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SAP Cost Allocation

Written by Bubai and last updated on November 27, 2017.

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Welcome to the SAP cost allocation tutorial. In every organization, there are costs
involved in various departments. In this tutorial, we will discuss how these costs
can be allocated across different SAP cost objects like cost center or internal
order and help to create a cost analysis report.

Let us look at a simple example on how cost allocation comes into effect and why
it becomes the most integral part of controlling.

CSN Ltd operates as an IT equipment service center for reputed brands across the UK. This company deals with
after-sales services including repair and refurbishment services for products like laptops, PC, LCD monitors, etc.
CSN Ltd has a division in the UK comprising of departments like Management, Logistics, Warehouse, Service and
Quality Control.

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Each of the departments has its own mode of operation running daily which incurs significant amount of cost which
can be attributed as Direct and also Indirect. CSN management has come out with a strategy on how these costs
can be charged to each impacted cost center to come out with the most efficient costing report. This is where cost
allocation planning comes to the picture where the company will consider impacted cost centers where costs will
be allocated in related proportion. In the allocation planning, amount and quantities will be periodically determined
and allocated from sender cost objects (like cost center) to receiver cost objects. In this case, we will be using
CSN departments as primary cost centers which will act as both sender and receiver cost objects.

In this tutorial, we will try to understand different cost allocation methods in SAP which a successful organization
can adapt in order to get clear insight about its cost accounting report.
• Cost Allocation Cycle
• Cost Allocation – Distribution
• Cost Allocation – Assessment

Basics of SAP Cost Allocation

For a dynamic organization with complex operations where multiple projects / activities are running on daily basis
adding up to the company’s profitability, accurate costing flow between related cost objects becomes one of the
vital factor to look at when it comes to project based costing. SAP provides the most systematic foundation on how
cost allocation process can contribute to the effecting reporting related to cost management.

Let’s take the scenario of CSN Ltd. The following image will give us a good idea on organizational structure of
CSN.

Organizational Structure

In course of daily operation, various department as given above incur costs which are captured under related cost
centers: CCGAM, CCWH, CCLOG, CCRC , CCSERV.

Cost Element Structure

In SAP Cost Allocation process, cost element plays the key role since costs flow from FI direct postings to related
cost objects in Controlling. As we know, in Controlling there are two kinds of cost elements.
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PRIMARY COST ELEMENT

Being directly associated with G/L, it is linking FI and CO via FI direct posting to related cost objects (cost center,
internal order, CO-PA object). In SAP, all primary cost elements are categorized as ‘1’ under CS00 controlling
area.

Primary Cost Elements

SECONDARY COST ELEMENTS

These cost elements are maintained based on specific category, so that they can be used for reposting, cost
assessment and revenues inside the CO.

CSN has also listed specific cost elements in a form of overheads which need to be used and allocated only within
controlling area ‘CS00’ to related cost objects.

Secondary Cost Elements

In order to cater to the requirement of cost flow across the related cost objects (FI to CO or within CO), SAP has
come out with unique methods of SAP cost allocation.

What is Cost Allocation in SAP?

Within cost center accounting and overhead cost controlling, allocations plays a vital role enabling the business
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users to periodically allocate amounts and quantities from sender cost objects to receiver cost objects based on
cost center allocation planning and structure. Both actual and planning data can be allocated from sender cost
object to receiver cost object in SAP cost allocation process using allocation cycle.
SAP Cost Allocation Methods

Taking the above scenario where primary cost elements and secondary cost elements are listed within a company
and there is a requirement of correct cost evaluation from operation perspective, SAP recommends the following
two types of Cost Allocation process:

1. Distribution – for Primary Cost Element

2. Assessment – for Secondary Cost Element

SAP Cost Allocation Method – Distribution

Distribution process is mainly used for allocating the amount and quantities (both plan and actual) of one or more
sender cost objects to multiple receiver cost objects. Generally, in this type of SAP cost allocation, debit and credit
of amount and quantities between sender cost objects (e.g., cost center) and receiver cost objects takes place
under the original primary cost element, which means amount in the primary (original) cost element remains the
same as before. Let’s consider the following scenario.

CSN has occupied building which is shared by its department as listed above in the structure. Monthly CSN’s
building management incurs rental charges for the building which is stated as primary cost element and it needs to
be allocated to various department (maintained as cost centers).

To address this requirement, SAP propose to define distribution process within the system since it is related to
allocation of costs incurred within primary cost elements.

In SAP, there is customizing related to calculation of both actual and planning overhead rates. On the following
screenshot, rates of overhead are related to planning. On the basis of these rates, overhead is allocated.

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Define Plan Overhead Rates

In the following windows, there are multiple options to plan overhead rate.
 Overhead – Initial Screen

For overhead cost allocation, there are three things we need to maintain as we are in the phase of planning:

1. Calculation Base: Cost Elements / Origin

2. Calculation Base: Cost Center / Activity Type
3. Percentage Overhead

The reason we choose the above options is because for all sorts of allocations methods, a calculation base is
required both for cost elements and cost centers. We need percentage rate to be planned for related overheads
on the basis of which cost allocation will be carried on.

Now, let’s go back to the scenario where we have to allocate building rental costs of CSN group. We need to first
put the related cost element / cost center as the calculation base for CSN rental cost.

Choose the option “Calculation Base: Cost Elements / Origin” and click “New Entries” button. Then, create a new
calculation base for CSAD: CS Admin Overhead.

Calculation Base – Cost Element

Under the CSN’s controlling area CS00, update the following cost element (Admin O/H) rate as calculation base.

Details of Calculation Base

Now, go back to the initial screen and choose the option “Calculation Base: Cost Center / Activity Type”. Create
new entries and update the related cost center in this allocation planning.
 Calculation Base – Cost Center / Activity Type

Finally, choose the option “Percentage Overhead”. In this option, we need to plan the percentage rate at which the
CSN Admin Overhead will be allocated.

Calculation Base – Overhead

Click Details tab and update Validity Period, Rate of Percentage, Controlling Area, etc.

Calculation Base Details

DEFINE DISTRIBUTION CYCLE

We need to define a Distribution Cycle (with a specific naming convention containing up to 6 digits), e.g. CSNRP1.

IMG -> Controlling -> Cost Center Accounting -> Planning -> Allocations -> Distribution -> Define Distribution
 Define Distribution

In the next screen, we will choose the option “Create Plan Distribution”.

Create Plan Distribution

Choose controlling area CS00.

Set Controlling Area

Next, create a Distribution Cycle (transaction KSV1).

Distribution Cycle

Within the distribution cycle we need to attach a segment consisting of the details of sender and receiver cost
centers and cost allocation percentage.
 Senders/Receivers

We maintain the following under Senders/Receivers tab:

• Sender cost center: CS-GAM

• Receiver cost centers: CC-LOG (Logistics), CC-WH (Warehouse), CC-SERV (Service Center)

Under Receiver Tracing Factor tab, we specify cost element 400310 – Building Rent which needs to be allocated
to the receiving cost centers. Finally, under Receiver Weighing Factor tab, we maintain the receiver cost center
and the allotted percentage at which rent cost will be allocated as primary cost element.

Receiver Weighting Factors

After saving the segment, we can save the distribution cycle.

EXECUTE DISTRIBUTION CYCLE (TRANSACTION KSV5)

This activity is carried out during the period end closing. All distribution cycles are generally executed in order to
fulfill the accomplishment of primary cost allocations like the above scenario where CSN rent cost is allocated to
receiver cost centers CC-LOG, CC-WH, and CC-SERV based on the percentage allotted in the distribution cycle.
 Transaction KSV5

Transaction KSV5 – Initial Screen

Enter the following data in KSV5 transaction:

• Period: 02 to 12 (Cost allocation will be performed according to the period stated in the distribution cycle)
• Select distribution cycle within the validitiy period

Once executed the system will display the following screen (see below). The screen displays the cycle structure:
sender cost center of CSN building rental.

Actual Distribution Sender List

The following screenshot tells how CSN building rental cost is allocated to receiver cost centers CC-LOG, CC-
SERV, and CC-WH.
 Actual Distribution Receiver List

SAP Cost Allocation Method – Assessment

In this method, internal SAP cost allocation is performed based on both primary and secondary cost elements. For
example, during product costing we use assessment method to allocate the internal cost from a production cost
center to a related production order.

This method is about grouping multiple cost elements and reclassifying them under a secondary cost element.

Process Prerequisites

Create assessment cost element (secondary) and specify receiver types for assessment where we can specify
which table fields are active and whether a single value, an interval, or a group can be entered for these fields.
You make these settings per controlling area and separately for plan and actual data respectively.

Allocation Structure

Process related to cost allocation via assessment usually requires predefined settings comprising of segment
containing a source cost element being assigned to desired assessment cost elements. The whole setup gives the
formation of the allocation structure which can be used during assessment cycle definition instead of an
assessment cost element in the segment. Usage of allocation structure during assessment cycle setup is always
optional and depends on the business scenario.

In SAP system, allocation structure is defined under the following path:

Define Allocation Structures in SPRO

New allocation structures can be created as demonstrated below where we will assign a source cost element and
assessment cost element and save the settings.
 Allocation Structures Configuration

Now, coming back to SAP cost allocation process with assessment method, where cost is allocated using the
assessment cost element which generally wipes out the traceability of original cost element at the time when cost
is getting allocated from a sender cost center to a receiver cost center. Finally, when the process completes,
assessment of cost elements gets updated in both sender and receiver cost centers.

Allocation process continues with creation of plan assessment (transaction KSU7) under controlling area CS00.

Plan Assessment Cycle

Next, you should assign the secondary cost element, specify sender rules and receiver tracing factor. In many
cases, cost assessment can use the allocation structure instead which already consists of allocation rules of
sender and receiver. In SAP, that is optional.

Allocation Structure
 Sender Values and Receiver Tracing Factor

In Sender/Receiver tab, we also assign the sender and receiver values (preferably, cost centers and cost
element).

Senders/Receivers

In the Receiver Tracing Factor tab, we provide the list of cost elements. In this example, we selected all cost
elements related to administration expenses.

Cost Elements

Finally, in the Receiver Weighting Factors tab, we will input the percentage of cost allocation for the related cost
receivers. Percentages are generally based on a client’s discretion considering how much indirect cost can be
allocated between cost receivers (to each department).

Receiver Weighting Factors

After all the necessary settings, an assessment cycle is saved. Once the assessment cycle is in place, we can use
the transaction code KSUB for execution of Plan/Actual assessment as per requirements. The process of
execution is the same as for the transaction code KSV5 – Execute Distribution Cycle.
 Transaction KSV5 – Initial Screen

Actual Assessment Receiver List

The above screen shows how administration costs are allocated to related cost centers using assessment method
of SAP cost allocation based on charging cost through secondary cost element as defined above.

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 CO tutorials.

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