Using ABC Costing in SAP Business One

11/30/17 5:46 AM

To maximize profits, you need to calculate the true cost of the products you manufacture and sell. If you have complex manufacturing processes, a wide array of products, or more than one production facility, calculating accurate costs can be difficult. Add to that the growing trend of manufacturers spending a larger proportion of their budgets on IT, sales, marketing, and other support, and allocating overhead costs makes assigning costs to products and customers even more challenging.

Why is that a problem?

You need to know which products are profitable and which are selling at a loss; for that matter, some customers are more profitable than others, and you need to know that, too.

Traditional costing methods don’t accurately assign overhead costs to products. ABC costing, by contrast, makes a more realistic profitability analysis by assigning overhead costs to products, customers, and other objects in a way that’s more correlated to cost drivers.

SAP Business One offers enterprise-wide visibility with integrated financials, CRM, purchasing, MRP, and more, enabling you to perform ABC costing. This post explains how ABC costing works – in general and with SAP Business One – so you can correctly apportion your direct and indirect costs to your outputs.

Here's why you should be using ABC costing in SAP Business One.

How ABC Costing Works in SAP Business One

ABC costing in SAP Business One works the same way manual ABC costing works but is easier to capture and report. Under ABC costing, you perform a two-stage process of cost allocation. Rather than allocate directly from resources to outputs, you allocate resource costs to activities in stage 1, and activity costs to outputs in stage 2. Thus, ABC costing enforces the idea that activities consume resources, while products (and customers) consume activities.

Think of how different ABC costing is from traditional costing. With traditional costing, you’ve likely been using arbitrary allocation percentages for overhead and labeled them indirect costs. It’s easy to see how ABC costing will yield very different results for ‘cost of goods sold’ and gross margin around individual products.

Traditionally, indirect costs for such firms are manufacturing overhead costs they can’t assign directly to specific product units. Instead, they allocate the costs to specific production runs, batches, or time periods.

These might include indirect costs like:using ABC costing in SAP Business One

  • Materials purchase order costs
  • Machine set-up costs
  • Product packaging costs
  • Machine testing and calibration costs
  • Machine maintenance and cleaning costs

In ABC, these indirect/overhead costs are labeled as activity pools, defined as all the activities required to complete a task. To cost out an activity pool, you identify the activity units that are your cost drivers for that pool; for example, the total cost for your activity pool "machine setup" is driven by the number of setups, and this assignment of cost totals to activity pools is stage 1 in ABC costing.

If you compare two products, Product A and Product B, you quickly see the difference in their costs using ABC costing.

Product A

Activity Pool Cost Driver Activity Units Cost Driver Unit Cost Total Activity Total Indirect Costs
Machine Setup # of Setups $1,300 150 $195,000


# of Product Packages Packed $0.30 $1,200,000 $360,000
Machine Cleaning & Maintenance # of Batch Runs $1,125 200 $225,000

Total Cost: 


Product B

Activity Pool Cost Driver Activity Units Cost Driver Unit Cost Total Activity Total Indirect Costs
Machine Setup # of Setups $1,300 90 $117,000


# of Product Packages Packed $0.20 $500,000 $100,000
Machine Cleaning & Maintenance # of Batch Runs $1,125 50 $56,250
        Total Cost:

Above, you see the difference using just two activity pools – imagine how great the difference will be when you use a complete set of activity pools.

Once you know the cost of each activity pool, you can calculate your cost per product unit. This represents stage 2 allocation, or “product level allocation.” Add to those your direct costs (which are the same using ABC costing and traditional costing), and arrive at your total cost per production unit. Simply divide the total cost by the number of units produced, and you have arrived at your cost per unit.

Finally, to measure the profitability of a product, simply allocate the revenue from that product, subtract its total costs, and you have your overall profit for the product. Divide that by the number of units sold, and you understand overall profitability and per-unit profitability for each product.


ABC costing supports more than just profitability analysis – it helps you make a wide range of management decisions about product pricing, expanding, or rationalizing your product portfolio, choosing in-house versus outsourced production, evaluating process improvement initiatives, and deciding which customers to prioritize. SAP Business One’s ABC costing capabilities transform the way you understand your business. Contact us for more information.


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