Use the Indirect Activity Allocation Cycle to Calculate and Post Sender Activity Quantities

  • by John Evanoff, Director, Hitachi Consulting
  • Tom King, Senior Business Analyst, Milliken and Co.
  • February 7, 2011
The indirect activity allocation cycle can be useful for allocating activity costs from one cost center to another. When it is difficult to determine how much activity to post from one cost center to another, you can use a method that involves the automatic calculation of activity quantities. Understanding how to set up the master data defining the allocation cycle is the key.
Key Concept
Allocation of activities from one cost center to other cost centers can be accomplished by directly posting the activity in the sender cost center and then manually calculating the quantities of the sender activity to allocate to the receiver cost centers. The indirect activity allocation cycle provides a method for automating the calculation of the quantities to allocate to the receiver cost centers based on weighting factors defined in the cycle. When it is not easy to determine the activity quantity to post in the sender cost center, the indirect activity allocation cycle is used to determine both the sender activity quantities and the allocated quantities based solely on receiver activity posted in the receiver cost center.

Indirect activity allocation is a useful method for allocating activity costs from sender cost centers to receiver cost centers based on activity reported in the receiver cost centers. For example, in a manufacturing environment, you can use it for allocating energy costs from a cost center from which the energy bills are paid to individual production cost centers that use the energy.

Instead of posting manual journal entries to assign the costs, the indirect activity allocation cycle assigns the costs based on production cost center activity. To continue the previous example, imagine there is no direct method for measuring utilities consumption for the manufacturing equipment. Additionally, this method maintains fixed and variable cost splits during the allocation process, unlike the cost center assessment method.

We’ll show you how to configure this in the SAP system, as well as what the reports look like afterward. The methodology employed for this is applicable to both SAP R/3 and SAP ERP Central Component (SAP ECC) systems and uses standard planning and allocation transactions.

John Evanoff

John Evanoff is a director at Hitachi Consulting. He has 15 years of experience in SAP Financials with a focus on the controlling modules. He spent 20 years working in downstream petrochemical operations as an accounting manager and cost accountant. He holds a BS degree in accounting from Oklahoma State and is a certified management accountant.

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Tom King

Tom King is a senior business analyst with Milliken and Company, a large textile and chemical company based in South Carolina. He has implemented various manufacturing, planning and scheduling, and product costing systems. He has vast experience in SAP controlling with a focus on product costing. Tom holds a BA degree from Northwestern University. You may contact him via email at tnk31953@aol.com.

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