Absorption Costing - SAP Business One Setup

1.) Create Cost Centers for all production resources (direct manufacturing costs), considering both machines and labor.

Important note: You cannot activate the “Use multidimensional” parameter in SAP Business One's General Settings if you want to use the Business Performance module, as it is not compatible with multiple Cost Center dimensions.

2) Create Cost Centers for indirect manufacturing costs.

3) If necessary, create Cost Centers to represent desired cost pools if you wish to book costs directly into them, although this is an optional step, as it is perfectly possible to execute absorption costing without having any cost pools. Costs related to cost pools will suffer a first distribution to direct and indirect Cost Centers before the costs from indirect Cost Centers are distributed to the direct ones.

Define Distribution Rules for costs requiring distribution amongst several Cost Centers. A typical example of cost distribution is in how to deal with meals for employees or corporate cafeteria. When all employees receive a share of a global expense, this expense affects several departments and might need to affect product costing as well. So, the first step is to split meals expense across different accounts, one related to administrative departments and one (or multiple) reflecting production department(s). Next, a Distribution Rule can be set to assign parts of these costs to each Cost Center based on a pre-defined criterion (like number of employees per department, for instance).

Important note: The absorption costing function of Beas Manufacturing is not compatible with “manual” distributions to Cost Centers (allowed by SAP Business One); so, make sure that all your documents with distributed values have a Distribution Rule assigned.

Configure the Price Difference Account to match the corresponding COGS (Cost of Goods Sold) account, using simple or advanced GL Account Determinations. The last steps of the absorption costing process generate Stock Revaluations to change the stock value of products according to the appropriated costs. However, if the products are not in stock anymore (sold during the month), COGS should be adjusted to reflect the correct costs, and SAP Business One uses the Price Difference Account to register Stock Revaluation values when the products are partially or completely out-of-stock.