Method of internal cost allocation by which valuated activities (allocation bases) from cost centers can be assigned to cost receivers in accordance with the cause of the cost.
The activities or allocation bases represent the output of a cost center (such as production hours or machine hours). These outputs are represented in the R/3 System as activity types. The activity types are valuated with prices that are either specified by the user manually or calculated by the system automatically by means of iterative activity price calculation. To calculate iterative prices, the R/3 System divides the cost center planned costs assigned to the activity types by the planned activity (or capacity, depending on how the system is set up).
In internal activity allocation, the activity produced by the cost center is multiplied by the activity price. The result is the cost to be allocated. The sender cost center is credited with this amount and the receiver object is debited.
Refer this:
http://help.sap.com/saphelp_46c/helpdata/EN/66/bc6f7643c211d182b30000e829fbfe/content.htm
Regards
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