefore, it can be said that the system calculates the cost of the real activity at the Plan activity rate at the moment of activity confirmation on the process order.

Calculating Actual Activity Prices and Actual Cost Splitting (KSS2) (KSII)

Before conducting transaction KSS2, provide the information below and enter transaction KSS2:

  • Cost-centering and cost-centering groups
  • Timeframe and Financial year (generally the month should be selected for which period end closing activities should be closed)

Start by running a test transaction; if there are no errors, continue without the test transaction.

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Calculating actual prices with KSII

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The Actual Activity Price is now

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The same rule established at the time of plan splitting is checked by the system at the time of actual cost split to distinguish between actual fixed and actual variable costs. If a GL account expense was designated as variable or activity dependant during primary cost planning in KP06, it will be treated as such.

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Actual Expenses Analysis and Splitting Results:

a. Plane cost splitting is the foundation for actual expense dividing.

b. Fixed and variable expenses, or actual costs, are split into two categories.

c. All GL accounts that were planned as variable at the time of primary cost planning are also taken into consideration when calculating actual expenses. The system considers this to be an activity dependent cost and uses it to determine the real variable activity rate if any accounting records are posted on these accounts and assigned the same manufacturing cost centre.

d. The variable cost is divided by the actual activities confirmed at process or production orders to determine the actual activity variable rate.

e. In contrast, expenses recorded on other GL accounts are regarded as being of a fixed nature. In this instance, the total fixed cost of 18016.25 has been distributed to the “Cutting RRRR” and “Maintenance SSSS” activities on the basis of the capacity ratio (7:3) maintained in KP26. Fixed expenses are dispersed to different activities assigned to cost centres based on plan capacity.

f. The activity itself Fixed costs on activities are divided by the actual activities verified at process or production orders to determine fixed rates.

Conclusion

I have attempted to illustrate how we can manage the plan and real spending in the fixed and variable parts with the aid of this paper. Management decisions, which might differ from sector to sector and firm to company, will determine whether expenses are based on activity or independent of activity. The aforementioned approach can be used to disperse the expense on a set and variable activity rate once the type of expenses has been determined. For more information, see which could be included in product costing as a component of cost.

Here, a single manufacturing cost centre has been used as an example to demonstrate the idea. This can be utilised for the purpose of managing overhead on various manufacturing and support cost centres.