Activity Based Costing in SAP

Activity Based Costing

ABC is more accurate costing methodology
Focus on indirect cost (Overheads)
Traces rather than allocate each expenses category to particular cost object
Makes “Indirect expenses” “direct”

Steps in ABC

Identify the activities
Determine cost for each activities
Determine cost drivers
Collect activity data
Calculate product cost

How ABC works in SAP

SAP provides standard solutions for ABC
Activities in ABC is same as business process in SAP, within the business process we have the process of cost allocation i.e. cost driver,
Cost for each activities can be collected in business process just like a cost object
Quantities for each activities i.e. quantity for cost driver is the basis for rate calculation of activities,
Depending on the quantity required for manufacturing of a product the product cost will be computed,
The booking of Indirect cost i.e. overhead or cost other than direct in nature would be routed through Business Processes,
There are two options available for collection of indirect cost on Business Processes:
Booking in cost centre and then allocation to Business processes
Direct booking on the business processes
Allocation of indirect cost from business process to product takes place for following purpose
Standard cost estimation at product level
Actual cost booking through template allocation process

Planning in Business Process

The business process planning is same as cost centre planning, the only difference between them is a cost centre may have multiple activity types and the business process can have only one cost driver for allocation of cost,
At cost element level the planning of input cost and planning of output quantity can be entered in business process based on that plan price of cost driver can be calculated,
At product level we need to plan and fix the activity quantity for each business process, based on that system will compute the standard cost and also post the actual allocation,
In business process the concept of revaluation of actual price at production order level is same as we know for cost centres,

ABC Illustration

Step 1,2,3 are Identification of activities, determine cost for each activity, determine cost drivers, respectively

ABC Illustration-Demo in SAP

Step 1,2,3 are Identification of activities, determine cost for each activity, determine cost drivers,

Traditional Cost Accounting

Allocation of indirect expenses/overheads to products is based on volume based measures e.g. labor hours , machine hours , (assumption is relation between overhead and volume based measures)

ABC Illustration- SAP Demo

Step 4 & 5 are collect activity data and calculate product cost

Traditional Cost Accounting

Allocation of indirect expenses/overheads to products is based on volume based measures e.g. labor hours , machine hours , (assumption is relation between overhead and volume based measures)

Traditional Cost Accounting

Allocation of indirect expenses/overheads to products is based on volume based measures e.g. labor hours ,

Comparison of product cost

Comparison of product cost between Traditional Cost Accounting (TCA) and Activity Based Costing (ABC)

Facts derivation out of ABC

Contribution for product A is much lower than B and hence product A is money losers
Production facility for product A is under utilized and it results into high overhead cost burden on existing production of product A
Opportunity cost loss for product A is substantial

Summarization for ABC in SAP

Identification of direct cost and indirect cost from total cost of product
For indirect cost we need to find out the process/activities, and cost drivers for that process
Planning of activity quantity for processes
Existing process of standard cost estimation to be reviewed and cost allocation for indirect cost to be deactivated and ABC way of cost allocation to be configured and tested,
Review of calculated cost through ABC

Activity Based Costing in SAP