Cost accounting in SAP ERP systems can significantly enhance a company's

understanding of product pricing, cost trends, and department performance,

but it's often underutilized. This article delves into three main methods for
allocating overhead costs in product costing: costing sheets, template
allocation, and overhead allocation via activity type, particularly focusing on
their application in the shoe manufacturing industry.

1. Costing Sheet Method

Explanation: Costing sheets are used to allocate indirect costs based on fixed
percentages or quantities. For example, a shoe manufacturer might allocate
5% of the material cost plus 1 EUR for every hour of labor involved in making
a pair of shoes.

Pros:

 Simple and easy to implement.

 Suitable for businesses with minor overhead costs compared to direct
costs.

Cons:

 Does not absorb all indirect costs fully, which can leave balances in the
cost centers at the end of the period.

Best for: Companies looking for a straightforward method and have a smaller
proportion of overheads.

2. Template Allocation Method

Explanation: This method uses predefined templates that trigger cost
allocations based on specific events, like order release or delivery. In a shoe
factory, this could mean allocating costs for quality control based on the
quantity of shoes delivered.

Pros:
  Allows for full cost absorption and can track variable overhead costs
effectively.
 Offers flexibility and maintains complex cost accounting systems within
SAP ERP.

Cons:

 More complex to set up and manage.

Best for: Complex organizations that need detailed tracking and

customization in their cost accounting.

Setup in SAP: To use template allocation, you need to enable "Parallel and
integrated calculation" in the controlling area settings (TCODE OKKP) and set
up a standard hierarchy for business processes (TCODE OKW1).

3. Overhead Allocation via Activity Type

Explanation: This method involves allocating overheads similar to how direct
costs like labor or machine usage are allocated. For instance, a shoe
manufacturer may include machine depreciation or electricity costs based on
the machine hours used.

Pros:

 Integrates overhead allocation with direct costs, simplifying the process.

 Enables actual overhead calculation alongside direct costs.

Cons:

 Requires new activities to be added just for costing, limited by the

maximum of six standard values in routings.

Best for: Businesses where overheads can be closely tied to direct activities,
such as machine usage in a shoe factory.

Additional Steps in SAP:

  Set the "Own business transaction" parameter to "Actual (OKEQ)".
 Configure activity types with "Actual price, automatically based on
activity" (Indicator 5).
 Regularly calculate actual prices (KSII) and post cost center variances
(CON1).

Alternatives for Overhead Costs in Shoe Manufacturing:

If standard methods don’t fit, shoe manufacturers can include overheads
directly in the planned activity rates, simplifying the allocation process but
potentially limiting detailed overhead analysis. Alternatively, overheads can be
randomly loaded using additive cost functionality, a less precise but flexible
method.

Each method has its strengths and challenges, and the choice depends on the
specific needs and complexities of the shoe manufacturing process. By
optimizing these SAP ERP functionalities, shoe manufacturers can gain better
control over their costs and pricing strategies.

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with more example in detail
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Let's delve deeper into the three main methods for allocating overhead costs
in the context of a shoe manufacturing company, providing detailed examples
to illustrate how each method can be applied effectively.

1. Costing Sheet Method

Detailed Example: Suppose a shoe manufacturing company produces various
types of shoes. To allocate overhead costs using the costing sheet method,
they might set up a simple allocation rule like this:
  Material Cost Allocation: 5% of all material costs are added as
overhead. For instance, if the material cost for a pair of running shoes is
$50, an additional $2.50 (5% of $50) is added as overhead.
 Labor Cost Allocation: $1 per hour of labor. If it takes 3 hours to
assemble a pair of shoes, an additional $3 is allocated as overhead.

This method would be reflected in their costing sheets in SAP, specifying these
percentages and fixed amounts for each cost element. This simple structure
makes it easy for the company to understand and manage their overhead
costs, although it might not capture the full complexity of actual overhead
expenditures.

2. Template Allocation Method

Detailed Example: In a more complex scenario, the shoe company uses
different machines and processes that contribute variably to overhead costs.
They could set up a template allocation in SAP that triggers specific overhead
costs based on production milestones:

 Quality Control Costs: Allocate $0.50 per pair of shoes for every batch
of 100 shoes tested. If a batch of 200 shoes is tested, $1.00 is allocated
to that batch as overhead for quality control.
 Machine Setup Costs: Allocate $10 for every time a machine setup
occurs, regardless of batch size. If the setup occurs 10 times a month,
$100 is allocated as overhead.

These templates allow for precise and flexible allocation based on actual
activities and events in the production process. They enable the company to
track the specific overhead costs associated with different stages of
manufacturing, providing better insights into cost drivers.

3. Overhead Allocation via Activity Type

Detailed Example: In this method, indirect costs like machine depreciation or
energy costs are allocated in the same way as direct labor and machine costs,
based on activity types. For instance:
  Machine Depreciation: Allocate $0.10 per machine hour used. If a
stitching machine runs for 1,000 hours in a month, $100 is allocated to
the products made using that machine.
 Energy Costs: Allocate $0.05 for every kWh of electricity used by the
machines. If a cutting machine uses 2,000 kWh in a month, $100 is
allocated as overhead.

This method ties overhead costs directly to the use of resources in the
production process, making it possible to calculate both direct and indirect
costs concurrently. This integrated approach provides a clear picture of total
production costs, linking overhead more closely to specific production
activities.

Implementing in SAP:
For each of these methods, the shoe manufacturing company would need to
configure their SAP system to handle the specific rules and calculations:

 Costing Sheets: Define percentage or fixed rate allocations in the

costing sheet settings.
 Template Allocations: Create and assign templates that trigger based
on defined production events, using transactions such as TCODE OKKP
for controlling area settings.
 Activity Types: Define and manage activity types with specific overhead
rates, ensuring proper tracking of resource usage and associated costs.

Each method offers different advantages, depending on the company’s

production complexity, volume of overhead costs, and management's
preference for simplicity or detail in cost tracking. By choosing the appropriate
method and configuring their SAP system accordingly, the shoe manufacturer
can achieve greater accuracy and insight into their cost structures.
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