Date: 24 May 2010
By Phillip Barwell
The cost of labour is significant for many organisations. The planning, management and accounting of labour costs must be accurate, timely and often detailed for businesses to run effectively.
The electronic systems employed by organisations to record and manage labour costs must meet a variety of demanding requirements - particularly from the perspective of payroll, costing and billing.
The management team - particularly the business unit and cost managers are most interested in labour costing. They are focused on monitoring the allocation and recovery of these costs. Costing will be impacting service contracts and the ability to invoice customers based upon costs.
What is labour costing?
In simple terms it is the allocation of labour costs to receiver cost objects.
What are the challenges?
While the concept of labour costing appears simple there can be a multitude of challenges in achieving the levels of accuracy, timeliness and detail demanded by most organisations. While the list of specific challenges can be many and organisation specific, the main challenges may be grouped into time recording, cost valuation and reporting.
What is the solution?
There are many options and many solutions however; there is no single perfect solution to meet the requirements of all organisations.
Fortunately SAP provides a range of options which can help meet the most demanding labour costing requirements. Let's look at how SAP could be used to tackle some of the main challenges.
Time Recording
The recording of time is essential for labour costing because it is a person's time which incurs cost. The time sheet record must include all of the working time attributes to ensure that time is allocated to the correct cost objects and the employee can be paid correctly.
SAP provides the Cross Application Time Sheet (CATS) for efficient time recording. The CATS data entry profiles are highly customisable enabling required fields to be "switched on" and other fields to be "switched off". Importantly for labour costing each data entry profile may be configured with a different costing variant.
The costing variants in CATS control how time records are assigned for costing purposes. There are six (6) cost variants
1) Assignment of personnel costs to the master cost centre - This is the default cost variant which is used in most situations, including where planned activity price allocation occurs. This variant is also used where the SAP HCM system is decoupled from the SAP Finance and Logistic systems.
2) Assignment of personnel costs to the receiver cost object - This cost variant is quite unique from the others in that actual payroll costs are posted directly to the receiver cost objects. For organisations able to wait until the completion of the payroll cycle this cost variant is a great option for ensuring actual labour costing! Note that confirmations of time units can still be made daily - however actual costs are only assigned when the payroll costs are posted.
3) Assignment of personnel costs to sender cost centre - Payroll labour costs will be assigned to the sender cost centre as opposed to the employee home cost centre. This option may be used to prevent the potentially undesirable situation where payroll costs are debited to an employee home cost centre while activity allocations credit a different sender cost centre.
4) Assignment of personnel costs to sender cost centre; assignment to activity type - This cost variant is similar to (3) however an activity allocation also occurs.
5) Activity allocation between master and sender cost centre - This cost variant is designed to prevent undesirable inconsistencies which may occur if the employee home cost centre is different to the sender cost centre.
6) Activity allocation between master and sender cost centre, assignment to activity type - This cost variant is similar to (5) however an activity allocation also occurs.
Cost Valuation
Maintaining accurate cost rates is a critical business function which can be a real challenge.
Activity allocations within SAP rely upon appropriate planned activity rates being maintained using the transaction KP26. Rates need to be maintained for each sender cost centre and activity type combination.
There are competing forces at play. In one direction is the pull of simplicity and low maintenance where fewer combinations of activity type and sender cost centre are used. In the opposite direction is the drive for greater accuracy and in the extreme actual cost for individual employees where many combinations are required.
Within CATS there is the ability to override the planned price set within KP26. The CATS Price field can be enabled in the data entry profile and if a value is recorded in the Price field it will override the planned rate.
The CATS user exit CATS0002 - Supplement Recorded data may also be used to calculate and record a value in the Price field. The cost price may be based upon the employee's historical pay results or basic pay details for example. This option enables accurate costing while keeping cost centre and activity type maintenance to a minimum.
Reporting
There is a range of SAP reports which provide visibility for labour costing. These include the CATS specific reports of CADO and CATS_DA which provide low level details recorded on the timesheet. There are also Controlling and Payroll reports that provide costing information from those respective modules.
The module specific reports provide plenty of detail but it can be difficult to compare payroll overhead costs with the costs recovered based on activity rates. Fortunately SAP provides the ability for it's customers to develop new reports and fill any reporting gaps. Consider the Cost Centre Line Item Report KSB1 which displays payroll costs but only at a summarised level. A custom report can be developed that combines the line item details with the relevant personnel details to provide this comparison.
Phillip Barwell is a Senior HCM Consultant with Extend Technologies specialising in Time Management, CATS, Payroll and Labour Costing. For more information please contact us at marketing@extendtec.com.au