Allocating Process Costs to a Product

Activity-Based Costing can be used to add transparency of indirect costs. For example, indirect costs can be allocated more accurately on the basis of a statistical value such as the number of sales orders, credit checks, purchase orders, or goods receipts for a material. The purpose is to accurately account for indirect costs based on a specific cost driver. Activity-Based Costing is a more accurate method than the smoothing method of overhead allocation using the costing sheet. It requires more analysis and planning to determine significant overhead costs and how they can be accurately applied to a product.

This section explains how to use activity-based costing and the technical aspects of template allocation in Product Cost Planning (PCP). The objective is to help you decide whether activity-based costing and the origin-based allocation of overhead blocks is the right method for your company to use.

Activities and Aims

The characteristics associated with activity-based costing are as follows:

• Overhead transparency:
  • Use of resources by processes
  • Quantity-based allocation of overhead
• Increased efficiency:
  • Use of capacity of indirect areas
  • Constant monitoring of internal processes
  • Interface management on a process-oriented basis
• Accurate costing through origin-based allocation of internal activities

The aims of activity-based costing are as follows:

• Reduction in overhead through optimization of processes
• Increase in profitability

Cost Parts

Material costing with quantity structure can allocate cost parts that are not contained in the bill of material (BOM) or routing.

The two main reasons that necessitate allocation of cost parts not contained in the BOM or routing are as follows:

• Identifying overhead blocks and their costs

• Identifying causal origin-based relationships with products that use these overhead blocks

Business Process

An Activity-Based Costing process can carry a price similar to an activity price, which can be applied to a product cost.

By using organization management allocation methods, the process receives costs that it can pass on to products. Operative Activity-Based Costing is an excellent method of allocating significant indirect costs such as indirect labor for warehousing, sales, and shipping, or quality management.

A business process is a process or an activity within a company that uses resources and activities from one or more cost centers. The business process is one of the master data objects used in activity-based costing and it is a measurement for output.

Like cost centers, business processes can be planned on cost accounting lines. The system can calculate a price for the output quantity of a business process. To determine the price, the system uses an allocation cost element stored in the business process master.

A process template can control the application of process costs. The template is linked to a type of cost driver to determine the amount of indirect costs to allocate to a product. The cost drivers for a process template can be located in various sources. It can use statistical key figures, Logistics Information System (LIS), and other sources, to determine the appropriate process values. The process template can include multiple processes or even multiple process templates to allocate as many indirect costs as appropriate. Provide a few business examples, such as warehousing material handling costs per movement or movements between different work centers for each operation.

For each process identified in a process template, logic can be defined to determine if a process is allocated to a product and how to calculate the quantity of cost drivers that will determine the amount of indirect cost to apply to the product. The quantity formula can read values from the material master or order (BOM or routing) to determine the number of movements and, if necessary, the amount of time (duration of order to determine storage costs). The process template can be defined to use functions to determine various results for various circumstances.

The process templates are assigned to the overhead sheet and overhead key, so that the templates can be recognized as required. Explain that it is possible to simultaneously use Activity-Based Costing, overhead sheets, and activity types as methods of overhead application. The assignment entry must define the controlling area and environment. The costing sheet and overhead key are optional. Process costs can also be allocated directly through a work center and work center formula. It is not necessary to allocate it through a template.

Templates are centrally maintained tabular frameworks.

The Object column can contain business processes, cost centers or activity types, templates, or object formulas.

The Quantity column is subdivided into plan and actual quantities because the planned and actual quantities to be allocated have different sources. For example, the planned quantity can be the lot size and the actual quantity can be the true quantity.

The Activation column is subdivided into plan and actual. For example, the work scheduling business process should be allocated only if products are semi-finished or finished. In this case the activation formula is "Material type = HALB or FERT". This applies to both plan and actual quantities.

For example, there are two plants, plant 1 and plant 2, each with local work scheduling. You created two business processes, WS-1 for plant 1 and WS-2 for plant 2. The system needs to ensure that products in plant1 are allocated automatically to WS-1 and products in plant 2 are allocated automatically to WS-2. The object formula is "If product from plant=1 then WS-1; if product from plant=2 then WS-2". The template function can be used for an overall view and reuse of the rules.

Formulas in the Template

The use of formulas in templates provides a high degree of flexibility and efficiency in designing origin-based rules. The formulas let you define allocation quantities and specify whether allocation should take place or not.

The standard system contains functions that assign environments to templates. The environment of a template supplies information relevant to cost drivers to the system. An environment limits the use of functions to those that are applicable only in the context selected. For example, the standard SAP S/4HANA application contains environments for production, product cost by period, sales orders, and reference and simulation costing.​

The standard functions are arranged in function trees and contain short descriptions. The template is designed in such a way that it can be enhanced by the user. For example, you can create user-specific functions centrally and make them available in the environments.

Consequently, you can access external and customer-specific structures and additional master data fields and use them in object, quantity, or activation formulas. The technical process of creating customer-specific functions is usually handled by IT departments because it requires programming knowledge.

The templates and formulas are designed to be maintained centrally for automatic use in cost accounting throughout the company.

Assignment of Templates

To assign the costing sheet and overhead key a template, you have to make the relevant settings in customizing.

To assign the overhead key to the master data, you can navigate through either of the following paths:

• Material master→Overhead group→Overhead key
• Base planning object→Master record→Overhead key

You can use the overhead key to specify whether the system finds one or more templates.

When you execute a material cost estimate, you can display the way the system interpreted the templates for the material. If more than one template was used, you can only analyze one in the cost estimate display mode. For further analysis, you use the information system.

• Activity-Based Costing provides transparency and accuracy in allocating indirect costs based on specific cost drivers.
• Process Templates control the application of process costs using cost drivers from various sources, enhancing allocation efficiency.
• Template Formulas offer flexibility in defining allocation rules, enabling efficient origin-based cost allocation.
• Templates link customized settings with costing sheets and overhead keys for precise cost estimation.
• Business Processes utilize resources from multiple cost centers, enabling effective allocation of significant indirect costs.