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Expense Analysis and Splitting inManufacturing Cost Centers

IntroductionIn SAP Cost center work as a cost responsibility center, where all the expenses and cost arestored and analyzed for the purpose of management decision making. The cost could be fixedor variable in nature. The difference between variable and fixed costs can be made in variousways in product costing in CO module. Fixed costs represent the static costs incurred by theorganization, which doesnt change on the basis on manufacturing activities, which remainconstant irrespective of production activities like rent for the premises, salaries of office staff etc.On the other hand, variable cost varies based on the level of production activities; if productionactivities increase then variable cost also increased like electricity consumes raw materialcharges etc. However all the variable cost doesnt vary in direct proportion by quantity of goodsproduced.In this document will try to define; how the Expenses analysis and splitting of cost done in manufacturing costcenters.From controlling prospective, fixed cost remain constant regardless of operating activities, but if these factorchanges, variable cost will fluctuate. Basically raw material costs represent variable cost, but in this documentmain focused will be given to distinguish fixed and variable activity cost.The segregation between fixed and variable cost is optional and is derived from the configuration and masterdata configured in cost center accounting and overhead accounting.Activity Price:There are different methods that could be used in cost center accounting to determine theactivity price. The simple way is the manually enter Fixed and Variable Activity cost (KP26).However there are other methods used in Cost center Planning and Budgeting that automaticallycalculate the fixed and variable activity price. Here the focused will be given on Planning andBudgeting activity and automatic calculation of plan activity rate in cost center. This methodaggregate planned costs by cost element and capacity by plan unit to calculate the activity price.Activity independent costs are segregated among different activities based on Splitting Structure,while activity dependent cost directly used for the purpose of variable activity rate calculation.Fixed Activity Cost:In product costing all those cost, which doesnt vary based on the activities in manufacturing costwill represent fixed cost. In a manufacturing cost centers there may be two or more activitiesperformed. To calculate the activities rate, the fixed costs are distributed to various activities onthe basis of Splitting Structure defined for cost center.Variable Activity Cost: Variable activity cost, which directly depend upon the activity type and fluctuate based on increase or decreasein manufacturing activities. In SAP variable activity cost are directly linked to the respective activity.

Expense Analysis and Splitting in Manufacturing Cost Centers


Activity Prices: Fixed and Variable SplitIn Cost Center Accounting dividing the cost between Fixed and Variable requires appropriate split to be madein the cost entered for the activity. The process is described below:i. Variable cost would be planned at activity level and expenses should be maintained at costelement in the manufacturing cost center by assigning activity and cost element combination. In other word,the expenses should be planned on Activity type at the time of primary cost planning (KP06). Then the variableactivity rates are calculated on Total cost planned at Activity divided by Total number of activity planned at thatcost center (i.e. capacity in KP26)ii. Fixed cost would be planned at independent of activity type. These costs are maintained in KP06at cost element level on manufacturing cost center. Then the fixed costs are distributed on various activitytypes on the basis of Splitting structure defined at OKEW. In Splitting Structure we define the rules, how thefixed cost will be distributed to Activities. For the purpose of this document, considering split of fixed cost on thebasis of Capacity maintained in KP26.To illustrate the scenario in more details, I have taken a hypothetical example.Supposed there is a manufacturing cost center Engine Plant, in an Automobile industry, havingtwo activities Cutting and Maintenance for the purpose of creating engine parts. Beforestarting any batch of material to process, the machine need to be Maintain to be ready for theprocess, for which it required to use cleaning oil to clean the machine and then the next processstart i.e. cutting the iron piece into the desired engine part.Assuming Cleaning oil cost as variable cost for the purpose of Maintenance activity, which is a manualprocess, and Electricity cost as variable cost for the purpose of Cutting activity, which is automaticprocess. Other costs are assumed to be fixed for the purpose of activity price calculation.Details of data use for the purpose of testing, there are three Plan fixed expenses in Engine plant,Depreciation on Machine & Equipment, Depreciation on Building and Salary. The variable costfor activity Cutting activity (let RRRR in SAP) is Electricity charges and for Maintenanceactivity (let SSSS in SAP) is Oil cost.

Cost center: Engine Plant

Activity Expenses GL Account Fixed Cost (USD) Variable Cost(USD)

Depreciation onMachine

600001 10000

Depreciation onBuilding

600002 20000

Salary 600003 15000

Cutting (RRRR) Electricity charges 600004 14000Maintenance(SSSS)

Oil cost 600005 15000

Maintain the Plan Activity and Capacity for the different activity on cost center Engine Plant



Configuration of Splitting StructureFor the purpose of splitting of fixed cost to the different activities assigned to cost center, need to defineSplitting structure. It includes the rules which should be followed to distribute the fixed cost to differentactivities. For the purpose of Planning and Budgeting this is an important configuration.Transaction: OKEW (Assign the new cost center to the splitting structure)

Specify Cost center and Fiscal year



Click

Double click on splitting structure for Manufacturing cost center (FF).



Here the splitting is defined that all the cost elements on manufacturing cost center will be distributed toactivities on the basis on Plan Capacity.

Mater data requirement Activity type (Transaction KL01)Here we can define the manufacturing activity cutting and maintenance in SAP.



Here activity type RRRR represents Cutting activity. The activity unit is defining as Hour. For thepurpose of assigning an activity to a manufacturing center so that that can be used in recipe, thecost center categories should be F i.e. manufacturing and production cost center.Price indicator 2 indicate that to calculate Activity Plan price, system will use capacity.

Define Plan Activity (transaction KP26):Assumed the total Capacity of Cutting (RRRR) & Maintenance (SSSS) are 700 and 300 hoursrespectively. For the purpose of Splitting Fixed cost on different activity, maintained the rules asCapacity, so the splitting rule will follow plan capacity ratio of (7:3) to distribute fixed costs toCutting and Maintenance activity.



In KP26 maintained the capacity as 700 Hours and 300 Hours for Cutting (RRRR) and Maintenance (SSSS)activity.

Define Plan Expenses in KP06 as fixed and variable dependingupon activity.KP06 is used for the purpose of Primary expenses planning in cost center accounting. Here we can define bothactivity dependent and activity independent cost. For the purpose of Activity dependent (i.e. activity variablecost), need to define expenses on Activity at cost element level. In the below screen variable cost 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. Oil Cost)



Plan Cost Split KSS4For the purpose of Splitting Fixed cost to different activities on manufacturing cost center, needto run Plan Cost Split, which will distribute the fixed cost to different activities assigned to thesame cost center as KP26 transaction based on the rule defined in splitting structure. Here for thepurpose of simplicity defined the splitting run based on capacity to distribute all fixed cost. Thesplitting rule is defined 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 on test run, if No errors comes then execute on Without testrun.



Total Plan fixed cost of 45000 has been distributed to two activities Cutting (RRRR) andMaintenance (SSSS) based on 7:3 ratio, i.e. on the basis of Capacity maintained in KP26. Plancost split only distribute Fixed Cost to activities.

Plan Activity Price calculation KSPIAfter Plan cost split, the next step if Plan price calculation. Plan price calculation basically helps tocalculate Plan Activity Rate. The activity rate could be in two parts, i.e. Fixed Activity rate andVariable 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 at the time of Primarycost planning (KP06), divided by Capacity. Total Activity rate include both Fixed and Variable activity rate. Its calculated by dividingtotal 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 comes then execute on Withouttest run



Report for Activity rate (KSBT): Through transaction KSBT, we can see the Plan and Actual Activityrate for the cost center. In the below screen variable, fixed and total activity rate have beendisplayed for activity Cutting and Maintenance for cost center Engine Plant.



How the system is calculating the cost is explained in details in the below table. Activity rate can be crossreconciled with the Activity type Price Report in the above screen.Plan CostAnalysis

Total Activity Cutting Maintenance Unit

A:- Capacity 1000 700 300 Hours

B:- Variable Cost 29000 USD

i.Electricitycharges

14000 USD

ii. Oilcost

15000 USD

C:- Fixed Cost 45000 USD

D:- Fixed costSplit (Split basedon Capacity)

(7:3) 31500 13500 USD

E:- Total Cost (B+D)

74000 45500 28500 USD

F:- VariableActivity rate (B/A)

20 50 USD/H

G:- Fixed Activityrate (D/A)

45 45 USD/H

H:- Plan Activityrate (F+G)

65 95 USD/H



Cost Center ReportThere are different cost center reports that can be used for the purpose of analyzing the plan and actualexpense in SAP. In the below Cost center report, we can see the entire Plan cost details. Here details ofexpense can be analyzed at cost element (GL account) level.

At cost center Engine Plant total debit is amount 74,000 /-, which include both Fixed andvariable cost. Total cost transferred to activities Cutting and Maintenance is 45,500 USD and28,500 USD respectively.

Actual expenses splitting for manufacturing cost centersTill now this document explain, the process of difference between Plan Fixed Cost and Plan Variable cost. Howthe SAP can be used to differentiate Plan fixed and Plan variable cost in any manufacturing activities. Now will look the Actual expenses splitting between Fixed and variable cost.For actual expense analysis, need to understand two different concepts, first the posting of documents at GLaccounts to represent actual expense, and second transfer of actual cost from cost center to production orprocess order.1. Posting of Actual Expenses at GL accounts: Accounting documents are posted only whenthere are events happened with financial impact. So to record the financial impact of event, need



to create journal entries in accounting. These documents in SAP could be stored through FB50 orFB01 etc. In the same way, the actual expenses in manufacturing cost centers are also recorderthrough accounting documents. Actual expenses are recorded at GL account level, at actualexpenses we dont define, whether the expenses are activity dependent or activity independentin nature. At the time of actual cost split to differentiate between actual fixed and actual variablecost, system check the same rule defined at the time of Plan splitting. It consider the GL accountexpense as variable expense if it has been assigned as variable/ activity dependent expense atPrimary cost planning in KP06.2. Transfer of Actual cost from Cost center to Process order: this process is called as secondaryallocation, i.e. movement of costs within controlling module only. Here No Finance documents arecreated. Transfer of Actual cost from Cost center to Process or production order happened whenthe plant controllers confirm the completion of Activity at order. The cost which get transferredfrom cost center to process order, basically represent Plant cost calculated at Actual Activity (i.e.plan activity rate calculated at KSPI multiplied by Actual activities at process order) because atthis time we dont have actual activities rates calculated. The Actual activity rates are calculatedat the time of monthly period end closing activities, when all the actual expenses are posted onmanufacturing cost center directly or get transferred form support cost centers.For the purposed of this document and to explain actual expense analysis I have passed fewFB50 entries and Activity confirmation at Process order level. For the purpose of testing, I havepassed accounting documents for amount of 18,548.75 /- and confirmed 150 Hours of Cuttingactivities and 100 hours of Maintenance activities at manufacturing cost center Engine Plant.The cost center reports are below:



After Activity confirmation the Activity cost are calculated at (Actual Activity* Plan Cost)The cost of 150 Hours of RRRR Cutting activity is 9750 CHF (150 Hour *65 CHF/Hour)Same the case for 100 Hours of SSSS Maintenance activity cost is 9500 CHF (100 hours *95CHF/Hour)So it can be say that at the time of activity confirmation on process order, system calculate the cost of actualactivity at Plan activity rate.



Actual Cost Splitting (KSS2) and Actual Activity Pricecalculation (KSII)Enter transaction KSS2 and specified the below details before executing the transaction: Cost center/ Cost center group Period and Fiscal year (generally the month should be selected for which period end closing activitiesshould be closed)Execute the transaction on test run first, if no error comes then execute without test run.



Actual price calculation KSII

Now the Actual Activity Price



At the time of actual cost split to differentiate between actual fixed and actual variable cost, system check thesame rule defined at the time of Plan splitting. It consider the GL account expense as variable expense if it hasbeen assigned as variable/ activity dependent expense at Primary cost planning in KP06.

Finding of Actual Expenses Analysis and Splitting:a. Actual expenses splitting work on the basis on Plane 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 consideras variable at actual expenses also. If any accounting documents are posted on these accounts by assigningsame manufacturing cost center, then system consider this as activity dependent cost and used to calculateactual variable activity rate.d. Actual activity variable rate are calculated by dividing variable cost by actual activities confirm at processor production orders. e. On the other hand expenses posted on other GL accounts are consider as Fixed in nature.Fixed expenses are distributed to different activities assigned to cost center on the basis on PlanCapacity, for this case total fixed cost of 18016.25 has been distributed to Cutting RRRR andMaintenance SSSS activities on the basis of capacity ratio (7:3) maintained in KP26.f. Actual activity fixed rate are calculated by dividing fixed cost on activity by actual activities confirm atprocess or production orders.



ConclusionWith the help of this document, I have tried to explain how we can manage the plan and actual expenses infixed and variable part. Deciding whether expenses will be dependent on activity or independent of activitywill depend upon management decision making, which can vary from industry to industry and companyto company. Once we decide the nature of expanses then we can use the above concept to distribute theexpense on fixed and variable activity rate. Further on which could be used in Product costing as part ofproduct cost.Here the example has been given for one manufacturing cost center to illustrate the concept. This can beapplied on multiple manufacturing and support cost center and can be used for the purpose of overheadmanagement.

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