# Work Center Formula and Overhead Calculation

This post will mainly describe how activity based overhead calculation is done in SAP from PP point of view very briefly. This is a very broad area in SAP.

To produce some product you need resources such as Labor, Electricity and Machine etc. Each of this has a cost which should be taken into product cost calculation. This is called Activity Based Costing (ABC).

Let’s take a simple example of knitting a fabric. For this we are using a knitting machine. Let’s assume the only cost relevant here is machine cost other than RM cost. Therefore machine overhead should be absorbed into the product cost.

Firstly knitting machine should be created in SAP as a work center. In the work center we have to maintain some important data relevant to activity based costing.

Knowledge in some concepts used in SAP would be important when creating work center master data.

Defining formulas and Standard Value Key

You will find below three configuration under SPRO –>Production ->Shop Floor Control -> Operations-> Scheduling Define Formula Parameters

Formula parameters are needed to define formula. SAP has a standard list of parameters.

1. I.e.: SAP_08 – This parameter refers to the base quantity of routing. You may note the field name BMSCH which refers to the base quantity. Similarly SAP_09 has the reference to operation quantity.

Note the origin of the parameter ‘General Operation Value’.

Formula

In this menu option, you can set up formula definitions which can be used in the following areas:

• Capacity planning
• Scheduling
• Costing

In this post we are considering costing formulas.

Here you can create a formula using parameters defined above. We can then link the formula parameters mathematically by using, for example, the following operators:

SAP has a standard set of formulas. We can create new formulas also.

IE

Standard formula for Production Set Up is SAP002. It has below calculation. This means,

SAP_02- Machine Time

SAP_09- Operation Quantity

SAP_08- Base Quantity

SAP_11- Number of Splits (this applies when an operation is carried out in different machines at the same time) Read More.

Standard Value Key

What is the use of Standard Value Key?

We can say below resources are needed to produce 1000M of a fabric F.

Labor – 2Hours

Machine- 10 hours

We have to maintaining above standard values in routings.  1000M is the base quantity of routing. Only after you set the relevant SVK in work center you will be able to maintain standard values for those activities in routing.

Standard values for the activities are maintained in routing as below. Standard Value key consists the cost parameters (i.e.: labor, machine etc.) relevant to the work center.

IE:

SAP1 is a standard value key defined in standard SAP. Below parameters are assigned to this standard value key (SVK).

SAP_01 -Setup

SAP_02 – Machine

SAP_03 – production time

SVK is assigned to work center in Basic Data tab. Then we can maintain standard values for above parameters (i.e.: Set up Time) in routing.

Work Center Formula:

In costing tab we can maintain a work center formula for each activity. For example if we are maintaining formula SAP002 for the activity Machine Time and routing information as below.

Activities Overview in Costing Tab

Example: Activity types are created from FICO side. Cost for each activity is maintained in KP26 transaction.

Routing Data

Base Quantity -1000M

Machine Time – 2H

Let’s assume for MACHINE activity USD30 /H is the standard cost.

How Target Cost calculation done for a production order of 5000M

SAP02 * SAP09 / SAP08 / SAP11

Parameter Values

 SAP_02 Machine Time 2H SAP_09 Operation Quantity 5000M SAP_08 Base Quantity 1000M SAP_11 Number of Splits 1

2H* 5000M/1000M/1= 10H

10 hours needed for do the production of 10000M.

Cost:

10H*30USD/H = USD300

This is how target cost is calculated for a production order. This may not be the actual cost. Actual cost is calculated using same formula using actual values submitted by user in production order confirmation. One can analyze the target cost vs. actual cost in the production order cost analysis.  Actual cost is based on the values entered by the user during production order confirmation.

Production Order Display > Go to > Cost Analysis

Variance analysis generally done by the management accountant of the company.

See below example. /       You must be Logged on to comment or reply to a post.
• Hello Jeewana,

Nice document and easy well explanation. You have explained one of the important part of product costing in well manner.

Regards,

Sharvari.

• Former Member Post author

Thanks Joshi.

• Nice document.

• Hi Jeevan,

I’m looking to understand the relationship between the Setup hours, Machine hours and Labor hours. How do i evaluate each one of this to input in my master recipe under STD value 1, STD value 2, STD value 3 respectively? I think I understand the Machine time, which is once a mixture is turned on to mix solution for 2 hours. i would call this as 2H machine time. Please correct me if I’m wrong. I need more understanding around what value’s are critical to input in Master Recipe.

Thank You in advance, hope to hear from you soon.

• nice document to understand

thnx

• nice document.

• Dear Jeewana,

Awesome Explanation. Keep it up

Regards

Qazi Raheel Ahmed

• Dear Jeewana

Its Nice Document.

Thanks, for sharing your Good Work

Regards

Raja Sekhara Reddy

• Nice document