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Part - 2 Product Costing - Activity Rate Calculation: Cost Center in A Plant

This document discusses activity rate calculation, which is used to value internal activities and production costs in product costing. Costs are first planned at the cost center level and then allocated to production cost centers if needed. Costs may also be split between multiple activities within a cost center. Transaction KSPI is then used to calculate the activity rates based on the total planned costs and activity units. These rates can be reviewed and revised as needed to accurately value inventory and production costs.

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106 views3 pages

Part - 2 Product Costing - Activity Rate Calculation: Cost Center in A Plant

This document discusses activity rate calculation, which is used to value internal activities and production costs in product costing. Costs are first planned at the cost center level and then allocated to production cost centers if needed. Costs may also be split between multiple activities within a cost center. Transaction KSPI is then used to calculate the activity rates based on the total planned costs and activity units. These rates can be reviewed and revised as needed to accurately value inventory and production costs.

Uploaded by

Avengers endgame
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Part - 2

Product Costing - Activity Rate Calculation

Now that you understand Cost Center Planning, the next step in understanding
the basics of product costing is Activity Rate Calculation. The goal of Activity
Rate Calculation is to calculate the plan activity rates for each activity in each
Cost Center in a Plant.

Prerequisites:
• Cost Center Plans are entered:
o Plan Costs in KP06
o Plan Activity units in KP26

Overview:
Now that our Cost Center dollars and activity quantities are planned, we need to
calculate Activity Type Rates. Activity Type Rates are used to value internal
activities to produce products.

If you manually entered activity rates based on last year's actual values instead
of planning total dollars and units. You can skip most of this blog, and simply
review activity rates in Transaction KSBT. Note that you can use a mixed
approach and plan rates for some activities/cost centers and calculate rates for
others.

If you planned all costs in production cost centers where they will be allocated,
you can skip the next step of plan allocations.

If you planned costs where they are incurred in overhead cost centers, you will
need to use plan assessments and/or distributions to allocate costs. The specific
details on Assessments and Distributions could be an entire blog in itself. The
main difference between assessments and distributions is that distributions
maintain the identity (primary cost element) of the cost. Assessments use
Secondary Cost Elements which act as cost carriers to move costs, and
therefore lose the identity (primary cost element) of the cost. You can choose to
use Assessments or Distributions only, or use a mixed process. Plan
Assessments and Distributions are created in Transactions KSU7 and KSV7 and
executed in Transactions KSUB and KSVB.
After costs are allocated, it is important to review the Cost Center
Actual/Plan/Variance report, Transaction S_ALR_87013611. Ensure that
allocations credited sending cost centers and debited receiver cost centers.

Next, execute plan cost center splitting which splits costs when you have more
than one activity type in a cost center and you want to split the costs between
two activities based on activity qty or some other basis. This is a great place to
use Cost Center groups to easily select desired cost centers since you cannot
enter a range. Cost splitting uses Transaction KSS4.

Finally, Activity Type Rates are calculated using Transaction KSPI. If rates are
undesirable, you can revise your cost center plans and recalculate rates. Rates
are not final until you use them to calculate and release product costs. This is an
iterative process, and it is expected that you will make several attempts at
desirable rates.

After calculating Activity Type Rates, you can review rates in Transaction KSBT.

Relatable Example:
Let's say we are using Product Costing to value our inventory in a cookie baking
shop. This will help us value our cookies (finished good), frosting (semi-finished
good), and baking items like eggs, milk, and sugar (raw materials).

In order to calculate costs, we need to come up with rates for each activity, such
as mixing baking items, oven baking, and cookie cooling. We planned overhead
costs like our building rent, electricity, and baker wages at an overhead cost
center. We need to allocate those costs to our production cost center in order to
include those costs in our product cost.

Prior to calculating costs, let's assume there are some overhead costs in a cost
center that should be split into multiple activities. Once we split these costs, then
we calculate rates for activities. Now we have a dollar per unit for activities like
indirect labor, direct labor, setup, and overhead to use in product costing.

Further information:
• You can use Cost Center Groups and Cost Element Groups to simplify
selecting Cost Centers and Cost Elements in KSBT and KSPI and in other
Cost Center/Cost Element Reports.
• You may find that your rates are not appearing for certain months, or that
they are averaged over 12 months. Make sure you review the 'Period
Overview' screen in Cost Center planning Transactions KP06 and KP26.
This screen shows costs and units by each month.
• You can reverse Assessments and Distributions if results are undesirable.
• In theory, your plan Assessments and Distributions should match your
actual Assessments and Distributions.

The next blog in the series explains how production data like BOM's (Bills of
Material), Routings/Master Recipes and Work Centers integrate with Product
Costing.

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