SAP PP Work Center and Cost Center Integration

The cost center is created for every organization function or department for recording the cost incurred that contribute to a company’s profitability indirectly.

The general cost center categories used is –

  • Production
  • Sales
  • Administration
  • Service Cost center

In production planning, every work center is assigned with one cost center. To every activity type specified in a work center an activity rate should be maintained in cost center. The SAP system will use this information for calculating the activity cost for an operation.

A work center is assigned to only one cost center but several work centers are assigned to one cost center.

Example –

For example, a steel factory making steel products made from steel scrap, IDM steels etc.

A furnace operates on 100 tons per day and the activities performed in furnace for making molten steel metal is –

  • Furnace operation i.e., charging, melting, slagging and tapping.
  • Labor hours.

Now the two activity types are defined in work center and then assigned to work center. This work center is assigned to cost center.

The activity rate of every activity is maintained against the cost center. The planned furnace and labor hours are maintained for base quantity specified as 100 Tons in a routing. The formula for every activity is maintained in work center.

Formula –

Furnace activity cost = Hours in order * Operation Quantity/ Base quantity.

If a production order is created in SAP system, the above information is used for calculating the activity cost.

Activity Types in Costing –

The activities produced in a cost center are created as activity types such as mentioned in above example, two activities are produced in furnace i.e., machine and labor hours. These activity types are created and assigned to furnace cost center and same are also assigned to cost centers of ladle and casting.

Activity Price of Activity type –

The activity price is defined for every activity type and cost center manually. Even though there are similar activity types for the all cost centers, the activity price is different for every cost center. The activity price is defined using the transaction code KP26.

Activity Cost in Product Costing –

Usually, the product cost is comprise of 3 primary components. They are –

  • Raw material or component cost
  • Activity cost
  • Overhead cost

The activity cost is actually calculated based on work centers, cost centers and activity prices. The sap system calculate activity cost by multiplying activity price to quantity.