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  • Generated by Jive on 2015-02-06+01:001

    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

    Generated by Jive on 2015-02-06+01:002

    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

  • Expense Analysis and Splitting in Manufacturing Cost Centers

    Generated by Jive on 2015-02-06+01:003

    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

  • Expense Analysis and Splitting in Manufacturing Cost Centers

    Generated by Jive on 2015-02-06+01:004

    Click

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

  • Expense Analysis and Splitting in Manufacturing Cost Centers

    Generated by Jive on 2015-02-06+01:005

    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.

  • Expense Analysis and Splitting in Manufacturing Cost Centers

    Generated by Jive on 2015-02-06+01:006

    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.

  • Expense Analysis and Splitting in Manufacturing Cost Centers

    Generated by Jive on 2015-02-06+01:007

    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)

  • Expense Analysis and Splitting in Manufacturing Cost Centers

    Generated by Jive on 2015-02-06+01:008

    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.

  • Expense Analysis and Splitting in Manufacturing Cost Centers

    Generated by Jive on 2015-02-06+01:009

    Total Plan fixed cost of 45000 has been distributed to two activities Cutting (RRRR) andMaintenance (SSSS) based