Activity Based Costing in SAP

INDEX

1.Introduction.

2.Acticity Based Costing.

3.Method of allocating Cost.

4.Master data.

5.Configuration of Splitting Structure.

6.Planning.

7. Primary cost planning on cost centers.

8. Allocation of expenses or activities.

9. Advantages of Activity based Costing.

10. Conclusion.
 Introduction

Activity Based Costing is a method of costing, where the cost of

products, processes, customers are determined through Activities
performed in the production/ support unit. It is more logical method of
determining overhead cost for the product than the historically method
of using machine hours or man hours to distribute the cost. In activity-
based costing process, first the activities are identified, which attract
cost and then the total cost are distributed to product on the basis of
number of activities consumed in the manufacturing and production
processes. The purpose of this document is to explain how we can
identify key activities in any manufacturing process and what are the
things that need to be taken care while using activity-based costing in
SAP?

Activity Based Costing

ABC is more logically, accurate, better way of allocating overhead

cost, but on the other hand it’s more complicated to design and
implement. If we define the processes, it includes the below steps:

1.Determining the cost objects, the organizational unit which can be used
for tracking cost and distributing to product

2. Identifying cost carriers or the activities performed in the cost object

3. Bifurcation between direct and indirect costs associated with

activities related to cost object

4. Identify linkage between overhead cost and activities.

 Select the method of overhead allocation, e.g., Push method
(Assessment, Distribution cycles) or Pull method (Indirect activities
allocation, template allocations)

Activity based costing is activity driven concept with a key

assumption that all the overhead costs are caused by different types
of activity. The main challenge of implementing this, is to identify cost
driven activities and to link 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 to receiver cost object with a flow
from sender to receiver. Here the full or pre-defined percentage of cost
from sender cost center is transferred to receiver cost objects. It is
like pushing the overhead cost from sender to receiver cost object.
E.g., Assessment, Distribution.

ii. Pull Approach (Quantity input method)

Pull approach is a method of overhead allocation, where quantities of

receiver cost objects are used as a base to take the cost from sender
cost centers. For example: in case of Indirect Activity Allocation,
which is a method of pull approach, the activities on receiver cost
objects are combined and same values are transferred to sender cost
objects as sender activity, which later on are used to transfer
overhead cost from sender cost center to receiver cost centers. Here
the Quantity of receiver cost centers are used as input to transfer the
sender cost, that’s why it is called as Quantity input method. E.g.,
Direct/Indirect activity allocation, template allocations
In general, an automobile organization includes the below
manufacturing departments.

1. Press Shop/ Stamping

Manufacturing 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 rolls of 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 the concept of Activity based
costing, then we need to identify the activities which are performed in
press shop, for example

1. A) SETUP: setup is an activity of putting the iron plates on the

machines in right places to perform the cutting and stamping. In
general, before cutting, a lubricant is used on iron plat so that it
doesn’t get damaged while pressing. Setup is a manual process, which
involve individuals to perform the activities.

1. B) PRESSING: pressing is an activity performed by machine to cut

the iron plat in the piece and then put the stamp to convert the iron
plate into the design of different parts of car.

How the cost will be considered as Setup and pressing, it’s depended
upon the nature of the activities, here in this example we are
considering SETUP as a manual activity so all the wages paid to the
workers could be consider as Variable Setup cost and cost for
lubricant oil used in press shop could also be consider as variable
cost. In this way we can decide activity dependent and activity
independent cost and in SAP it can be used to distribute the cost to
the product. The details can be seen from the below document on how
to differentiate activity dependent and activity independent cost:
2. Body Shop/ Welding

The next department in automobile organization is where welding of

different body parts is done to shape the car. After this step the
structure of car is ready. For activity-based costing, we need to
identify the different activities performed in body shop. Before
deciding what, all activities can be there, we need to validate whether
having two different activities is going to have any impact on product
cost for two or more products, if not, then there is no point in using the
second additional activity. Suppose the organization is making only
two different types of cars, standard module and custom-built car,
suppose machines are used to weld standard modules and individual
are used to weld custom module of cars. In this way we need to
identify the different activities, as there is no specific rule for this.
After identifying the activities, we need to link the cost to the
activity.

3. Paint Shop

The next department is Paint shop, where different layers of color

coating are done on body of car based as per standard procedure or
requirement by customer. Then drying/ heating activity is done to
make the color permanent. All these activities like Painting activity, or
drying activity can be used in activity-based costing as cost carrier
and used to transfer the cost of paint shop to different Production
order and finally to the product.

4. Engine Plant
 In engine plant all different parts of engine are manufactured and
assembled. After manufacturing of engine, it is sent to assembly line
to be included in car. Here we can identify two different activities, like
manufacturing of engine parts and assemble of parts. These activities
can be used to track cost.

5. Assembly Line

The next department is assembling line, where the painted car body
and its engine are assembled. Then car is sent for quality testing.

6. Finish Line or Warehouse

The car is driven on a few miles test track to check for rattles or other
issues. Once a car meets all quality standards, 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 a smaller number of activities as possible and validate

whether creating a new activity is going to provide more accuracy in
the product costing or not.

Activity based costing are beneficial to be used in more complex

manufacturing processes, so it’s advisable to use additional activities
only if it has an impact on accuracy of product cost.
Master Data

Creation of Activity:

T-Code: KL01

Path: SAP Easy Access > Accounting > Controlling > Product Cost
Controlling > Product Cost Planning > Master Data > Activity Type/Price
Planning > Condition Records > Create (KL01)

Purpose: The purpose of KL01 in SAP is to create condition records for

activity-dependent costs used in product costing. It allows users to define
prices for activities performed by cost centers, which are essential for cost
estimation and resource allocation in manufacturing or service processes. By
integrating with cost center accounting, KL01 helps manage activity rates and
facilitates accurate cost distribution during cost calculations. This
functionality supports activity-based costing and detailed cost analysis,
enabling organizations to plan and control their production costs effectively.
 For 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
activity will be used. For
production activities, the
activity categories should be
“F”; for utility cost centers it
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 and what method will be used for distributing
or allocating activities. Different standard options are:

Manual entry, manual allocation (category 1): category 1 activity used

plan activities to allocate activities to receiver cost centers or objects
based on manual activity planning in KP26. Actual activities for
category type 1 are determined through business transaction (e.g.,
confirmation of activity in process order or production orders).
 b. Indirect calculation, indirect allocation (category 2): category 2
activities are used in indirect activity allocation 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 quantities defined 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 manually and the allocation happened through
indirect activity allocation.

d. Manual entry, no allocation (category 4): This category activity takes

the values entered manually and but it’s not allocated.

·Allocation Cost element: while defining an activity in controlling, we need

to define and assign a secondary cost element with category 43
(indirect activity allocation)

·Price indicator: price indicator represent, what method will be used to

calculate activity price. We can say this about plan activity price. For
actual activity price we can define the method in the below tab where
it’s mentioned as Actual price indicator.

i. Indicator 001: if we select 001, then plan activity price are calculated
automatically based on Plan Total Cost divided by plan activity.
ii. Indicator 002: in 002, the variable plan activity price is calculated based
on plan activity and fixed activity price is calculated by considering the
Capacity.

iii. Indicator 003: here the activity price is set manually.

·Actual price indicator: if we define the actual price indicator then system
use this for calculating actual price 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 is determined 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 define Splitting structure. It includes
the rules which should be followed to distribute the fixed cost to
different activities. For the purpose of Planning and Budgeting this is an
important configuration.

T-Code: OKEW (Assign the new cost center to the splitting structure)

Path: SAP Easy Access > Controlling > Cost Center Accounting > Master Data
> Assignments > Splitting > Assign Cost Centers to Splitting Structure.
 Purpose: OKEW is used to assign cost centers to splitting structures in SAP.
This enables accurate allocation of costs across multiple cost centers based
on predefined rules, improving the accuracy of internal cost reporting and
controlling processes.

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

CO-ABC planning is very similar to cost center planning. The customizing

process is divided into the following steps, explored shortly:

1. Maintain the versions.

2. Perform group maintenance.

3. Define layouts and profiles for manual planning.

4. Define the templates for plan data transfer.

5. Define planning allocations.

1.Maintain Versions:

You’ve defined the planning versions for CO-CCA in Chapter 3, and the same
versions defined for CO-CCA are available to use in CO-ABC. You can use
Transaction OKEQ to maintain versions.
2.Group Maintenance:

The grouping functionality is available for business process master data. It

works the same way as cost center and internal order groups and has the same
benefits. Use Transactions CPH1, CPH2, and CPH3 to create, change, and
display the business process groups, respectively.

3.Manual Planning:

In the manual planning step, you’ll define the planning layouts and planning
profiles for CO-ABC planning. You’ve already created planning layouts for cost
center planning in Chapter 3, and the process is similar in CO-ABC. Use
Transaction CP65 to create planning layouts for business process cost
planning, Transaction CP75 for business process quantity/prices planning, and
Transaction CP85 for business process statistical key figures planning.
4.Plan Data Transfer:

Though transfer of quantities from SAP Production Planning (PP) is also

available for CO-ABC, it works differently from CO-CCA, where you defined the
scenarios to transfer from SAP PP to CO-CCA. In CO-ABC, you use a template
to transfer quantities from SAP PP. In the template creation, you must use the
SOP – Transfer Sales and Operations Plan environment.

5.Allocations:

Planning allocations in CO-ABC are based on cycles (the same as in CO-CCA).

The process to customize a cycle for CO-ABC is just like the process you saw
in Chapter3 for CO-CCA. The following planning allocations options are
available for CO-ABC:

Distribution.

Assessment.

Indirect activity allocation.

Distributions and assessments follow the push method (the approach where
you define a sender cost object and a receiver cost object for the costs without
using a valuated quantity structure to perform the allocation). The customizing
of distributions and assessments follows the same principle as for cost center
distributions and assessments. Use Transactions CPV7, CPV8, and CPV9 to
create, change, and display CO-ABC plan distributions, and use Transactions
CPP7, CPP8, and CPP9 to create, change, and display CO-ABC plan
assessments.

Together with templates, indirect activity allocations are used to create the
pull method, where a complex allocation method based on quantity and
 formulas can be used to allocate the CO-ABC costs. Indirect activity allocation
is also customized using allocation cycles, which have been already described
in the Chapter 3. Use Transactions CPC7, CPC8, and CPC9 to create, change,
and display CO-ABC indirect activity allocation. Now that you’ve seen the CO-
ABC planning customizing and its similarity with CO-CCA planning
customizing, you’re ready to move on to the next topic, actual posting

For planning and budgeting of activities, the below processes need to

be followed:

a. Define activities on the cost centers

T-Code: KP26

Path: SAP Easy Access > Accounting > Controlling > Cost Centre
Accounting > Planning > Activity Inputs > Change Price/Activity Inputs
> Change Plan Prices.

Purpose: KP26 in SAP is used to plan and maintain activity prices for cost
centers. It helps allocate costs to cost objects like production orders or
projects based on activity consumption, supports budgeting and cost control,
and integrates with other modules like Product Costing and Production
Planning for accurate cost management.
 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 used to calculate activity prices at KSPI depending upon
price indicator set while defining master data. If we select price

indicator as 002, then fixed activity price is calculated by considering

plan capacity and variable activity price is calculated by dividing plan
activity.

Primary cost planning on cost centers

T-Code: KP06
 Path: SAP Easy Access > Accounting > Controlling > Cost Centre
Accounting > Planning > Cost & Activity Inputs > Change Cost/Activity
Inputs > Change Plan.

Purpose: KP06 in SAP is used for planning costs for cost elements within specific
cost centers. It helps with budgeting, cost control, and providing a basis for
cost allocation, while supporting variance analysis by comparing planned and
actual costs.

All the primary expenses are planned on cost centers through KP06.
Here we can also define activity dependent cost with the combination
of planning at cost element for activity at cost center.

Allocation of expenses or activities:

i. Indirect Activity allocations: it is one of the pull approaches of allocating

the cost from sender cost object to receiver cost object. Here
 overhead costs are allocated in two stapes processes. First the sender
cost centers activities are determined by combining receiver cost
center activities and second the cost is allocated from sender cost
center to receiver cost center/ object. It basically worked on Quantity
calculated inversely. Once we execute indirect activity allocation
cycles, then only activities are allocated but no cost is transferred
from sender cost center to receiver cost centers. Transfer of cost to
receiver cost center can only be viewed after plan cost split (KSS4)
and plan activity price calculation (KSPI). It doesn’t follow the same
process as assessment and distribution, for distributing the overhead
cost. In assessment and distribution, the cost is transferred exactly
after executing the cycles.

ii. Distribution: It is a method of push cost allocation. Distribution cycles

are used to distribute primary cost from sender cost object to receiver
cost object on the basis of fixed percentage, or fix proportion, or
statistical key figures.

iii. Assessment: It is also a method of push cost allocation. Assessment

cycles are used to distribute primary & secondary cost from sender
cost object to receiver cost object on the basis of fixed percentage, or
fix proportion, or statistical key figures. In assessment cycles the
allocation of cost done through assessment cost element.

d. Plan Cost Splitting through (KSS4): plan cost split distributes the plan
fixed cost to the activities assigned to 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:

Ø Accurate product cost calculation based on based assigning overhead

cost based on overhead carriers as activities.

Ø Monitoring of direct and indirect activity cost possible with the help of
controlling activities.

Ø More accurate calculation of profitability and selling prices for multi-

product organization.

Limitations of Activity based Costing:

Ø Not suitable and cost effective for small manufacturing organization to

implement

Ø 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 in SAP. Here we can see how to
identify activities in different manufacturing processes. By carefully
analyzing the business process for manufacturing or production
organization, we can find out cost carrier activities and use activity-
based costing to improve the accuracy of product costing and
profitability analysis.