Expense Analysis and Splitting in

Manufacturing Cost Centers

Introduction
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:
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.

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Expense Analysis and Splitting in Manufacturing Cost Centers

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 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
Expenses

GL Account

Fixed Cost (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

Activity

Variable Cost
(USD)

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

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Expense Analysis and Splitting in Manufacturing Cost Centers

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)

Specify Cost center and Fiscal year

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Expense Analysis and Splitting in Manufacturing Cost Centers

Click <Enter>

Double click on splitting structure for Manufacturing cost center (FF).

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Expense Analysis and Splitting in Manufacturing Cost Centers

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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Expense Analysis and Splitting in Manufacturing Cost Centers

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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Expense Analysis and Splitting in Manufacturing Cost Centers

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)

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Expense Analysis and Splitting in Manufacturing Cost Centers

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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Expense Analysis and Splitting in Manufacturing Cost Centers

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:

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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Expense Analysis and Splitting in Manufacturing Cost Centers

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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Expense Analysis and Splitting in Manufacturing Cost Centers

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

i.
Electricity
charges

USD
14000

ii. Oil

USD

15000

USD

cost
C:- Fixed Cost

45000

USD

D:- Fixed cost

Split (Split based
on Capacity)

(7:3)

31500

13500

USD

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

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Expense Analysis and Splitting in Manufacturing Cost Centers

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.
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

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Expense Analysis and Splitting in Manufacturing Cost Centers

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.
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 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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Expense Analysis and Splitting in Manufacturing Cost Centers

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.

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Expense Analysis and Splitting in Manufacturing Cost Centers

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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Expense Analysis and Splitting in Manufacturing Cost Centers

Actual price calculation KSII

Now the Actual Activity Price

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Expense Analysis and Splitting in Manufacturing Cost Centers

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.

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

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Expense Analysis and Splitting in Manufacturing Cost Centers

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 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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