Performing Activity-Based Costing (ABC)

Objective

After completing this lesson, you will be able to perform Activity-Based Costing (ABC)

Business Example

As a project controller, you need to know how overheads are determined for your projects. You are interested in reducing overheads by improving processes within your company. You may want to have additional cost plan scenarios, so you want to gain an understanding of CO versions and how you can use them to establish different cost plans. The cost center managers also like to know how many activity hours are being planned by projects. For this reason, you want to gain an understanding of how Project System is integrated with cost center planning.

Activity-Based Costing (ABC) is another form of cost allocation. ABC allocated process quantities are based on resource and process drivers, which enables you to define cost allocation more precisely along the value-added chain than is possible with overhead rates.

Activity-Based Costing (ABC)

Diagram showing cost allocation from cost centers to a process using assessments, activity inputs, and process inputs, with template allocation for additional processes.

ABC supplies strategic information that can be used to:

  • Reduce overheads by improving processes.

  • Increase profitability by highlighting unprofitable products or customers.

Advantages of ABC

  • Transparent overheads

  • Parallel quantity and value flows

  • Precise assignment of internal activities to consumer

  • Use of cost drivers instead of overhead costing sheets to distribute overheads based on all of the cost drivers

Processes in ABC are complete controlling objects. A secondary cost element is assigned to the process master record. As in the case of cost centers/activity types, you can maintain prices for the process either periodically or the prices are calculated iteratively using activity and cost input planning. When a process is allocated to a cost object, the process is credited using a rate for the process, and the cost object is debited.

Processes are debited to cost objects or profitability segments using ABC.

Process Costs for Projects

You can allocate process costs to cost objects or profitability segments by assigning a template, which is dynamically determined during cost calculation. In the Project System, you can assign templates to WBS elements, networks (header assigned), or network activities. You make the assignment based on the overhead costing sheet and overhead key that are assigned to the cost object.

A single-process template can allocate multiple processes or include other process templates. You enter one process for each line in the process template. By referencing a sub-template in a template, you can create multilevel template allocations.

The cost driver determines the quantity used by the cost object. The cost driver enables you to allocate the relevant values to all the levels in the process hierarchy as far as cost objects or profitability segments. Cost drivers can originate from various sources in the SAP system or external systems (for example, weight in the material master, number of components, activities of a particular category, work centers in the network, or number of sales orders for market segment). The quantities determined by the cost driver are multiplied by the price of the process. The resulting value is then charged to the cost object (for example, a WBS element or network/activity) and the process is credited.

For example, you can determine the number of externally processed or service activities and the number of directly procured components in the network. The total is multiplied by the price of one purchasing transaction (vendor selection, purchase order entry, and purchase order monitoring).

How to Perform ABC

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Perform ABC

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Learning

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