Overhead calculation

Allocation cycles move costs between cost centers. Overhead calculation does something different: it applies a surcharge to cost objects such as production orders, internal orders and WIP-carrying objects, based on costs already on them, and credits a cost center or order at the same time. It is how indirect costs that are hard to trace, such as material handling or production supervision, reach the products that cause them.

The costing sheet

The rules live in an overhead costing sheet. It combines three things. The base is the set of cost elements the surcharge applies to, for example raw material accounts. The overhead rate is either a percentage of the base or a quantity-based amount per unit, and it can depend on criteria such as plant, company code, order type or profit center, with separate rates for actual, plan and commitment data. The credit names which object is credited (a cost center or order) and under which cost element. The overhead itself posts on a secondary account with cost element category 41.

Take a production order in plant 1710 for 500 units of CMC-ALT-100. By month end it carries $40,000 of material issues (rotors and other components), activity allocations from Assembly and Machining, and nothing else. The costing sheet CMC001 applies 10% material overhead on the material base. The overhead run debits the order with $4,000 and credits Detroit Warehouse with $4,000. Detroit Warehouse's costs are now partly absorbed by the products that used its services; the remainder shows up as under- or over-absorption on the cost center, which the controller analyzes.

The same costing sheet can serve planning. When Contoso runs its standard cost estimate for CMC-ALT-100, the costing sheet applies the plan rate to the planned material costs, so the standard price already contains material overhead. At period end the actual rate applies to the actual base on each order. If the two rates or bases differ, the difference becomes part of the order's variance at settlement. That link is worth stating in test scripts: a change to an overhead rate changes both the next standard cost estimate and the variances of open orders, so it must be tested in both places. Quantity-based overhead works the same way, except that the base is a quantity such as machine hours confirmed on the order, multiplied by an amount per unit.

Running overhead

Overhead is a period-end function, run individually or collectively for a range of orders. Classic transactions remain in use in many private cloud systems, for example individual and collective overhead for production orders and for internal orders; SAP Fiori job templates are available for scheduling period-end overhead runs, and SAP's training notes that overhead is now calculated per ledger, with the ledger optional when only one ledger exists. Every run offers a test run (simulation) that produces the result and an error log without posting. Use it.