Cost Center based Overhead Cost Controlling

[indrajit_das]

Introduction

This blog is a concise overview designed for Functional Consultants engaged in an implementation project, focusing on addressing the client's business process requirements related to Overhead Accounting within the Financial Controlling processes. The aim is to guide consultants in providing the most suitable solutions for these requirements. Rather than delving extensively into specific functionalities, which are covered in detail by numerous well-written articles, this blog offers a high-level perspective and recommendations on which solution to employ for various purposes. It is assumed that individuals will explore specific sections further based on their interest or needs by referring to the wealth of excellent articles available on each function or solution. It is important to note that while the fundamental business concepts remain consistent, the solutions have undergone some changes between SAP ECC and SAP S/4HANA.

The motivation behind writing this blog stems from observations across various projects, where a common issue is the lack of clarity regarding overhead cost accounting as a business functional concept and the challenge of translating it into solutions within SAP (specifically referencing S/4HANA in this blog, though most overhead functions were available in ECC as well).

 

A few business explanations first

1. What are overhead expenses? Overhead refers to the ongoing business expenses not directly attributable to creating a product or service. Hence overhead is frequently referred as Indirect costs. Note that overhead expenses can be fixed, variable or a hybrid of both.


2. What makes overhead accounting significant? A thorough examination of cost control reveals a clear trend: overheads, in comparison to direct costs, have experienced a substantial increase as a percentage of total costs in both manufacturing and service settings over the past few decades. Therefore, the ability for clients to effectively control and report on overheads is of paramount importance.


3. What role does overhead accounting serve? Put simply, a business needs to comprehend the comprehensive cost of manufacturing a product or providing a service. This includes not only direct costs like raw materials but also indirect costs such as electricity expenses for operating a manufacturing plant. This understanding is crucial not only for budgeting and planning but also for establishing the appropriate pricing of products or services to ensure profitability or to ascertain the actual profit margin.


4. Contribution margin: based on observations, this is often mixed up with overhead accounting but in reality, is related to direct variable costs only. Read up here if interested: Contribution Margin: Definition, Overview, and How To Calculate (investopedia.com). FYI: Margin Analysis (formerly CO-PA) can be used to report on contribution margin.

 

A few pointers based on observed lack of clarity around overhead accounting solutions available within SAP 

1. Cost Center accounting provides a location-oriented view of overhead accounting


2. Activity based costing (ABC) provides a process-oriented view of overheads and is out of scope for this blog. It is often observed with functional consultants and blogs that this is mixed up with the cost center overhead accounting. ABC both complements and enhances overhead accounting using cost centers


3. SAP solutions for overhead accounting are offered for both plan and actual costs.


4. SAP overall offers below two ways of allocating overheads with some commonly used methods among each.
   
   
   
   1. Pure cost distribution methods (push approach) – Assessment, Distribution
   
   
   2. Quantity consumption (pull approach) – direct and indirect Activity allocation, template allocation
   
   
   
   


5. Push approach is about transfer of cost from sender to receiver cost object (cost center, WBS Elements, Orders) based on amounts, percentages or tracing factors (on receiver cost objects)


6. Pull approach is based on allocation of activity and business process (ABC) quantities, which are then valuated using prices in a second step. This is more accurate than the push approach but also requires more analysis to set up.


7. Some of the tools in overhead accounting (like activity) are also used in the manufacturing environments to calculate the cost of the product (activity quantities used in routing/recipes) and to process actual overhead amounts at period end.

 

Business requirement to solution mapping – high level use cases

1. Allocation of overheads from indirect to other indirect or direct cost centers. Here the reference to direct cost centers is to those which lend resources (activity types) to manufacturing activities (routing, recipes)
   
   
   
   1. Assessment
   
   
   2. Distribution
   
   
   3. Direct Activity allocation
   
   
   4. Indirect Activity Allocation
   
   
   
   


2. Some price calculation methods for Activity Types (refer SAP help: Activity Price Indicator | SAP Help Portal)
   
   
   
   1. Automatically, based on the plan activity and the plan costs (e.g. plan costs come from cost center planning and plan activity could come from Long Term Planning (LTP) or entered manually
   
   
   2. Automatically, as above but fixed costs based on capacity
   
   
   3. Manually (user specified)
   
   
   4. Multiple options for the actual price indicator – refer help linked above
   
   
   
   


3. Allocation of overheads from cost centers to other cost objects (WBS elements, network activities and orders)
   
   
   
   1. Direct activity allocation
   
   
   2. Costing sheet based overhead calculation and revaluation of receiver cost objects
   
   
   
   


4. Allocation of overheads from cost center to Margin Analysis
   
   
   
   1. Overhead Assessment
   
   
   
   


5. Allocation of overheads based on non-financial key metrics e.g. salary costs assessed based on number of employees
   
   
   
   1. Usage of Statistical key figures as tracing factors in allocations
   
   
   
   

 

Some important S/4HANA concepts

1. All cost elements are General Ledger (GL) accounts with the Cost Element category specified in the GL master.


2. Transfer of Statistical Key figures (SKF) from Logistics Information System (LIS) is still active in S/4HANA (as in ECC) and can be used as drivers for allocations


3. Universal Allocation (UA) is the new umbrella tool for all plan and actual allocations in S/4HANA including intercompany allocations. A good blog on UA (applicable to S/4HANA 2021) is here: Universal Allocation in SAP S/4HANA 2021 | SAP Blogs


4. SAP Analytics Cloud Planning (SAC-P) is now the recommended tool for all planning functions including plan allocations and the price calculation of the activity


5. Since material ledger is mandatory for inventory accounting in S/4HANA, Actual Costing merits a serious look where needed. Note: with price determination = 3 (material master), there is no revaluation of orders (actual activity price) but the delta is directly booked to Inventory, COGS and WIP as desired


6. Some alternatives for solution selection for Overhead Cost Accounting: Solution Selection for Overhead Cost Accounting - SAP Community Groups