Cost Centers in Product Cost Planning

Cost centers

Cost centers are used to manage the expenses of departments and provide decision-making data for management. This requires that all costs be assigned according to their source. While expenses may temporarily be held on projects, internal orders, or manufacturing orders, they are eventually settled to cost centers as a final cost object.

Cost center accounting lets you analyze overhead costs according to where they were incurred within the organization. In addition to plan versus actual analysis, you can also see the under/over absorption by cost center. This is an important analysis to perform when planning activity rates for product costing. If a cost center was under-absorbed, you did not include the total actual spend in the activity rates or material cost for that cost center. The opposite applies if a cost center was over-absorbed.

Cost centers are specific to a company code within a controlling area. A single profit center is assigned to a cost center, so the design of each is congruent. Cost centers are created in transaction KS01, shown in below diagram

Display Cost Center diagram



The person responsible, cost center category, hierarchy area, company code, and profit center fields are required fields. User responsible and department are helpful fields that can indicate the user id of the person responsible and the department name. Functional area is a commonly used data element that drives cost of sales accounting. Typical functional areas include research & development, general & administration, sales & distribution, and cost of sales. Note that the currency defaults from the company code currency and cannot be changed in the cost center.

Cost center category distinguishes types of cost centers for analysis purposes. You could also use cost center category to restrict the types of activities that can be performed on a cost center. Some of the standard SAP categories are “F” for Production, “V” for Sales and “W” for “Administration”.

On the control tab, you typically lock actual and plan revenues to block statistical postings of revenues to cost centers. If you deselect these boxes you 
can post revenue statistically on cost centers for reporting, but they are not included in cost center totals. Revenue is typically posted to a profit center
instead of a cost center. Since cost centers are assigned to profit centers, costs on cost centers will also be posted to the associated profit center.

The templates tab provides options for formula planning, activity and business process allocation, and overhead via costing sheet. Formula planning allows you to plan cost element and activity input for multiple cost centers using the same basis. Formula planning is performed in transaction KPT6. Activity and business planning allows you to allocate actual overhead costs using a function or formula which calculate the amount of costs to send. Overhead rates can be applied to a cost center via costing sheets. We will discuss costing sheets in further detail in further posts.

Fields on the address and communication tabs are optional fields that can hold contact information for cost center owners.

Cost center hierarchy

A cost center hierarchy is required for each controlling area. The hierarchy consists of cost center groups which can be used to simplify reporting and
assessments and distributions. Unfortunately the assessment and distribution screens only allow you to select a single cost center, a range of cost centers, or a group of cost centers. It’s not possible to enter a list of cost centers. You typically want to design the allocation process prior to designing the cost center hierarchy so you can use an appropriate grouping method. The cost center hierarchy can be changed or displayed in transaction OKEON, shown in below

Display cost center hierarchy figure



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