Expense Analysis and Splitting in Manufacturing Cost

Centers
In SAP Cost center work as a cost responsibility center, where all the expenses and cost are stored
and analysed for the purpose of management decision making.

The cost could be fixed or variable in nature. The difference between variable and fixed costs can be
made in various ways in product costing in CO module.

Fixed costs represent the static costs incurred by the organization, which doesn’t change on the basis
on manufacturing activities, which remain constant 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 production activities increase then variable cost also increased like electricity
consumes raw material charges etc.

However all the variable cost doesn’t vary in direct proportion by quantity of goods produced.

In this document will try to define; how the Expenses analysis and splitting of cost done in
manufacturing cost centers.

From controlling prospective, fixed cost remain constant regardless of operating activities, but if
these factor changes, variable cost will fluctuate. Basically raw material costs represent variable cost,
but in this document main 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
master data configured in cost center accounting and overhead accounting.

Activity Price:

There are different methods that could be used in cost center accounting to determine the activity
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 automatically calculate the
fixed and variable activity price. Here the focused will be given on Planning and Budgeting activity
and automatic calculation of plan activity rate in cost center. This method aggregates 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 costs, which doesn’t vary based on the activities in manufacturing cost
will represent fixed cost. In a manufacturing cost centers there may be two or more activities
performed. To calculate the activities rate, the fixed costs are distributed to various activities on the
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 decrease in manufacturing activities. In SAP variable activity cost are directly linked to the
respective activity.

Activity Prices: Fixed and Variable Split

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In Cost Center Accounting dividing the cost between Fixed and Variable requires appropriate split to
be made in the cost entered for the activity. The process is described below:

• Variable cost would be planned at activity level and expenses should be maintained at cost
element 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 variable activity rates are calculated on Total cost
planned at Activity divided by Total number of activities planned at that cost center (i.e.
capacity in KP26)
• Fixed cost would be planned at independent of activity type. These costs are maintained in
KP06 at cost element level on manufacturing cost center. Then the fixed costs are distributed
on various activity types on the basis of Splitting structure defined at OKEW. In Splitting
Structure we define the rules, how the fixed cost will be distributed to Activities. For the
purpose of this document, considering split of fixed cost on the basis 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, having two
activities “Cutting” and “Maintenance” for the purpose of creating engine parts. Before starting any
batch of material to process, the machine need to be “Maintain” to be ready for the process, for
which it required to use cleaning oil to clean the machine and then the next process start 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
manual process, and Electricity cost as variable cost for the purpose of “Cutting” activity, which is
automatic process. 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 cost for
activity “Cutting activity” (let “RRRR” in SAP) is Electricity charges and for “Maintenance activity” (let
“SSSS” in SAP) is Oil cost.

Cost center: Engine Plant

Activity Expenses GL Account Fixed Cost Variable Cost

(USD) (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 Plan Activity and Capacity for the different activity on cost center “Engine Plant”

Configuration of Splitting Structure

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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.

Transaction: OKEW (Assign the new cost center to the splitting structure)

Specify Cost center and Fiscal year

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Click <Enter>

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 to activities 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.

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Here activity type “RRRR” represents Cutting activity. The activity unit is defining as Hour. For the
purpose of assigning an activity to a manufacturing center so that that can be used in recipe, the cost
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 hours
respectively. For the purpose of Splitting Fixed cost on different activity, maintained the rules as
“Capacity”, so the splitting rule will follow plan capacity ratio of (7:3) to distribute fixed costs to
Cutting and Maintenance activity.

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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 depending upon activity.

KP06 is used for the purpose of Primary expenses planning in cost center accounting. Here we can
define both activity dependent and activity independent cost. For the purpose of Activity dependent
(i.e. activity variable cost), 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 KSS4

For the purpose of Splitting Fixed cost to different activities on manufacturing cost center, need to
run Plan Cost Split, which will distribute the fixed cost to different activities assigned to the same cost
center as KP26 transaction based on the rule defined in splitting structure. Here for the purpose of
simplicity defined the splitting run based on “capacity” to distribute all fixed cost. The splitting rule is
defined in OKEW transaction.

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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 test
run”.

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

Plan Activity Price calculation KSPI

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After Plan cost split, the next step if Plan price calculation. Plan price calculation basically helps to
calculate “Plan Activity Rate”. The activity rate could be in two parts, i.e. Fixed Activity rate and
Variable 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
Primary cost planning (KP06), divided by Capacity.

· Total Activity rate include both Fixed and Variable activity rate. It’s calculated by dividing total
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 “Without test
run”

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Report for Activity rate (KSBT): Through transaction KSBT, we can see the Plan and Actual Activity rate
for the cost center. In the below screen variable, fixed and total activity rate have been displayed 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
cross reconciled with the Activity type Price Report in the above screen.

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 (7:3) 31500 13500 USD
on Capacity)

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 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

Cost Center Report

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

At cost center “Engine Plant” total debit is amount 74,000 /-, which include both Fixed and variable
cost. Total cost transferred to activities “Cutting” and “Maintenance” is 45,500 USD and 28,500 USD
respectively.

Actual expenses splitting for manufacturing cost centers

Till now this document explain, the process of difference between Plan Fixed Cost and Plan Variable
cost. How the 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 GL accounts to represent actual expense, and second transfer of actual cost from cost
center to production or process order.

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1. Posting of Actual Expenses at GL accounts: Accounting documents are posted only when there
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 or FB01 etc. In
the same way, the actual expenses in manufacturing cost centers are also recorder through
accounting documents. Actual expenses are recorded at GL account level, at actual expenses we
don’t define, whether the expenses are activity dependent or activity independent in nature. At the
time of actual cost split to differentiate between actual fixed and actual variable cost, system check
the same rule defined at the time of Plan splitting. It consider the GL account expense as variable
expense if it has been assigned as variable/ activity dependent expense at Primary cost planning in
KP06.

2. Transfer of Actual cost from Cost center to Process order: this process is called as secondary
allocation, i.e. movement of costs within controlling module only. Here No Finance documents are
created. Transfer of Actual cost from Cost center to Process or production order happened when the
plant controllers confirm the completion of Activity at order. The cost which get transferred from 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 at this time we don’t
have actual activities rates calculated. The Actual activity rates are calculated at the time of monthly
period end closing activities, when all the actual expenses are posted on manufacturing 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 few FB50
entries and Activity confirmation at Process order level. For the purpose of testing, I have passed
accounting documents for amount of 18,548.75 /- and confirmed 150 Hours of Cutting activities and
100 hours of Maintenance activities at manufacturing cost center “Engine Plant”. The cost center
reports are below:

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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 *95
CHF/Hour)

So it can be say that at the time of activity confirmation on process order, system calculate the cost
of actual activity at Plan activity rate.

Actual Cost Splitting (KSS2) and Actual Activity Price calculation (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
activities should be closed)

Execute the transaction on test run first, if no error comes then execute without test run.

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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 the same rule defined at the time of Plan splitting. It consider the GL account expense as

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variable expense if it has been 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
consider as variable at actual expenses also. If any accounting documents are posted on these
accounts by assigning same manufacturing cost center, then system consider this as activity
dependent cost and used to calculate actual variable activity rate.

d. Actual activity variable rate is calculated by dividing variable cost by actual activities confirm at
process or 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 Plan Capacity,
for this case total fixed cost of 18016.25 has been distributed to “Cutting RRRR” and “Maintenance
SSSS” activities on the basis of capacity ratio (7:3) maintained in KP26.

f. Actual activity fixed rate is calculated by dividing fixed cost on activity by actual activities
confirm at process or production orders.

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