2 Replies Latest reply: May 11, 2009 8:40 PM by Sridhar Vasudevan RSS

difference between direct and Indirect activity allocat

gopi p
Currently Being Moderated

Hi Experts,

 

Can u please explain me the difference between direct activity allocation and Indirect activity allocation in some general examples,In our client there is no production scenario, we have cost center accounting & PCA. In this situation who to do the activity allocation.

 

regards,

Gopi.P

  • Re: difference between direct and Indirect activity allocat
    Srikanth Munnaluri
    Currently Being Moderated

    Hi Gopi,

     

    Direct activity allocation involves the measuring, recording, and allocating of business services performed. To do this, you must create the relevant (measurable) tracing factors (allocation bases which can be used as cost drivers). In Cost Center Accounting these are known as activity types. Activity allocation occurs, for example, when business transactions are confirmed or when posting activity quantities to accounts. The system multiplies the activity produced by the price of the activity type.

     

    To do so, for the cost centers or business processes involved, you must plan activity types either using prices set manually or using subsequent iterative price calculation.

     

     

    If the receiver of the activity allocation is not a cost object (such as, cost center, business process, or internal order), then the following applies: If no price was set manually, then the plan price is used. If you have not executed an iterative price calculation, then the manually set price for the activity type is used for direct activity allocation (the price in the plan/actual (000) version).

     

     

    If the receiver of the activity allocation is a cost object (such as, a production order or a product cost collector), then the price used for valuation is determined according to the valuation variant (which is linked to the cost object for the simultaneous costing via the costing variant). If the receiving cost object is not linked to a costing variant for the simultaneous costing, then the plan price for the valuation period is used.

     

     

    The service cost center "Plumbers" (1000) performs 2 hours of the activity type "Repairs" for production cost center "H" (5000). The plan price for the repairs activity type is USD 15 per hour. In direct activity allocation, this price is valuated as follows:

     

     

    2 hrs X 15 USD/hr = 30 USD

     

     

    The u201CPlumbersu201D cost center is credited with this amount and the HI production cost center is debited correspondingly.

     

     

    Indirect activity allocation can be used to automatically allocate planned and actual activities.

     

     

    You can specify keys to allocate activity, which is not possible when you use manual activity input in the plan or actual activity allocation. In addition, if calculating the sender activity quantities involves too much time or expense, the system can determine the activity quantity inversely based on the activity of the receivers.

     

     

    If you execute indirect activity allocation without completing planning for the combination cost center/activity type, you must activate the actual price indicator in the activity type master data.

     

     

    A special type of indirect activity allocation for actual allocation is the plan=actual activity allocation. In contrast to other types of indirect activity allocation, the plan=actual activity allocation allows for a multiple level activity network to be determined iteratively with the operating rate as the tracing factor.

     

     

    You can choose between two methods of indirect activity allocation, depending on the activity types category. These methods are determined for each segment and can be combined in one cycle.

     

     

    Activity quantities can be determined on the sender object:

    For certain activity types you can determine the total activity quantity for each sender. These are category 3 activity types, Manual entry, indirect allocation.

     

     

    Using indirect activity allocation, these posted activity quantities are distributed by the senders among the receivers defined in the segment according to their allocation bases. The corresponding segment must use the sender rule Posted quantities. Any receiver rule can be used, with the exception of Fixed quantities.

     

     

    The Quality control cost center uses 1000 hours of the Testing activity type. This cost center provides activity for the cost centers Goods receipt and Finished products. Allocations are made on the basis of the tracing factor Number of test items (TI). These are 4000 items for the Goods receipt cost center and 6000 items for Finished products. This corresponds to an activity input of 400 hours for Goods receipt and 600 hours for Finished products.

     

     

    The price per activity unit for the Quality control cost center is 50 USD/hr. This results in activity output costs of 50,000 USD. The receiver cost centers are debited with the following costs based on the tracing factor TI.

     

     

    Goods receipt: (50,000 USD X 4000 TI) / 10,000 TI = 20,000 USD

     

    Finished products: (50,000 USD X 6.000 TI) / 10,000 TI = 30,000 USD

     

     

    Srikanth Munnaluri

  • Re: difference between direct and Indirect activity allocat
    Sridhar Vasudevan
    Currently Being Moderated

    SAP has given this good example, in the background of activity based costing. Let me attempt to reword it.

     

    Let's assume there is Purchasing department that incurred $ 42,000 in a month, which employs around 50 staff.  This department performs procurement activities for both local purchases and Imports. They work for a 1000 man hours in a month and each manhour cost $ 42. Assume that the department spent equal number of hours for processing both local and import purchase orders. If there is no significant difference in activities for local and foreign purchases, the purchasing department can simply allocate number of hours booked for local purchase and import processes. viz $ 21,000 each This is Direct Activity Allocation. Here the activity is that of the sender that plays a major role, because it is easy and direct to measure this activity.

     

    However, with the same above example, if the processes for imports are complicated compared to local purchases, it may not be appropriate to charge based on direct activity ie., man hours. You may want to charge it based on the number of orders processed and, perhaps, adding a weightage.

     

    Let's say 600 local orders and 400 import orders were processed. The imports are twice complicated then the local. The activity for purchasing department for the purpose of allocation is determined indirectly, based on the receiver's activity. The weightage of 2 is assigned import processes a total of 1400 hours is determined based on 600 for local and 800 for imports. This 1,400 hours is not actual hours spent, but derived for the purpose of allocation based on receivers activities. This would lead to a charging local process with $ 18,000 (42,000/1400*600) and $ 24,000 for imports. This is an example of Indirect Activity Allocation

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