Expense Analysis and

Splitting in
Manufacturing Cost
Centers
created by Manish Sharma on Sep 4, 2013 5:04 PM, last modifed by Manish
Sharma on Sep 4, 2013 5:39 PM
Version 1
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Introduction
n S!P "ost center #or$ as a cost responsibility center, #here all the e%penses and cost are
stored and analy&ed 'or the p(rpose o' mana)ement decision ma$in)* +he cost co(ld be
f%ed or ,ariable in nat(re* +he di-erence bet#een ,ariable and f%ed costs can be made in
,ario(s #ays in prod(ct costin) in ". mod(le* /i%ed costs represent the static costs
inc(rred by the or)ani&ation, #hich doesn0t chan)e on the basis on man('act(rin)
acti,ities, #hich remain constant irrespecti,e o' prod(ction acti,ities li$e rent 'or the
premises, salaries o' o1ce sta- etc* .n the other hand, ,ariable cost ,aries based on the
le,el o' prod(ction acti,ities2 i' prod(ction acti,ities increase then ,ariable cost also
increased li$e electricity cons(mes ra# material char)es etc* 3o#e,er all the ,ariable cost
doesn0t ,ary in direct proportion by 4(antity o' )oods prod(ced*
n this doc(ment #ill try to defne2 ho# the 5%penses analysis and splittin) o' cost done in
man('act(rin) cost centers*
/rom controllin) prospecti,e, f%ed cost remain constant re)ardless o' operatin) acti,ities,
b(t i' these 'actor chan)es, ,ariable cost #ill 6(ct(ate* 7asically ra# material costs
represent ,ariable cost, b(t in this doc(ment main 'oc(sed #ill be )i,en to distin)(ish f%ed
and ,ariable acti,ity cost*
+he se)re)ation bet#een f%ed and ,ariable cost is optional and is deri,ed 'rom the
conf)(ration and master data conf)(red in cost center acco(ntin) and o,erhead
acco(ntin)*
Activity Price:
+here are di-erent methods that co(ld be (sed in cost center acco(ntin) to determine the
acti,ity price* +he simple #ay is the man(ally enter 8/i%ed9 and 8Variable9 !cti,ity cost
:;P2<=* 3o#e,er there are other methods (sed in "ost center Plannin) and 7(d)etin) that
a(tomatically calc(late the f%ed and ,ariable acti,ity price* 3ere the 'oc(sed #ill be )i,en
on Plannin) and 7(d)etin) acti,ity and a(tomatic calc(lation o' plan acti,ity rate in cost
center* +his method a))re)ate planned costs by cost element and capacity by plan (nit to
calc(late the acti,ity price* !cti,ity independent costs are se)re)ated amon) di-erent
acti,ities based on Splittin) Str(ct(re, #hile acti,ity dependent cost directly (sed 'or the
p(rpose o' ,ariable acti,ity rate calc(lation*
Fixed Activity Cost:
n prod(ct costin) all those cost, #hich doesn0t ,ary based on the acti,ities in
man('act(rin) cost #ill represent f%ed cost* n a man('act(rin) cost centers there may be
t#o or more acti,ities per'ormed* +o calc(late the acti,ities rate, the f%ed costs are
distrib(ted to ,ario(s acti,ities on the basis o' Splittin) Str(ct(re defned 'or cost center*
Variable Activity Cost:
Variable acti,ity cost, #hich directly depend (pon the acti,ity type and 6(ct(ate based on
increase or decrease in man('act(rin) acti,ities* n S!P ,ariable acti,ity cost are directly
lin$ed to the respecti,e acti,ity*
Activity Prices: Fixed and Variable Split
n "ost "enter !cco(ntin) di,idin) the cost bet#een /i%ed and Variable re4(ires
appropriate split to be made in the cost entered 'or the acti,ity* +he process is described
belo#:
i* Variable cost #o(ld be planned at acti,ity le,el and e%penses sho(ld be maintained
at cost element in the man('act(rin) cost center by assi)nin) acti,ity and cost element
combination* n other #ord, the e%penses sho(ld be planned on !cti,ity type at the time o'
primary cost plannin) :;P0<=* +hen the ,ariable acti,ity rates are calc(lated on +otal cost
planned at !cti,ity di,ided by +otal n(mber o' acti,ity planned at that cost center :i*e*
capacity in ;P2<=
ii* /i%ed cost #o(ld be planned at independent o' acti,ity type* +hese costs are
maintained in ;P0< at cost element le,el on man('act(rin) cost center* +hen the f%ed
costs are distrib(ted on ,ario(s acti,ity types on the basis o' Splittin) str(ct(re defned at
.;5>* n Splittin) Str(ct(re #e defne the r(les, ho# the f%ed cost #ill be distrib(ted to
!cti,ities* /or the p(rpose o' this doc(ment, considerin) split o' f%ed cost on the basis o'
"apacity maintained in ;P2<*
To illustrate the scenario in more details, I have taken a hypothetical example
S(pposed there is a man('act(rin) cost center 85n)ine Plant9, in an !(tomobile ind(stry,
ha,in) t#o acti,itiesCutting and Maintenance 'or the p(rpose o' creatin) en)ine
parts* 7e'ore startin) any batch o' material to process, the machine need to be 8Maintain9
to be ready 'or the process, 'or #hich it re4(ired to (se cleanin) oil to clean the machine
and then the ne%t process start i*e* 8c(ttin)9 the iron piece into the desired en)ine part*
!ss(min) Cleaning oil cost as ,ariable cost 'or the p(rpose o' Maintenance acti,ity,
#hich is a man(al process, and Electricity cost as ,ariable cost 'or the p(rpose
o' Cutting acti,ity, #hich is a(tomatic process* .ther costs are ass(med to be f%ed 'or
the p(rpose o' acti,ity price calc(lation*
?etails o' data (se 'or the p(rpose o' testin), there are three Plan f%ed e%penses in 5n)ine
plant, ?epreciation on Machine @ 54(ipment, ?epreciation on 7(ildin) and Salary* +he
,ariable cost 'or acti,ity 8"(ttin) acti,ity9 :let 8AAAA9 in S!P= is 5lectricity char)es and 'or
8Maintenance acti,ity9 :let 8SSSS9 in S!P= is .il cost*
Cost center: Engine Plant
Activity Expenses GL Account
Fixed
Cost
!S"#
$aria%le Cost
!S"#
?epreciation on Machine <00001 10000
?epreciation on 7(ildin) <00002 20000
Salary <00003 15000
Cutting &&&&# 5lectricity char)es <00004 14000
Maintenance SSSS# .il cost <00005 15000

Maintain the Plan !cti,ity and "apacity 'or the di-erent acti,ity on cost center 85n)ine
Plant9
Con!"uration o# Splittin" Structure
/or the p(rpose o' splittin) o' f%ed cost to the di-erent acti,ities assi)ned to cost center,
need to defne Splittin) str(ct(re* t incl(des the r(les #hich sho(ld be 'ollo#ed to
distrib(te the f%ed cost to di-erent acti,ities* /or the p(rpose o' Plannin) and 7(d)etin)
this is an important conf)(ration*
+ransaction: .;5> :!ssi)n the ne# cost center to the splittin) str(ct(re=
Speci'y "ost center and /iscal year
"lic$ B5nterC

?o(ble clic$ on splittin) str(ct(re 'or Man('act(rin) cost center ://=*
3ere the splittin) is defned that all the cost elements on man('act(rin) cost center #ill be
distrib(ted to acti,ities on the basis on Plan "apacity*

$ater data re%uirement Activity type &'ransaction (L)*#
3ere #e can defne the man('act(rin) acti,ity c(ttin) and maintenance in S!P*
3ere acti,ity type 8AAAA9 represents "(ttin) acti,ity* +he acti,ity (nit is defnin) as 3o(r*
/or the p(rpose o' assi)nin) an acti,ity to a man('act(rin) center so that that can be (sed
in recipe, the cost center cate)ories sho(ld be 8/9 i*e* man('act(rin) and prod(ction cost
center*
Price indicator 829 indicate that to calc(late !cti,ity Plan price, system #ill (se capacity*
'e!ne Plan Activity &transaction (P)*+:
!ss(med the total "apacity o' "(ttin) :AAAA= @ Maintenance :SSSS= are D00 and 300
ho(rs respecti,ely* /or the p(rpose o' Splittin) /i%ed cost on di-erent acti,ity, maintained
the r(les as 8"apacity9, so the splittin) r(le #ill 'ollo# plan capacity ratio o' :D:3= to
distrib(te f%ed costs to "(ttin) and Maintenance acti,ity*
n ;P2< maintained the capacity as D00 3o(rs and 300 3o(rs 'or "(ttin) :AAAA= and
Maintenance :SSSS= acti,ity*
'e!ne Plan ,xpenses in (P-* as !xed and variable
dependin" upon activity
;P0< is (sed 'or the p(rpose o' Primary e%penses plannin) in cost center acco(ntin)* 3ere
#e can defne both acti,ity dependent and acti,ity independent cost* /or the p(rpose o'
!cti,ity dependent :i*e* acti,ity ,ariable cost=, need to defne e%penses on !cti,ity at cost
element le,el* n the belo# screen ,ariable cost are:
E 5%penses on !cti,ity :AAAA i*e* "(ttin)= at "ost element :<00004 i*e* 5lectricity char)es=
E 5%pense on !cti,ity :SSSS i*e* Maintenance= at "ost element :<00005 i*e* .il "ost=
Plan Cost Split (SS.
/or the p(rpose o' Splittin) /i%ed cost to di-erent acti,ities on man('act(rin) cost center,
need to r(n Plan "ost Split, #hich #ill distrib(te the f%ed cost to di-erent acti,ities
assi)ned to the same cost center as ;P2< transaction based on the r(le defned in splittin)
str(ct(re* 3ere 'or the p(rpose o' simplicity defned the splittin) r(n based on 8capacity9
to distrib(te all f%ed cost* +he splittin) r(le is defned in .;5> transaction*
A(n transaction ;SS4, then the belo# screen #ill appear, select the belo# details:
E "ost centerF "ost center )ro(p :'or #hich #e #ant to (se Plan cost splittin)=
E Version
E PeriodF /inancial Gear :)enerally '(ll 7(d)et year is selected=
/irst e%ec(te the Plan "ost splittin) on test r(n, i' Ho errors comes then e%ec(te on
8>itho(t test r(n9*
+otal Plan f%ed cost o' 45000 has been distrib(ted to t#o acti,ities 8"(ttin) :AAAA=9 and
8Maintenance :SSSS=9 based on D:3 ratio, i*e* on the basis o' "apacity maintained in ;P2<*
Plan cost split only distrib(te /i%ed "ost to acti,ities*
Plan Activity Price calculation (SP+
!'ter Plan cost split, the ne%t step i' Plan price calc(lation* Plan price calc(lation basically
helps to calc(late 8Plan !cti,ity Aate9* +he acti,ity rate co(ld be in t#o parts, i*e* /i%ed
!cti,ity rate and Variable !cti,ity rate*
E /i%ed !cti,ity rates are calc(lated based on Plan "ost :/i%ed= Split, d(rin) ;SS4, di,ided
by "apacity*
E Variable !cti,ity rate are calc(lated based on Variable "ost, assi)ned to acti,ity at the
time o' Primary cost plannin) :;P0<=, di,ided by "apacity*
E +otal !cti,ity rate incl(de both /i%ed and Variable acti,ity rate* t0s calc(lated by di,idin)
total cost by capacity*
A(n transaction ;SP, then select the belo# details:
E "ost centerF "ost center )ro(p :'or #hich #e #ant to calc(late Plan acti,ity rate=
E Version
E PeriodF /inancial Gear :)enerally '(ll 7(d)et year is selected=
/irst e%ec(te the Plan Price calc(lation on test r(n, i' Ho errors comes then e%ec(te on
8>itho(t test r(n9
Aeport 'or !cti,ity rate :;S7+=: +hro()h transaction ;S7+, #e can see the Plan and !ct(al
!cti,ity rate 'or the cost center* n the belo# screen ,ariable, f%ed and total acti,ity rate
ha,e been displayed 'or acti,ity 8"(ttin)9 and 8Maintenance9 'or cost center 85n)ine
Plant9*
3o# the system is calc(latin) the cost is e%plained in details in the belo# table* !cti,ity
rate can be cross reconciled #ith the !cti,ity type Price Aeport in the abo,e screen*
Plan Cost Analysis 'otal Activity Cutting Maintenance !nit
A:, Capacity 1000 D00 300 3o(rs
-:, $aria%le Cost 29000 IS?
i. Electricity
c/arges 14000 IS?
ii. 0il cost 15000 IS?
C:, Fixed Cost 45000 IS?
":, Fixed cost Split Split
%ased on Capacity# :D:3= 31500 13500 IS?
E:, 'otal Cost -1"# D4000 45500 2J500 IS?
F:, $aria%le Activity rate
-2A# 20 50 IS?F3
G:, Fixed Activity rate "2A# 45 45 IS?F3
3:, Plan Activity rate F1G# <5 95 IS?F3
Cost Center /eport
+here are di-erent cost center reports that can be (sed 'or the p(rpose o' analy&in) the
plan and act(al e%pense in S!P* n the belo# "ost center report, #e can see the entire Plan
cost details* 3ere details o' e%pense can be analy&ed at cost element :KL acco(nt= le,el*
!t cost center 85n)ine Plant9 total debit is amo(nt D4,000 FM, #hich incl(de both /i%ed and
,ariable cost* +otal cost trans'erred to acti,ities 8"(ttin)9 and 8Maintenance9 is 45,500
IS? and 2J,500 IS? respecti,ely*
Actual expenses splittin" #or manu#acturin" cost centers
+ill no# this doc(ment e%plain, the process o' di-erence bet#een Plan /i%ed "ost and Plan
Variable cost* 3o# the S!P can be (sed to di-erentiate Plan f%ed and Plan ,ariable cost in
any man('act(rin) acti,ities*
Ho# #ill loo$ the !ct(al e%penses splittin) bet#een /i%ed and ,ariable cost*
/or act(al e%pense analysis, need to (nderstand t#o di-erent concepts, frst the postin) o'
doc(ments at KL acco(nts to represent act(al e%pense, and second trans'er o' act(al cost
'rom cost center to prod(ction or process order*
1* Posting of Actual Expenses at GL accounts: !cco(ntin) doc(ments are posted only
#hen there are e,ents happened #ith fnancial impact* So to record the fnancial impact o'
e,ent, need to create No(rnal entries in acco(ntin)* +hese doc(ments in S!P co(ld be
stored thro()h /750 or /701 etc* n the same #ay, the act(al e%penses in man('act(rin)
cost centers are also recorder thro()h acco(ntin) doc(ments* !ct(al e%penses are
recorded at KL acco(nt le,el, at act(al e%penses #e don0t defne, #hether the e%penses
are acti,ity dependent or acti,ity independent in nat(re* !t the time o' act(al cost split to
di-erentiate bet#een act(al f%ed and act(al ,ariable cost, system chec$ the same r(le
defned at the time o' Plan splittin)* t consider the KL acco(nt e%pense as ,ariable
e%pense i' it has been assi)ned as ,ariableF acti,ity dependent e%pense at Primary cost
plannin) in ;P0<*
2* 'ransfer of Actual cost fro4 Cost center to Process order: this process is called as
secondary allocation, i*e* mo,ement o' costs #ithin controllin) mod(le only* 3ere Ho
/inance doc(ments are created* +rans'er o' !ct(al cost 'rom "ost center to Process or
prod(ction order happened #hen the plant controllers confrm the completion o' !cti,ity at
order* +he cost #hich )et trans'erred 'rom cost center to process order, basically represent
Plant cost calc(lated at !ct(al !cti,ity :i*e* plan acti,ity rate calc(lated at ;SP m(ltiplied
by !ct(al acti,ities at process order= beca(se at this time #e don0t ha,e act(al acti,ities
rates calc(lated* +he !ct(al acti,ity rates are calc(lated at the time o' monthly period end
closin) acti,ities, #hen all the act(al e%penses are posted on man('act(rin) cost center
directly or )et trans'erred 'orm s(pport cost centers*
/or the p(rposed o' this doc(ment and to e%plain act(al e%pense analysis ha,e passed
'e# /750 entries and !cti,ity confrmation at Process order le,el* /or the p(rpose o'
testin), ha,e passed acco(ntin) doc(ments 'or amo(nt o' 1J,54J*D5 FM and confrmed 150
3o(rs o' "(ttin) acti,ities and 100 ho(rs o' Maintenance acti,ities at man('act(rin) cost
center 85n)ine Plant9* +he cost center reports are belo#:
!'ter !cti,ity confrmation the !cti,ity cost are calc(lated at :!ct(al !cti,ityO Plan "ost=
+he cost o' 150 3o(rs o' 8AAAA "(ttin)9 acti,ity is 9D50 "3/ :150 3o(r O<5 "3/F3o(r=
Same the case 'or 100 3o(rs o' 8SSSS Maintenance9 acti,ity cost is 9500 "3/ :100 ho(rs
O95 "3/F3o(r=
So it can be say that at the time o' acti,ity confrmation on process order, system calc(late
the cost o' act(al acti,ity at Plan acti,ity rate*
Actual Cost Splittin" &(SS)+ and Actual Activity Price
calculation &(SII+
5nter transaction ;SS2 and specifed the belo# details be'ore e%ec(tin) the transaction:
E "ost centerF "ost center )ro(p
E Period and /iscal year :)enerally the month sho(ld be selected 'or #hich period end
closin) acti,ities sho(ld be closed=
5%ec(te the transaction on test r(n frst, i' no error comes then e%ec(te #itho(t test r(n*
Actual price calculation (SII
Ho# the !ct(al !cti,ity Price
!t the time o' act(al cost split to di-erentiate bet#een act(al f%ed and act(al ,ariable
cost, system chec$ the same r(le defned at the time o' Plan splittin)* t consider the KL
acco(nt e%pense as ,ariable e%pense i' it has been assi)ned as ,ariableF acti,ity
dependent e%pense at Primary cost plannin) in ;P0<*
/indin) o' !ct(al 5%penses !nalysis and Splittin):
a* !ct(al e%penses splittin) #or$ on the basis on Plane cost splittin)*
b* !ct(al e%penses are di,ided into t#o parts, i*e* /i%ed and Variable*
c* !ll those KL acco(nts, #hich are planned as ,ariable at the time o' Primary cost plannin)
are consider as ,ariable at act(al e%penses also* ' any acco(ntin) doc(ments are posted
on these acco(nts by assi)nin) same man('act(rin) cost center, then system consider this
as acti,ity dependent cost and (sed to calc(late act(al ,ariable acti,ity rate*
d* !ct(al acti,ity ,ariable rate are calc(lated by di,idin) ,ariable cost by act(al acti,ities
confrm at process or prod(ction orders*
e* .n the other hand e%penses posted on other KL acco(nts are consider as /i%ed in nat(re*
/i%ed e%penses are distrib(ted to di-erent acti,ities assi)ned to cost center on the basis on
Plan "apacity, 'or this case total f%ed cost o' 1J01<*25 has been distrib(ted to 8"(ttin)
AAAA9 and 8Maintenance SSSS9 acti,ities on the basis o' capacity ratio :D:3= maintained in
;P2<*
'* !ct(al acti,ity f%ed rate are calc(lated by di,idin) f%ed cost on acti,ity by act(al
acti,ities confrm at process or prod(ction orders*

Conclusion
>ith the help o' this doc(ment, ha,e tried to e%plain ho# #e can mana)e the plan and
act(al e%penses in f%ed and ,ariable part* ?ecidin) #hether e%penses #ill be dependent
on acti,ity or independent o' acti,ity #ill depend (pon mana)ement decision ma$in),
#hich can ,ary 'rom ind(stry to ind(stry and company to company* .nce #e decide the
nat(re o' e%panses then #e can (se the abo,e concept to distrib(te the e%pense on f%ed
and ,ariable acti,ity rate* /(rther on #hich co(ld be (sed in Prod(ct costin) as part o'
prod(ct cost*
3ere the e%ample has been )i,en 'or one man('act(rin) cost center to ill(strate the
concept* +his can be applied on m(ltiple man('act(rin) and s(pport cost center and can
be (sed 'or the p(rpose o' o,erhead mana)ement*


As per my assumption, your present understanding is that Costs which are posted (debited) through FI
postings to the cost centers are activity Independent Costs is not 100% correct. hey may be activity
dependent and activity independent both.

he cost which you re!ate with the activity at the time o" activity input p!anning screens (#$0%). At this
screen apart "rom version, period and "isca! year, you need to p!an cost center (or cost center group)
Activity type (or group) and cost e!ement (or &roup). I" you provide here activity type (say 'A()*) and
then p!an cost e!ements. his is ca!!ed activity dependent planning. +hi!e ca!cu!ating activity
price "or 'A()* system wi!! consider on!y those cost ,!ements which you have provided at the time o"
p!anning as above. he system behavior wi!! remain same "or p!an and actua! activity price ca!cu!ations.

)n the other hand I" you don-t provide here activity type (say 'A()*) and then p!an cost e!ements. his
is ca!!ed activity independent planning. +hi!e ca!cu!ating activity price system wi!! ta.e tota! p!an
costs (as per cost e!ements provided at #$0%) and divide it by number o" activities used in that cost
center. /uppose you use 0 activity types in a cost center ('A()* and $)+,*) and tota! activity
independent cost p!anned on the cost center is 00000012 it wi!! consider 10000012 (000000 divided by 0
number o" activities) "or each activity as p!an and according!y ca!cu!ate the price by dividing this amount
by 3uantities p!anned in #$0%. o avoid this (and "or some other reasons) you do sp!itting #//0.

4our second understanding that Cost credited to the cost centers by $$ con"irmations are activity
dependent costs, is a!so not correct. $robab!y you are thin.ing that as these are dependent on
con"irmations hence the cost shou!d be ca!!ed as Activity 5ependent.

/ystem credits the amount to cost centers with the amounts arrived at by mu!tip!ying activity 3uantity
con"irmed in $$ with the p!anned price o" activity.$!anned price may have been be ca!cu!ated by activity
dependent or independent p!anning.

In the month end activities you ca!cu!ate actua! price (#/II) and re2va!uate your orders with actua!
activity prices as ca!cu!ated at #/II.