SAP Work Center and Cost Center Integration

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SAP Work Center and Cost Center IntegrationWelcome to the tutorial about SAP Work Center and Cost Center Integration. This tutorial is part of the SAP PP training course. You will learn about the relationship between work centers and cost centers in SAP, how to use activity types and define activity prices. Also, we will discuss a complete example of calculating activity cost in product costing.

What is a Cost center in SAP?

SAP cost center can be created for each organization function or department to record the cost incurred which contribute to a company’s profitability indirectly. Here some of the cost center categories generally used in SAP

  • Production
  • Sales
  • Administration
  • Service Cost center

In SAP production planning, each work center will be assigned to one cost center. For every activity type defined in a work center, an activity rate will be maintained in the cost center. SAP system uses this information to calculate activity cost for an operation.

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We can assign a work center to only one cost center. But we can assign several work centers to one cost center.

Example

Consider a steel making industry where steel billets are manufactured from DRI steels, steel scrap, etc. A furnace operates on 120 T per day and the following activities are performed in furnace to make the molten steel metal:

  1. Furnace operation (charging, melting, slagging and tapping)
  2. Labor hours

In this case, we can define two activity types in the work center EAF01 (electric arc furnace) and assign them to work center EAF01. The work center is assigned to the cost center F1000.

Activity rate for each activity (furnace hours and labor hours) are maintained against the cost center. Planned furnace hours and labor hours are maintained for the base quantity of 120 T (furnace capacity) in a routing. Formula for each activity (furnace hours and labor hours) are maintained in a work center.

Activity Cost Calculation Formula
Activity Cost Calculation Formula

When a production order is created in the SAP system, it uses the above information to calculate the activity cost.

Example of SAP Work Center and SAP Cost Center Integration
Example of SAP Work Center and SAP Cost Center Integration

Activity Types in Costing

Activities produced in a cost center are created as activity types. In the above example, two activities are produced in a furnace which are machine hours and labor hours. We can create these two activity types and assign them to the cost center of furnace. The same two activity types can also be assigned to cost centers of ladle and casting.

Activity Types in SAP Cost Centers
Activity Types in SAP Cost Centers

Activity Price of Activity type

Activity price will be defined for each activity type and cost center manually. In this example, even though we have similar activity types for all three cost centers, activity price will be different for each cost center. The activity price is defined in the transaction KP26.

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Activity Cost in Product Costing

In general, product cost in SAP comprise of three primary components:

  1. Raw material or component cost
  2. Activity cost
  3. Overhead cost

Here, activity cost is calculated based on work centers, cost centers and activity prices. The SAP system calculates the activity cost by multiplying the activity price to quantity of operations.

Example of Activity Cost in Product Costing

Let’s consider an example. A work center furnace produces molten metal for casting formation. This work center has the following activities:

  1. Setup
  2. Machine
  3. Labor
SAP Work Center Assignment to SAP Cost Center
SAP Work Center Assignment to SAP Cost Center

The work center is assigned to the cost center (4230) and each activity (setup, machine and labor) is assigned with an activity type (1422, 1420 and 1421).

Now, let’s look at activity price calculation. Activity prices are maintained for the cost center (4230) and activity types (1422, 1420 and 1421) in the transaction KP26 by a controlling person.

Setup Activity Price (Cost Center 4230 and Activity Type 1422)
Setup Activity Price (Cost Center 4230 and Activity Type 1422)
Machine Activity Price (Cost Center 4230 and Activity Type 1420)
Machine Activity Price (Cost Center 4230 and Activity Type 1420)
Labor Activity Price (Cost Center 4230 and Activity Type 1422)
Labor Activity Price (Cost Center 4230 and Activity Type 1422)

Next, let’s check routing details of the material. It will specify how many units of each activity are required for manufacturing a base quantity of this material.

SAP Routing for a Material (Transaction CA01)
SAP Routing for a Material (Transaction CA01)

We perform a costing run for the material CAST01 in transaction CK11N to see how the SAP system calculates product cost for this material.

Material Cost Estimate (Transaction CK11N)
Material Cost Estimate (Transaction CK11N)

On the picture above, the highlighted area is the activity cost calculated by the system based on the information maintained in the work center (transaction CR01), activity price (transaction KP26) and routing (transaction CA01).

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The calculation is performed according to the following formula:

Machine hour activity cost = Machine activity price / Unit * Quantity from Formula

Quantity = ((120/100) *10)/60 = 0.200 Hour

Activity Price = 2246.88/100 = 22.47

Activity Cost = 22.47 * 0.200 = 4.49 EUR

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For other activity types calculation is performed in a similar manner.

Did you like this tutorial? Have any questions or comments? We would love to hear your feedback in the comments section below. It’d be a big help for us, and hopefully it’s something we can address for you in improvement of our free SAP PP tutorials.

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5 thoughts on “SAP Work Center and Cost Center Integration”

  1. Very good and easy to understand tutorial, so far has been understood, I hope next lesson. Thank you

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