Activity Based Costing in SAP.pdf

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Activity Based Costing in SAP

IntroductionActivity Based Costing is a method of costing, where the cost of products, processes, customers aredetermined through Activities performed in the production/ support unit. It is more logical method of determiningoverhead cost for the product than the historically method of using machine hours or man hours to distributethe cost. In activity based costing process, first the activities are identified, which attract cost and then thetotal cost are distributed to product on the basis of number of activities consumed in the manufacturing andproduction processes. The purpose of this document is to explain how we can identify key activities in anymanufacturing process and what are the things that need to be taken care while using activity based costing inSAP? Activity Based CostingABC is more logically, accurate, better way of allocating overhead cost, but on the other handits more complicated to design and implement. If we define the processes, it includes the belowsteps:a. Determining the cost objects, the organizational unit which can be used for tracking cost and distributingto productb. Identifying cost carriers or the activities performed in the cost objectc. Bifurcation between direct and indirect costs associated with activities related to cost objectd. Identify linkage between overhead cost and activities e. Select the method of overhead allocation, e.g. Push method (Assessment, Distribution cycles) or Pullmethod (Indirect activities allocation, template allocations)Activity based costing is activity driven concept with a key assumption that all the overhead costs are causedby different types of activity. The main challenge of implementing this, is to identify cost driven activities and tolink the overhead cost to the specify activities and designing the overall value flow. Method of allocating cost:i. Push Approach (Cost flow method)Push approach is a method of overhead allocation, where we transfer the cost from sender cost object toreceiver cost object with a flow from sender to receiver. Here the full or pre-defined percentage of cost fromsender cost center is transferred to receiver cost objects. It is like pushing the overhead cost from sender toreceiver cost object. E.g. Assessment, Distributionii. Pull Approach (Quantity input method)Pull approach is a method of overhead allocation, where quantities of receiver cost objectsare used as a base to take the cost from sender cost centers. For example: in case of IndirectActivity Allocation, which is a method of pull approach, the activities on receiver cost objects arecombined and a same values are transferred to sender cost objects as sender activity, whichlater on are used to transfer overhead cost from sender cost center to receiver cost centers. Herethe Quantity of receiver cost centers are used as input to transfer the sender cost, thats why it iscalled as Quantity input method. E.g. Direct/Indirect activity allocation, template allocationsTo illustrate the scenario in more details, I have taken a hypothetical example of an automobile industry:In general an automobile organization includes the below manufacturing departments.



1. Press Shop/ StampingManufacturing of car start with creation of different steel plates for different parts of car, for example doors,body of cars etc. These activities are performed in press shop, where different pieces are made out of rollsof steels. These pieces are later converted into different shape with help of automatic press/stamp machine.Generally both activities are performed one after other on same or different machine. If we need to apply theconcept of Activity based costing, then we need to identify the activities which are performed in press shop, forexample1. A) SETUP: setup is an activity of putting the iron plates on the machines in right places toperform the cutting and stamping. In general before cutting, a lubricant is used on iron plat sothat it doesnt get damaged while pressing. Setup is a manual process, which involve individualsto perform the activities.1. B) PRESSING: pressing is an activity performed by machine to cut the iron plat in the piece and then put thestamp to convert the iron plate into the design of different parts of car.How the cost will be consider as Setup and pressing, its depend upon the nature of the activities,here in this example we are considering SETUP as a manual activity so all the wages paid to theworkers could be consider as Variable Setup cost and cost for lubricant oil used in press shopcould also be consider as variable cost. In this way we can decide activity dependent and activityindependent cost and in SAP it can be used to distribute the cost to the product. The detailscan be seen from the below document on how to differentiate activity dependent and activityindependent cost:Expense Analysis and Splitting in Manufacturing Cost Centers http://scn.sap.com/docs/DOC-460282. Body Shop/ WeldingThe next department in automobile organization is where welding of different body parts are done to shapethe car. After this step the structure of car is ready. For activity based costing, we need to identify the differentactivities performed in body shop. Before deciding what all activities can be there, we need to validate whetherhaving two different activities is going to have any impact on product cost for two or more products, if not, thenthere is no point in using the second additional activity. Suppose the organization is making only two differenttypes of car, standard module and custom built car, suppose machines are used to weld standard modules andindividual are used to weld custom module of cars. In this way we need to identify the different activities, asthere is no specific rule for this. After identifying the activities we need to link the cost to the activity. 3. Paint ShopThe next department is Paint shop, where different layers of color coating are done on body of car based asper standard procedure or requirement by customer. Then drying/ heating activity is done to make the colorpermanent. All these activities like Painting activity, or drying activity can be used in activity based costing ascost carrier and used to transfer the cost of paint shop to different Production order and finally to the product.4. Engine PlantIn engine plant all different parts of engine are manufactured and assembled. After manufacturing of engine, itis sent to assembly line to be included in car. Here we can identify two different activities, like manufacturing ofengine parts and assemble of parts. These activities can be used to track cost. 5. Assembly LineThe next department is assembling line, where the painted car body and its engine are assembled. Then car issent for quality testing.



6. Finish Line or WarehouseThe car is driven on a few miles test track to check for rattles or other issues. Once a car meets all qualitystandards, kept in warehouse and are ready to send to customer, dealers.

Need to identify the different activities which can be used in different departments as cost carrier Try to keep less number of activities as possible and validate whether creating a new activity is going toprovide more accuracy in the product costing or not. Activity based costing are beneficial to be used in more complex manufacturing processes, soits advisable to use additional activities only if it has an impact on accuracy of product cost.

Master DataCreation of Activity: transaction KL01For defining the activity, the below details need to be configured Name: name of activity Description of activity Activity Unit: kg, hours etc CCtr Categories: cost center categories depend upon the cost centers where this activitywill be used. For production activities, the activity categories should be F; for utility cost centersit should be U. We can select the activity categories depending upon the nature of cost centers Activity Type Categories: this defines how we are going to put the values of plan & actual activity andwhat method will be used for distributing or allocating activities. Different standard options are:a. Manual entry, manual allocation (category 1): category 1 activity used plan activities to allocate activitiesto receiver cost centers or objects based on manual activity planning in KP26. Actual activities for categorytype 1 are determined through business transaction (e.g. confirmation of activity in process order or productionorders). b. Indirect calculation, indirect allocation (category 2): category 2 activities are used in indirect activityallocation and the price of these activities are calculated automatically through indirect activity allocation with



the help of relationship between sender & receiver cost centers, or receiver tracing factor, or fixed quantitiesdefined in segments. Here plan activities are automatically reconciled with scheduled activities. c. Manual entry, indirect allocation (category 3): This category activity takes the values entered manuallyand the allocation happened through indirect activity allocation.d. Manual entry, no allocation (category 4): This category activity takes the values enteredmanually and but its not allocated. Allocation Cost element: while defining an activity in controlling, we need to define and assign asecondary cost element with category 43 (indirect activity allocation) Price indicator: price indicator represent, what method will be used to calculate activityprice. We can say this about plan activity price. For actual activity price we can define themethod in the below tab where its mentioned as Actual price indicator.i. Indicator 001: if we select 001, then plan activity price are calculated automatically based onPlan Total Cost divided by plan activity. ii. Indicator 002: in 002, the variable plan activity price is calculated based on plan activity and fixedactivity price is calculated by considering the Capacity.iii. Indicator 003: here the activity price are set manually. Actual price indicator: if we define the actual price indicator then system use this for calculating actualprice otherwise previous price indicator will be used.iv. Indicator 005: here the actual activity price is calculated by considering the actual activity.v. Indicator 006: the variable portion of cost is determined through actual activity and fixed portion isdetermined through actual capacity.



Configuration of Splitting Structure:For 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

Double click on splitting structure and assign the cost centers to the respective splitting structure



Here the splitting is defined that all the cost elements on manufacturing cost center will be distributed toactivities on the basis on Plan Capacity. (Source: http://scn.sap.com/docs/DOC-46028)Planning:For planning and budgeting of activities, the below processes need to be followed:a. Define activities on the cost centers through KP26:After designing the overall structure of value flows, activities need to be linked to cost centers through KP26.Here we need to define Plan Activity, and Plan Capacity. Quantity defined for plan activity or capacity are usedto calculate activity prices at KSPI depending upon price indicator set while defining master data. If we selectprice indicator as 002, then fixed activity price is calculated by considering plan capacity and variable activityprice is calculated by dividing plan activity.



b. Primary cost planning on cost centers through KP06All the primary expenses are planned on cost centers through KP06. Here we can also defined activitydependent cost with the combination of planning at cost element for activity at cost center.

c. Allocation of expenses or activities:i. Indirect Activity allocations: it is one of the pull approaches of allocating the cost fromsender cost object to receiver cost object. Here overhead costs are allocated in two stapesprocess. First the sender cost centers activities are determined by combining receiver cost centeractivities and second the cost are allocated from sender cost center to receiver cost center/



object. It basically worked on Quantity calculated inversely. Once we execute indirect activityallocation cycles, then only activities are allocated but no cost is transferred from sender costcenter to receiver cost centers. Transfer of cost to receiver cost center can only be viewed afterplan cost split (KSS4) and plan activity price calculation (KSPI). It doesnt follow the same processas assessment and distribution, for distributing the overhead cost. In assessment and distributionthe cost are transferred exactly after executing the cycles.ii. Distribution: It is a method of push cost allocation. Distribution cycles are used to distribute primarycost from sender cost object to receiver cost object on the basis of fixed percentage, or fix proportion, orstatistical key figures. iii. Assessment: It is also a method of push cost allocation. Assessment cycles are used to distributeprimary & secondary cost from sender cost object to receiver cost object on the basis of fixed percentage, or fixproportion, or statistical key figures. In assessment cycles the allocation of cost done through assessment costelement. d. Plan Cost Splitting through (KSS4): plan cost split distribute the plan fixed cost to the activities assignedto the cost center. The distribution of cost happened on the basis of splitting rule defined in splitting structure.So the assignment of cost centers to the splitting structure is important.e. Plan Activity Price calculation (KSPI): KSPI calculates plan activity price or activity rate.f. Product costing CK40N or CK11N & CK24 Advantages of Activity based Costing: Accurate product cost calculation based on based assigning overhead cost based on overhead carriers asactivities. Monitoring of direct and indirect activity cost possible with the help of controlling activities. More accurate calculation of profitability and selling prices for multi-product organization.Limitations of Activity based Costing: Not suitable and cost effective for small manufacturing organization to implement Difficult to identify cost driver or activities performed in cost centers Conclusion:With the help of this article, I have tried to focus how the concept of activity based costing can be applied inSAP. Here we can see how to identify activities in different manufacturing processes. By carefully analyzing thebusiness process for manufacturing or production organization, we can find out cost carrier activities and useactivity based costing to improve the accuracy of product costing and profitability analysis.

Activity Based Costing in SAP.pdf

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