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Expense Analysis and Splitting in

Manufacturing Cost Centers
September 4, 2013 | 4,735 Views |

Manish Kr Sharma
more by this author

FIN Controlling
FIN (Finance) | Manufacturing | SAP ERP | activity | analysis | center | co | controlling | cost | dependent

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Introduction

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In SAP Cost center work as a cost responsibility center, where all the
expenses and cost are stored and analyzed 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 doesnt 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 doesnt 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 aggregate 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:

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In product costing all those cost, which doesnt 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

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:

i. 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 activity planned at that cost
center (i.e. capacity in KP26)

ii. 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

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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

(USD)

Depreciation on Machine 600001 10000

Depreciation on Building 600002 20000

Salary 600003 15000

Cutting (RRRR) Electricity charges 600004

Maintenance (SSSS) Oil cost 600005

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

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.

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

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Specify Cost center and Fiscal year

Click <Enter>

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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.

Here activity type RRRR represents Cutting activity. The activity unit is
defining as Hour. For the purpose of assigning an activity to a manufacturing

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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.

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:

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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.

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.

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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

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. Its calculated
by dividing total cost by capacity.

Run transaction KSPI, then select the below details:

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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

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.

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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 Mainten

A:- Capacity 1000 700

B:- Variable Cost 29000

i. Electricity charges 14000

ii. Oil cost

C:- Fixed Cost 45000

D:- Fixed cost Split (Split (7:3) 31500

based on Capacity)

E:- Total Cost (B+D) 74000 45500

F:- Variable Activity rate (B/A) 20

G:- Fixed Activity rate (D/A) 45

H:- Plan Activity rate (F+G) 65

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.

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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.

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 dont 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.
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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 dont 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 variable expense if it has been
assigned as variable/ activity dependent expense at Primary cost planning in
KP06.

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Finding of Actual Expenses Analysis and Splitting:

Actual expenses splitting work on the basis on Plane cost splitting.

Actual expenses are divided into two parts, i.e. Fixed and Variable.

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.

Actual activity variable rate are calculated by dividing variable cost by actual
activities confirm at process or production orders.

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.

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

Conclusion
With the help of this document, I have tried to explain how we can manage the
plan and actual expenses in fixed and variable part. Deciding whether
expenses will be dependent on activity or independent of activity will depend
upon management decision making, which can vary from industry to industry
and company to company. Once we decide the nature of expanses then we

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can use the above concept to distribute the expense on fixed and variable
activity rate. Further on which could be used in Product costing as part of
product cost.

Here the example has been given for one manufacturing cost center to
illustrate the concept. This can be applied on multiple manufacturing and
support cost center and can be used for the purpose of overhead
management.

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43 Comments
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Preeti Lohchab

September 6, 2013 at 5:41 am

Its a very good document on SAP Controlling with full details of Plan & Actual Cost
Splitting.

arturo senosain

September 8, 2013 at 4:55 am

Hi Manish.

https://blogs.sap.com/2013/09/04/expense-analysis-and-splitting-in-manufacturing-cost-centers/ 17/31
10/10/2017 Expense Analysis and Splitting in Manufacturing Cost Centers | SAP Blogs

Nice you spend time sharing!

Arturo.

NITESH PATEL

September 9, 2013 at 10:57 pm

Very helpful document.

keep it up.

Nk

Pranav Agrawal

September 10, 2013 at 2:48 pm

Its really nice doc. Good to understand Plan & Actual cost behavior.Really appreciate
for the contribution.

Very informative example with activity dependent & independent cost.

Thanks

Ravi Sankar Venna

September 10, 2013 at 3:26 pm

Nice blog Manish.

Kind Regards,

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Ravi

Satendra Singh Sikarwar

September 11, 2013 at 4:22 am

Hello Ravi

Very Informative & helpful document.

Warm Regards,

Satendra Singh SIkarwar

Rajneesh Saxena

September 11, 2013 at 6:15 am

Dear Friend

Indeed great work. Very informative and useful.

Regards

Rajneesh Saxena

Hrusikesh Dalai

September 17, 2013 at 12:46 pm

Very informative Manish well done

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MANOJ SHARMA

September 19, 2013 at 9:07 am

Very exhaustive and exclusive document

Keep it up.

With Love

Manoj Sharma

raja sekhar

September 19, 2013 at 9:33 am

HI Manish,

Great insight..! Keep it up.

Regards

Raj

Vijay Anandhan

September 19, 2013 at 10:15 am

Hi Manish,

Very Informative

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10/10/2017 Expense Analysis and Splitting in Manufacturing Cost Centers | SAP Blogs

regards,

vijay

David Feng

September 20, 2013 at 12:48 pm

This is an Wonderful document, loved it good work

Sudhir Krishna Kumar Singh

September 27, 2013 at 10:33 am

Very helpful, thanks for sharing

Murali Babu Nallamothu

September 27, 2013 at 12:12 pm

Excellent document.

Thanks for the sharing.

Srinivas Salpala

October 1, 2013 at 9:28 am

Hi Manish,

Very easy to understand for everyone. Keep share the knowledge!!!

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BR, Srinivas Salpala

veenu gulati

October 3, 2013 at 1:55 pm

Excellent document

Thanks for sharing.

Regards

Veenu

indranil sen

October 5, 2013 at 5:04 pm

Excellent and detailed . Really helpful for someone who wants to implement actual
activity calculation .

Regards

Indranil

G SRINIVASA RAO

October 6, 2013 at 9:51 am

hi manish,

its very usefull document thanks for sharing..

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Regards

srinivas

maalik maalik

October 6, 2013 at 4:41 pm

Hi MS

GOOD WORK AND HELPFUL & UNDERSTAND EASILY

Expect many more .which are helpful and useful

Ram Vusirikala

October 7, 2013 at 10:03 pm

Manish

Well laid out details with good explanation for the reader to grasp the content. The
document demonstrates your handle on the process knowledge. Thanks for sharing.

Best

Ram Vusirikala

raja sekhar

October 11, 2013 at 4:14 pm

HI Manish,

https://blogs.sap.com/2013/09/04/expense-analysis-and-splitting-in-manufacturing-cost-centers/ 23/31
10/10/2017 Expense Analysis and Splitting in Manufacturing Cost Centers | SAP Blogs

Nice explanation..! But small doubt.. i.e.,

Is it Plan Activity Rate Or Actual Activity Rate which was mentioned in the Actual Activity
Analysis?

Plan
I Activitiy
Rate (G+H)

Regards

Raj

Manish Kr Sharma Post author

October 11, 2013 at 4:50 pm

Hello Raj

Its Actual Activity rate. Thanks for the point.

Regards

Manish

Lakshmi Kumari Sama

October 26, 2013 at 4:42 am

Hi Manish,

It is a good document.

Best Regards,

Lakshmi S
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Naresh Krishnamoorthy

October 30, 2013 at 6:09 am

Useful oneThanks.

Best Regards,

Naresh K.

Narasimhulu Konnipati

November 17, 2013 at 1:27 pm

Nice one Manish.

Keep up the good work

Thanks,

NSK

nikki saju

December 3, 2013 at 9:15 am

Very good effort..thx

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NITESH PATEL

December 6, 2013 at 9:24 pm

Hi Manish,

Screen shot for Cost center report for planned cost I can see that values for each cost
element is changed. e.g. for CE 600001- $15000 in report, where as in KP06 it was
planned for 10000. Same for other CE also.

Did I miss some thing?

Thanks

NK

Pankaj Agarwal

May 6, 2014 at 2:22 pm

Very good document..quite detailed.

Santosh Sharma

June 25, 2014 at 6:25 am

Very good documents.

Regards,

Santosh Sharma

lakshmi p

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June 25, 2014 at 9:52 am

Hi Manish,

Well explained and appreciate for your good work keep it up expect more
documents in SCN. Thanks to share your knowledge.

Thanks

Lakshmi

Manish Kr Sharma Post author

June 25, 2014 at 12:49 pm

Thank you all

Best regards,

Manish

Vivaan Vijay Ganesh

July 11, 2014 at 6:46 am

Hi Manish,

Indeed great work. Very informative and useful.

Regards,

Vivaan

Pavan Kumar Arvapally

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August 16, 2014 at 9:49 am

Hi Manish,

Excellent work done.

Regards,

Pavan Kumar Arvapally

Manish Kr Sharma Post author

August 18, 2014 at 5:33 am

Thank you all.

Mansoor Khan

August 25, 2014 at 11:52 am

Dear Manish,

Excellent, Thanks for your patience & effort.

Regd,

Khan Mansoor.

Rajinder Kumar Mangal

September 9, 2014 at 9:16 am

Dear Manish,

https://blogs.sap.com/2013/09/04/expense-analysis-and-splitting-in-manufacturing-cost-centers/ 28/31
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Excellent, Thanx for explaining

Regards

Rajinder

Balaji Chapala

November 3, 2014 at 7:35 am

Hi,

It Very good documents, and possible pls add if the manufacturing cost center received a
expenses through distribution and assessment, how that expenses are treated in price
calculation, then it will cover entire expenses of fixed and variable activity price
calculation.

T & R,

Balaji C

nikki saju

February 10, 2015 at 6:24 am

Good work Manish.

Din Yaln

February 9, 2016 at 2:42 pm

nice info thanks

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kittu ramkey

February 10, 2016 at 11:58 am

HiManish

I Tried the what your sharing the document it was excellent .i Understand the clearly your
document it awesome report i got it.

Thanks and regards

P.Ramakrishna

Iara Oliveira

April 12, 2016 at 6:51 pm

Hi Manish,

Excellent, Thanks for explaining

Regards

Kazi Sakib Hasan

May 22, 2016 at 5:48 am

Very helpful for a beginner like me. After reading the doc Ive understood a complex
procedure easily. Thanks for sharing.

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Arnab Sen

August 13, 2016 at 3:16 pm

Hi Manish

This is really an excellent document. Thanks for sharing it. I have one question
regarding calculation of actual costs, that I couldnt answer from your document.

If I dont plan activity costs using KSS4 and KSPI, but do it directly using KP26, is it
possible for the system to calculate actual costs and split it into fixed and variable costs
when I run KSS2 and KSII?

From what I could understand from your document, system splits the fixed costs
between multiple activities using the splitting structure configuration. But how does the
system identify the cost elements for variable portion costs? Can it do so if I dont do
cost element + activity type level of planning in KP06?

Thanks

Arnab

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