Cost Center & Work Center Integration!!

What is a Cost center in SAP?

SAP cost center can be created for each organization function or department to record the cost incurred which contribute to a company’s profitability indirectly. Here some of the cost center categories generally used in SAP

·         Production

·         Sales

·         Administration

·         Service Cost center

In SAP production planning, each work center will be assigned to one cost center. For every activity type defined in a work center, an activity rate will be maintained in the cost center. SAP system uses this information to calculate activity cost for an operation.

We can assign a work center to only one cost center. But we can assign several work centers to one cost center.

Example

Consider a cement making industry where cement bulk are manufactured from Clinker, Gypsum, Fly Ash, Slag (Granulated), Limestone etc. A Ball Mill operates on 120 T per day and the following activities are performed in Ball Mill to make the Bulk cement:

1. Machine hours

2. Labor hours

3. Setup hours

In this case, we can define 3 activity types in the work center MILL-1 (Ball Mill - A) and assign them to work center MILL-1. The work center is assigned to the cost center EX1_PQ_Production.
Activity rate for each activity (Machine hours, Setup hours and labor hours) are maintained against the cost center. Planned Machine hours, Setup hours and labor hours are maintained for the base quantity of 120 T (ball mill capacity) in a routing. Formula for each activity (Machine hours, Setup hours and labor hours) are maintained in a work center.

                                                        Activity Cost Calculation Formula

 When a production order is created in the SAP system, it uses the above information to calculate the activity cost.

                        Example of SAP Work Center and SAP Cost Center Integration

Activity Types in Costing

Activities produced in a cost center are created as activity types. In the above example, 3 activities are produced in a ball mill which are machine hours, setup hours and labor hours. We can create these 3 activity types and assign them to the cost center of production. 

 

                                                  Activity Types in SAP Cost Centers

Activity Price of Activity type

Activity price will be defined for each activity type and cost center manually. In this example, even though we have similar activity types for the cost center, activity price will be different for the cost center. The activity price is defined in the transaction KP26.

Activity Cost in Product Costing

In general, product cost in SAP comprise of three primary components:

1.    Raw material or component cost

2.    Activity cost

3.    Overhead cost

Here, activity cost is calculated based on work centers, cost centers and activity prices. The SAP system calculates the activity cost by multiplying the activity price to quantity of operations.

Example of Activity Cost in Product Costing

Let’s consider an example. A work center ball mill produces bulk cement for 50 kg Cement Bag. This work center has the following activities:

1.    Setup

2.    Machine

3.    Labor

                                SAP Work Center Assignment to SAP Cost Center

The work center is assigned to the cost center (3010255001) and each activity (setup, machine and labor) is assigned with an activity type (MSUSFG, MACSFG and LABSFG).

Now, let’s look at activity price calculation. Activity prices are maintained for the cost center (3010255001) and activity types (MACSFG, MSUSFG and LABSFG) in the transaction KP26 by a controlling person.

               Setup Activity Price (Cost Center 3010255001 and Activity Type MSUSFG)

 

              Machine Activity Price (Cost Center 3010255001 and Activity Type MACSFG)

                     Labor Activity Price (Cost Center 3010255001 and Activity Type LABSFG)

Next, let’s check routing details of the material. It will specify how many units of each activity are required for manufacturing a base quantity of this material.

                                  SAP Routing for a Material (Transaction CA01)

Now lastly we perform a costing run for the material in transaction CK11N to see how the SAP system calculates product cost for this material.

The calculation is performed according to the following formula:

Machine hour activity cost = Machine activity price / Unit * Quantity from Formula