Expense Analysis and Splitting in

Manufacturing Cost Centers

Introduction
In SAP cost center works as a cost responsibility center, where all the expenses and
costs 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 dont change on the
basis on volume of manufacturing activities, which remain constant irrespective of
production activities, e.g. 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 costs also increase like electricity
consumed, raw material cost etc. However all the variable costs dont vary in direct
proportion to quantity of goods produced.
In this document will try to define how expense analysis and splitting of cost is done
in manufacturing cost centers.
From controlling prospective, fixed costs remain constant regardless of operating
activities, but if this factor changes, variable costs will fluctuate. Basically raw
material costs represent variable cost, but in this document main focus will be given
to distinguishing between fixed and variable activity cost.
The segregation between fixed and variable cost is optional and is derived from the
configuration and master data 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 to 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
focus 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 units to calculate the activity price. Activity independent
costs are segregated among different activities based on Splitting Structure, while
activity dependent costs are directly used for the purpose of variable activity rate
calculation.

Fixed Activity Cost:

In product costing all those costs, which dont vary based on the activities in
manufacturing 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 are those costs which directly depend upon the activity and
fluctuate based on increase or decrease in manufacturing activities. In SAP variable
activity costs 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 words, 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 for activity divided by total
quantity of activity planned at that cost center (i.e. capacity in KP26).

ii.

Fixed cost would be planned 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, we
calculate the 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
needs to be maintained 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.
Assume 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.
There are three planned fixed expenses in engine plant, Depreciation on Machine &
Equipment, Depreciation on Building and Salary. The variable cost for Cutting
activity (defined as RRRR in SAP) is Electricity charges and for Maintenance
activity (defined as SSSS in SAP) is Oil cost.
Cost center:

Activity

Cutting
(RRRR)
Maintenance
(SSSS)

Engine Plant

Expenses
Depreciation
Machine
Depreciation
Building
Salary

Fixed
GL
Cost
Account (USD)

Variable
Cost
(USD)

on
600001

10000

600002
600003

20000
15000

on

Electricity charges

600004

14000

Oil cost

600005

15000

Maintain the Plan Activity and Capacity for the different activities 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, we need to define a 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

Press <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.

Master data requirement Activity type (Transaction

KL01)
Here we can define the manufacturing activities Cutting and Maintenance in SAP.

Here activity type RRRR represents Cutting activity. The activity unit is defined as
Hour. For the purpose of assigning an activity to a manufacturing cost center so that
it can be used in price calculation, the cost center categories should be F i.e.
manufacturing and production cost center.
Price indicator 2 indicates that to calculate Activity Plan price, system will use
capacity.

Define Plan Activity (transaction KP26):

Assume that the total capacity of Cutting (RRRR) and Maintenance (SSSS) are 700
and 300 hours respectively. For the purpose of splitting fixed cost on different
activities, maintain the rules as Capacity, so the splitting rule will follow plan
capacity ratio of (7:3) to distribute fixed costs to Cutting and Maintenance activities.

In KP26 maintain the capacity as 700 Hours and 300 Hours for Cutting (RRRR) and
Maintenance (SSSS) activities.

Define Plan Expenses in KP06 as fixed and variable

depending on 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 cost (i.e. variable cost), need to define expenses on
activity at cost element level. In the screen below variable costs 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 among different activities on manufacturing
cost center, we need to run Plan Cost Split, which will distribute the fixed cost to
different activities assigned to a cost center in KP26 transaction based on the rule
defined in splitting structure. Here for the purpose of simplicity we have defined the
splitting rule 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 with test run, if no errors occur then execute
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 distributes 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:
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 occur then execute
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.

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
A:- Capacity
B:- Variable Cost
i. Electricity
charges
ii. Oil cost
C:- Fixed Cost
D:- Fixed cost Split
(Split based on
Capacity)
E:- Total Cost (B+D)
F:- Variable Activity
rate (B/A)
G:- Fixed Activity
rate (D/A)
H:- Plan Activity
rate (F+G)

Total
Activity
1000
29000

Cutting Maintenance
700
300

14000
15000

USD
USD
USD

13500
28500

USD
USD

45000

(7:3)
74000

31500
45500

Unit
Hours
USD

20

50 USD/H

45

45 USD/H

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 cost center report below, 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 amount is 74,000 /-, which includes 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 explains the process of differentiating between Plan Fixed
Cost and Plan Variable Cost and how the SAP can be used to differentiate between
Plan Fixed and Plan Variable cost in manufacturing activities.
Now we will look the actual expenses splitting between Fixed and Variable cost. For
actual expense analysis, we need to understand two different concepts, first the
posting of documents at GL accounts to represent actual expense, and the second
transfer of actual cost from cost center to production or process order.

1. Posting of Actual Expenses at GL accounts: Accounting documents are

posted only when there are events with financial impact. So to record the financial
impact of event, we 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 recorded through accounting
documents. Actual expenses are recorded at GL account level 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 checks the rule defined at the time of Plan splitting. It considers 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 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 costs which get transferred from
cost center to process order basically represent planned 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 from support cost centers.

For illustration of actual expense analysis journal entries have been posted and
activities have been confirmed at process order level. Expenses for amount of
18,548.75 /- have been posted and 150 hours of Cutting activities and 100 hours of
Maintenance activities have been confirmed at manufacturing cost center Engine
Plant. The cost center reports are below:

After Activity confirmation the activity costs are calculated as (Actual Activity* Plan
Cost)
The cost of 150 Hours of RRRR Cutting activity is 9750 CHF (150 Hour *65
CHF/Hour)
Similarly the cost of 100 Hours of SSSS Maintenance activity is 9500 CHF (100
hours *95 CHF/Hour)
So it can be said that at the time of activity confirmation on process order, system
calculates 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 errors are encountered then execute
the transaction without test run.

Actual price calculation KSII

Now the Actual Activity Price

At the time of actual cost split, in order to differentiate between actual fixed and
actual variable cost, the system checks the same rule defined at the time of Plan cost
splitting. It considers the GL account expense as 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 works on the basis on Plan 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 considered as variable at actual expenses also. If any accounting
documents are posted on these accounts by assigning same manufacturing cost
center, then system considers this as activity dependent cost and calculates actual
variable activity rate.
d. Actual activity variable rates are 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 considered as Fixed
in nature. Fixed expenses are distributed to different activities assigned to cost
center on the basis on Plan Capacity. In this example 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 rates are calculated by dividing fixed costs on activity by actual
activities confirm at process or production orders.

Conclusion
With the help of this document, we have learnt 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 be a management decision,
which can vary from industry to industry and company to company. Once we decide
the nature of expenses, we can use the above concept to distribute the expense on

fixed and variable activity rate, which could be further used in product costing as part
of product cost.
Here the example given is for one manufacturing cost center to illustrate the concept.
This can be applied on multiple manufacturing and support cost centers and can be
used for the purpose of overhead management as well.