How to exclude a portion of fixed indirect overhead costs in COGM calculation process?

[former_member548649]

Dear SAP Experts,

For calculating product cost, according to International Accounting Standard 2 we need to exclude a portion of fixed indirect overhead costs from the COGM calculation process and it must go to P&L report. The portion is calculated based on utilization of production capacity. So the questions are as bellow:

• 1.Is there any way to calculate that portion by PP and used by CO automatically?
• 2.If the required portion is identified by PP supervisor (in an Excel file) how we can use it to calculate unabsorbed costs and send it to P&L report?
• 3. Is there any way to see the COGS(or COGM) based on primary cost element groups? However, we know that is possible to use Activity types in cost component structure.

Thank you in advance.

[former_member548649]

Indeed!

1) I thought about the solution you suggest at the first paragraph even though I didn't know about the explore template allocation process. I will try it. By the way, we have another constraint in this case cause we suggested the business this approach, they insist on using that Activity types. Just the same, It is good idea I think.

2) The second approach needs some development and I should talk with the business.

anyway I do thank you for your valuable comments. Malay, I was thinking about another solution. If you let me know your idea about it I will be happy.

1) At the beginning of the year the planned number of production based on Normal Capacity for each month is identified(we call it Normal capacity. for ex. 1000 pieces of FGs)

2) During the month production orders are confirmed and FGs inventory level will be update.

3)At the end of the month FI will post actual costs.

4) since during the month we know the how many of productions we produced, so we easily can see the number of FGs we produced.(ex. 800 pieces)

5) we can calculate the coefficient of idle capacity easily however out of SAP( Actual number of production divided by normal capacity). in this case it will be 800/1000 or 0.8.

6) with an assessment cycle we can credit our cost center for fixed costs and debit it for a secondary cost element namely "Unabsorbed costs of Production" by using that coefficient in the share in % field.

7) If they need to post FI document we need to post an FI posting for that cost center based on fixed CEs.

😎 we are ready to start KSS2 and the following steps.

what do you think?

[kathiresan_nagarajan]

Hi Ali,

I hope, the solution would have finalized and implemented, as of now.

Recently, I'm facing similar kind of situation. Please let us know the methodology, adopted to fulfil the statutory requirements.

Thanks,

Kathir

[malay_vakil]

Hi Ali,

You have raise some valid questions. Let me try to clarify

1) Reporting: Generally we got cost in production cost center after allocation from various service and production cost center. For any allocated cost SAP understand that cost as "FIXED" cost. For example power, power is by nature variable cost but in production cost center we can have power cost only after allocation. Hence for SAP it is "Fixed" cost. So for practical purpose we can not go by SAP definition. In your example you have mentioned Labour cost having some cost like overtime etc is variable cost and other is fixed cost. Here I suggest to create two activity type "Labour Variable" & "Labour Fixed" with 2 different cost components. Linked Labour variable cost with recipe / routing and Labour fixed with template allocation process. I advise to explore template allocation process

2) Capacity Utilization: Process steps will be

(1) Calculate cost center - activity capacity utilization factor (can develop custom program)

(2) cost center splitting (KSS2)

(3) Actual activity Calculation (KSII)

(4) Calculate actual activity rate after by applying capacity utilization factor which is derived by step1

(5) Update activity rate by KBK6 with new rate derived by step4 (can do through BAPI)

(6) Revaluate process or production order (CON2)

After this process portion of non utilized cost will remain unabsorbed at cost center.

Regards,

Malay

[former_member548649]

Dear Malay,

Thank you for your comments. Let me be more deep on the problem.

1.What I know from the behavior of system in Activity type’s planning and revaluation is as below:

1.1.At the beginning of the year(month) I need to pass cost center planning steps such as:

1.1.1.Activity type quantity planning with kp26

1.1.2.Act type independent planning of Cost elements with Kp06

1.1.3.Using KSS4 to plan cost splitting

1.1.4.Running KSPI to calculate the rate of fixed and/or variable rates of each activity type.

**Now it is ready to utilize Act types in process orders (we use process orders in PP). during the period we will confirm actual quantity of Act. Types utilization and we will the value as multiplication of actual quantity and planes costs.

1.2.At the end of the month based on FI Actual postings. We need to reevaluate the Activity types.

1.2.1.Actual cost splitting with KSS2

1.2.2.Actual price calculation with KSII

According to my understanding from your comments, we need to:

1.Use template allocation for overheads however I don’t know how it works!!!!

2.Apply Capacity logic and based on the portion of using capacity, drive new Act type rates

3.Manually update the actual rate of Act types

4.Run KSII and so on.

If my inference from your comments is not wrong, please let me know your idea about this conditions:

1.We created 6 activity types as below:

a.Direct Labor (for production employees)

b.Direct Machine (for machines located in Production Cost centers)

c.Direct PM costs (for Production Cost centers)

d.Direct Energy (consumed in production CCs)

e.Indirect Overheads (including all costs that will transfer from production support cost centers using assessment cycle)

** As you know better than me, we need to assign CE groups to our Act types. For Labor Activity type, for example, we have some fixed (such as base wage that doesn’t depend on production) and some variable (such as overtime cost that depends on the overtime hours) cost elements or for machines if we use Straight-line as depreciation method and it is not directly related to production quantity. So, we have some fixed cost elements assigned to each activity type.

Now I’m going back to my questions:

1.In the first (also seconed) question I wanted to know, since I planned each activity quantity (for ex. 500 hours for Machine) at the end of the month does CO recognized the portion of utilization of each activity type (for ex. If actually we consumed 400 hours of machine the portion will be 400/500 so 80% of fixed costs will must use to revaluate the act type and 20% of fixed costs must go to profit and loss report as expense of the period)? If we need to change the act type rates manually it would somehow difficult and the probability of mistaking is not negligible. Does SAP have any direct solution if we want to use Actual allocation price indicator 5 rather than 7?

2.For question 3, let me give you more details. As I said before, we have both fixed and variable cost elements that assigned in a cost element group to an activity type such as Labor. According to the Cost component Structure we can see the COGS based on each component (logically based on material and Activity types as table 1) but my question is since activity types and cost elements are related to each other can we have a report to see COGS based on Fixed and variable cost element groups. Something like what I depicted in table 2.

** Since tables are not shown in table format, I attached them as coq1.jpg

Sorry if I had to explain the problem in a long text pack. I do thank you very much for your consideration.

Regards,

Ali Movaffagh.

[malay_vakil]

Hi,

There are some alternative workaround is possible. I suggest below solution that may work for your requirement no. 1 & 2

1) Use template allocation for overheads so we have activity types for all overheads

2) Calculate actual activity rate calculation through KSII

3) Before revaluation of orders with actual activity rate, apply capacity logic and derive new activity rate based on capacity.

4) Update actual activity rate (derived by KSII) with new rate derived based on capacity with mass update of transaction code KBK6 (Activity actual prices

For point no.3, please elaborate your requirement.

Regards,
malay