Controlling Management EGN 5622 Enterprise Systems Integration Fall, 2015

Controlling Management Concepts & Theories

FI (Financial Accounting (FI) and Controlling Accounting (CO) ECC 6.0 January 2008 FI (Financial Accounting (FI) and Controlling Accounting (CO) Accounting function can be divided into two: internal and external. External accounting is called financial accounting, and Internal accounting is often called controlling accounting or managerial accounting. You can capture these cost any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

Comparison between FI & CO ECC 6.0 January 2008 Comparison between FI & CO Financial Accounting External Accounting Balance Sheet Profit & Loss Statement Legal Requirements Standards Controlling Accounting Internal Accounting not required by law Flexible Objective of controlling accounting is how to cut cost and add value. Process of identifying, measuring, analyzing, and communicating information for organizations goals. You can capture these cost any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

Comparative Reporting ECC 6.0 Comparative Reporting January 2008 Liquidity Calculation Retained Earnings Report Financial Accounting (FI) Balance Sheet Income Statement External Reporting Cost Center Reports Financial accounting is external and feeds the external reporting requirements Managerial Accounting is internal only Product Costs Reports Managerial Accounting (CO) Profit Margin Profit Center Reports Internal Reporting January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 2008. All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Fundamentals of Cost Management ECC 6.0 January 2008 Fundamentals of Cost Management Internal (cost management) accounting system and the external (financial) accounting system are fully integrated. Every cost is linked to an expense booked in the financial accounting system and to a cost element in managerial accounting system. Cost elements are in turn assigned to cost objects. You can capture these cost any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

Cost Elements assigned in Prod Order ECC 6.0 January 2008 Cost Elements assigned in Prod Order You can capture these cost any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

Interrelated and Closely Connected FI & CO ECC 6.0 January 2008 Interrelated and Closely Connected FI & CO (FI) Transaction Document Amount G/L Account # Cost Center 1900012432 (CO) Transaction Cost Element 20000657 Income Statement Bal. Sheet Financial Accounting Supplies Exp. Bank 1000 1000 Controlling Cost Center Transactions can have an effect on both FI and CO. The transaction will create a debit and a credit for FI (FI transaction) If CO is turned on a cost center or cost element bucket will be updated. (CO transactions) 1000 January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 2008. All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Interrelated and Closely Connected FI & CO ECC 6.0 January 2008 Interrelated and Closely Connected FI & CO Cost Center Transactions can have an effect on both FI and CO. The transaction will create a debit and a credit for FI (FI transaction) If CO is turned on a cost center or cost element bucket will be updated. (CO transactions) © SAP AG and The Rushmore Group, LLC 2008

Fundamentals of Cost Management ECC 6.0 January 2008 Fundamentals of Cost Management Cost object is a classification of costs desired by the user. It could be a cost center (a department where the cost is incurred), a production order (costs to produce unit 10004232), or a special project (installation of an ERP system), etc. Cost object is used to aggregate costs for some decision purpose at a later time. For instance, sales/marketing, finance/accounting, and general administration could be three cost centers (objects) in the headquarters under the direction of three different VPs or EVPs. A cost element can be assigned to multiple cost objects. For example, travel as a cost element may appear in all cost centers. You can capture these cost any way you want. Manager’s bonuses are often based upon their profit center’s profitability January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 2008. All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Target Audience Executives Senior Management Department Managers Version 1.0 Target Audience January 2007 Executives Senior Management Department Managers Controllers Cost Accountants The Rushmore Group, LLC

Controlling Accounting Terminology Version 1.0 Controlling Accounting Terminology January 2007 Controlling Area A self-contained, organizational element for managerial accounting and reporting system. A controlling area is the highest level organizational entity within the Control module A controlling area may include one or more company codes; therefore, an enterprise can perform management accounting analyses and reports across several companies Each company code can be assigned to one and only one controlling area A way to identify and track where revenues and costs are incurred for evaluation purposes 6. A controlling area is also broken down into two different “standard” hierarchical structures: 1) standard cost center hierarchy; and 2) standard profit center hierarchy The Rushmore Group, LLC

Subcomponents of Controlling Accounting ECC 6.0 January 2008 Subcomponents of Controlling Accounting Cost Element Accounting Cost Center accounting Internal Orders, and Profit Center Accounting You can capture these cost any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

1. Cost Element Accounting ECC 6.0 January 2008 1. Cost Element Accounting 1.1 Cost Elements Cost and revenue accounts within a chart of accounts but involved in cost accounting are referred to as “elements,” which are further divided into primary cost elements, primary revenue elements, and secondary cost elements You can capture these costs any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

Cost Element Accounting ECC 6.0 January 2008 Cost Element Accounting 1.2 Primary Cost and Revenue Element Primary cost and revenue elements are created in the FI module and are used both in the FI and CO modules to account for cost and revenue flows with parties external to the organization. You can capture these costs any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

Cost Element Accounting ECC 6.0 January 2008 Cost Element Accounting 1.3 Secondary Cost Element Secondary cost elements are created in the CO module and are used exclusively within the CO to account for internal cost flows among cost objects within a controlling area (e.g., cost allocations among cost centers). There are no secondary revenue elements. You can capture these costs any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

Cost Element Accounting ECC 6.0 January 2008 Cost Element Accounting You can capture these costs any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

2. Cost Center Accounting (CCA) ECC 6.0 January 2008 2. Cost Center Accounting (CCA) Cost center accounting (CCA) module is used to assign planned costs and actual costs incurred to areas of cost responsibility within an organization. For example, if a manager wants to know how much it costs to run his department for the month of April, this module can be used to provide the answer. CCA module contains a variety of methods for allocating costs among cost centers and from cost centers to other cost objects (e.g., internal orders, production orders, profitability segments, etc.). You can capture these cost any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

2. Cost Center Accounting 2.1 Cost Centers ECC 6.0 January 2008 2. Cost Center Accounting 2.1 Cost Centers Cost center is created for internal controlling purposes and provides a tool for collecting costs. It may be a unit distinguished, for example, by area of responsibility, location, or type of activity, such as Copy center, Security department, Maintenance department Can be permanent or temporary (e.g., internal order) Operates as a collector and assignor of responsibility for expenditures Responsible for cost containment, not responsible for revenue generation January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 2007. All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Cost Center (- continued) ECC 6.0 January 2008 Cost Center (- continued) A cost center is the basic organizational responsibility component of a controlling area. There is one and only one standard cost center hierarchy for a controlling area. Cost centers may also be linked to a specific business area, company code, and profit center (i.e., business areas, company codes, profit centers and controlling areas may all be viewed as collections of cost centers). You can capture these cost any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

2. Cost Center Accounting ECC 6.0 January 2008 2. Cost Center Accounting 2.2 Activity Any event, action, or transaction that causes a cost to be incurred in the production of a product or the providing of a service. You can capture these cost any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

2. Cost Center Accounting ECC 6.0 January 2008 2. Cost Center Accounting 2.3 Activity types Activity types are production or service activities rendered to a work center or cost center that are used to allocate costs. Activity types generally include different types of labor (e.g., setup, production labor, machine labor, etc.) that are performed by personnel within a work center or cost center. Measure of activity type quantity (e.g., hours worked), which may be used to allocate all or a portion of the costs of a cost center to other cost objects (e.g., other cost centers, production orders, profitability segments, etc.). You can capture these costs any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

2. Cost Center Accounting ECC 6.0 January 2008 2. Cost Center Accounting Activity types (-continued) Cost center in which the activity is performed is referred to as the “sender,” and the cost objects receiving the allocated costs are called “receivers.” Allocation is based on an “activity (transfer) price” that is developed for the activity type. The activity price may be set manually by management. You can capture these cost any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

2.Cost Center Accounting ECC 6.0 January 2008 2.Cost Center Accounting 2.4 Cost Drivers A cost driver is a factor, such as machine hours, beds occupied, computer usage time, flight hours, or any other factor that causes overhead costs. Typical cost driver types: activity types and statistical key figures, such square feet or head count. You can capture these cost any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

2. Cost Center Accounting ECC 6.0 January 2008 2. Cost Center Accounting 2.5 Product Costing (PC) Product costing (PC) is a CO module function which provides the means for developing different types of cost estimates for a particular product or subassembly, such as standard cost, future cost, tax cost, or commercial cost estimate. These estimates may be used for a variety of purposes, including product pricing, production planning and control, inventory valuation, and income measurement (cost of goods sold). You can capture these cost any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

2. Cost Center Accounting ECC 6.0 January 2008 2. Cost Center Accounting 2.6 Activity Based Costing (ABC)   Activity based costing (ABC) module provides the means for assigning planned costs and actual costs incurred at the cost center level to business processes. The costs assigned to a business process can in turn be allocated to those cost objects (products, services, customers, etc.) that utilize the business process. Cost center resources can allocate to business processes based on their true utilization of activities. You can capture these cost any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

2. Cost Center Accounting ECC 6.0 January 2008 2. Cost Center Accounting 2.7 Work Center Work centers are organizational units that perform operation functions within a plant. A work center might include a production line, quality checkpoint, packaging line, and warehouse. For each operation created in a routing, a work center must be identified. All manufacturing processes are routed through work centers. Each work center is connected to only one cost center as defined in Work Center Master Records. This way allows costing, scheduling, and capacity planning to be done for each functional production area individually. You can capture these cost any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

ECC 6.0 January 2008 3. Internal Order A method of internal cost allocation by which valuated activities 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). 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. Sender cost center is credited with this amount and the receiver object is debited. Internal orders support task-oriented planning, monitoring, and allocation of costs. You can capture these cost any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

4. Profit Center Accounting (PCA) ECC 6.0 January 2008 4. Profit Center Accounting (PCA) Profit center accounting is used to analyze income and expenditure for profit centers that represent an independent subunit within an organization. Profit centers are linked to cost centers with one-to-one or one-to-many relationship. Responsible for revenue generation and cost containment There is one and only one standard profit center hierarchy for a controlling area. You can capture these cost any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

4. Profit Center Accounting ECC 6.0 January 2008 4. Profit Center Accounting 4.2 Profitability Analysis (PA) Profitability analysis (PA) module provides the means for assigning planned and actual revenues and costs to a variety of profitability segments, including customers, sales territories, sales employee groups, product groups, etc. You can capture these cost any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

Controlling Management SAP Implementation

R/3 SAP Module View Controlling (CO) Integrated Solution Financial Accounting Sales & Distribution Materials Mgmt. Controlling Production Planning R/3 Fixed Assets Mgmt. Integrated Solution Human Resources Project System Client / Server Quality Management Open Systems Workflow Plant Maitenance Industry Solutions

Components of Managerial Accounting ECC 6.0 January 2008 Components of Managerial Accounting Controlling (CO) Cost Element Acct Center Product Internal Orders Activity Based Costing Profit Profitability Analysis Controlling (CO)  Purpose Controlling provides you with information for management decision-making. It facilitates coordination, monitoring and optimization of all processes in an organization. This involves recording both the consumption of production factors and the services provided by an organization. As well as documenting actual events, the main task of controlling is planning. You can determine variances by comparing actual data with plan data. These variance calculations enable you to control business flows. Income statements such as, contribution margin accounting, are used to control the cost efficiency of individual areas of an organization, as well as the entire organization. Cost Element Accounting Cost Element Accounting is the part of accounting where you enter and organize costs incurred during a settlement period. It is thus not an accounting system as such, but rather a detailed recording of data that forms the basis for cost accounting. Cost Center Accounting   You use Cost Center Accounting for controlling purposes within your organization. The costs incurred by your organization should be transparent. This enables you to check the profitability of individual functional areas and provide decision-making data for management. This requires that all costs be assigned according to their source. However, source-related assignment is especially difficult for overhead costs. Cost Center Accounting lets you analyze the overhead costs according to where they were incurred within the organization. Internal Orders Internal orders are normally used to plan, collect, and settle the costs of internal jobs and tasks. The SAP system enables you to monitor your internal orders throughout their entire life-cycle; from initial creation, through the planning and posting of all the actual costs, to the final settlement and archiving: Activity-Based Costing Activity-Based Costing provides a process-oriented, cross-functional view of overhead, in contrast to the traditional location-oriented view provided by Cost Center Accounting. Activity-Based Costing thus complements and enhances Cost Center Accounting. Activity-Based Costing allocates process quantities based on resource and process drivers, allowing you to define cost allocation along the value-added chain more exactly than is possible with overhead rates. Activity-Based Costing also complements and enhances product costing by assigning costs to the business processes where they originated. Cost center resources can allocate to business processes based on their true utilization of activities. Product Cost Controlling Product Cost Planning Cost Object Controlling Actual Costing/Material Ledger Product Cost Controlling Information System Profit Center Accounting Profit Center Accounting determines the profit of the defined cost center Profitability Analysis Profitability Analysis enables you to evaluate market segments, which can be classified according to products, customers, orders or any combination of these, or strategic business units, such as sales organizations or business areas, with respect to your company's profit or contribution margin. January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 2008. All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Business Process Integration ECC 6.0 Business Process Integration January 2008 FI CO MM PP SD Transactions Org Data Master Data FI MM/PP SD Rules FI MM/PP SD CO CO CO FI In the Business Process Integration class we use the stool as a metaphor for the SAP structure. There are four basic components needed to run execute SAP. Three of these are the legs of the stool: org data, master data, and rules. These ‘hold up’ the transactions. Transactions cannot be run unless these are setup. The legs are typically configured during the implementation process. During BPI 1 we will setup the stool for Finance, Materials management and Sales and Distribution. MM/PP SD January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 2008. All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Version 1.0 SAP CO Module January 2007 Fully integrated with other SAP modules including, but not limited to: Financial Accounting (FI) Materials Management (MM) Sales and Distribution (SD) Production Planning and Execution (PP) January 2007 (v1.0) © 2007 by SAP AG. All rights reserved. SAP University Alliance. The Rushmore Group, LLC The Rushmore Group, LLC

Business Process Integration ECC 6.0 Business Process Integration January 2008 CO Org Data CO January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 2007. All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

SAP CO Organizational Objects Version 1.0 SAP CO Organizational Objects January 2007 These objects represent the legal and/or organizational views of an enterprise They form a framework that supports business activities in the manner desired by management They permit the accurate and organized collection of business information They support the development and presentation of relevant information in order to enable and support business decisions The Rushmore Group, LLC

SAP CO Organizational Objects Version 1.0 SAP CO Organizational Objects January 2007 Client Company Code Chart of Accounts Controlling Area Cost Center Group Cost Center Profit Center Group Profit Center The Rushmore Group, LLC

Organizational Structure ECC 6.0 Organizational Structure January 2008 Client 635 Chart of Accounts Fiscal Year Variant Global Bike Inc. Credit Control Area Controlling Area Company Code January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 2007. All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Business Process Integration ECC 6.0 Business Process Integration January 2008 CO Master Data CO January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 2007. All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Cost Element Overview Cost Element Groups Cost Elements ECC 6.0 January 2008 Cost Element Overview Cost Element Groups Cost Elements Primary Cost Elements Secondary Cost Elements Statistical Key Figures January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 2007. All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

ECC 6.0 January 2008 Cost Element Groups Logical groupings of primary and secondary cost elements Facilitates reporting, planning, and allocating costs Total Costs Total Primary Costs Total Secondary Costs Wages Utilities Materials Internal Order Settlement January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 2007. All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

General Ledger Accounts ECC 6.0 January 2008 Cost Elements (continued) Controlling Financial Accounting Total Cost Elements General Ledger Accounts Income Statement Balance Sheet Secondary Cost Elements Primary Cost Elements Expense Accounts Revenue Accounts January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 2007. All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Statistical Key Figures ECC 6.0 Statistical Key Figures January 2008 Provide the foundation for accurate and effective cost allocations between cost objects Utilized to support internal cost allocations involving allocations, assessments, and distributions Examples: number of employees, square footage, minutes of computer usage January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 2007. All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Statistical Key Figures ECC 6.0 January 2008 Statistical Key Figures Cost Center Activity (20 Hours) 6 Hours Work Center 10 Hours Maintenance Department 4 Hours Information Services Department January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 2007. All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Primary Cost Element for ECC 6.0 January 2008 Primary Cost & Secondary Elements Income Balance Statement Sheet Account Account General Ledger Account Posting Rent Expense Acct. Payable Debit Credit 1,500 Debit Credit 1,500 Primary Cost Element for Rent Expense Cost Center A January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 2007. All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Primary & Secondary Cost Elements (cont.) ECC 6.0 January 2008 Primary & Secondary Cost Elements (cont.) Income Balance Statement Sheet Account Account General Ledger Account Posting Rent Expense Acct. Payable Debit Credit 1,500 Debit Credit 1,500 Secondary Cost Element Cost Center A CC 2 CC 3 January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 2007. All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Secondary Cost Elements (continued) ECC 6.0 January 2008 Secondary Cost Elements (continued) Cost Center 2 Debit Credit 1,500 Rent Expense 1,750 Cost Center A Sec. Cost Element Primary Cost Element Cost Center 3 1,500 2,500 2,000 Supplies Expense 2,000 Debit Credit Sec. Cost Element 2,500 Primary Cost Element Cost Center 4 Debit Credit 2,000 Labor Expense Sec. Cost Element 2,250 Primary Cost Element Allocation from CCA to CC2, CC3, and CC4 is based on headcount: CC2: 7, CC3, 8, and CC4: 9 © SAP AG and The Rushmore Group, LLC 2008

Business Process Integration ECC 6.0 Business Process Integration January 2008 CO Transactions January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 2007. All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Cost Center Allocations ECC 6.0 Cost Center Allocations January 2008 Define Sender and Receiver Rules Percentage, portions, fixed Identify Sender Cost center or internal order (what object has the amounts?) Cost element (which expenditures are we interested in transferring?) Identify Receiver Cost center or internal order (where do the amounts need to go to?) January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 2007. All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Cost Accounting Allocation ECC 6.0 January 2008 Cost Accounting Allocation Posting Types of Cost Allocation In this unit, Costs will be allocated to particular Cost Centers. There are three different types of cost allocation: Direct Reposting, Percentage Allocation, and Statistical Key Figures. In Direct Reposting, an amount of money is allocated directly to a specific cost center. For example, $200 is allocated directly to the Production cost center. You can capture these cost any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

Cost Accounting Allocation ECC 6.0 January 2008 Cost Accounting Allocation Posting Types of Cost Allocation (- continued) In Percentage Allocation, the amount that is to be allocated is split up among multiple cost centers based on a predetermined percentage. For instance, assume that there are two services, and 70% of the cost is to be assigned to one service, while 30% is assigned to the other. In addition, the total costs to be allocated equal $2,500. Because the first service is to be allocated 70% of the cost, it will be allocated $1750. Likewise, the second service which is to be allocated 30% of the cost will be allocated for the remaining $750. . You can capture these cost any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

Cost Accounting Allocation ECC 6.0 January 2008 Cost Accounting Allocation Posting Types of Cost Allocation (- continued) Statistical Key Figures (SKFs) are used in the ERP system to allocate costs from a service department to a user department at the closing of a period. These cost drivers, which are often referred to as tracing factors, are used in allocation methods that do not involve the explicit development of activity (transfer) prices. You can capture these cost any way you want. Manager’s bonuses are often based upon their profit center’s profitability © SAP AG and The Rushmore Group, LLC 2008

Types of Allocations Cycles Version 1.0 January 2007 Types of Allocations Cycles Distributions – primary cost elements Assessments – combination of primary and/or secondary cost elements In Distribution and Assessment, you further allocate costs (or quantities for Indirect Activity Allocations) collected on a cost center during the accounting period to receivers, according to user-defined keys. These are therefore indirect allocation methods, because the exchange of activity is not the basis for allocating costs/quantities. Instead, user-defined keys such as percentage rates, amounts, statistical key figures, or posted amounts provide the cost/quantity assignment basis. The advantage of these methods is that they are easy to use. You usually define the keys and the sender/receiver relationships only once. Distribution and assessment are used primarily for cost centers. This is because direct cost allocation is not possible here due to the variety of transactions, the lack of clearly defined individual activity types and the fact that the entry of the activity is too time-consuming. For example, the costs of the company cafeteria may be assigned based on the number of employees in each cost center. Telephone costs are seldom allocated directly to the individual cost centers, but are collected on a clearing cost center for each period. They are then reposted or distributed at the end of the period according to the number of telephone units or telephone installations in each cost center. Assessment is a method of allocating primary and secondary costs in Cost Center Accounting and Activity-Based Costing. The following information is passed on to the receivers: The original cost elements are assigned cumulatively, or in groups, to assessment (secondary) cost elements. The original cost elements are not recorded on the receivers. Sender and receiver information (sender cost center, receiver cost center, or business process) appears in the Controlling (CO) document. January 2007 (v1.0) © 2007 by SAP AG. All rights reserved. SAP University Alliance. The Rushmore Group, LLC The Rushmore Group, LLC

Version 1.0 Distribution Cycle January 2007 Method for periodically allocating primary cost elements Primary cost elements maintain their identities in both the sending and receiving objects Sender and receiver cost centers are fully documented in a unique Controlling (CO) document Distribution  Use Distribution is used to allocate the primary costs of a cost center. The following information is passed on to the receivers: The original cost element (that is, the primary cost element) is retained. Sender and receiver information (for example, the identities of the sender and receiver cost center/business process) is documented using line items in the CO document. You can use the information system to analyze the distribution results according to sender and receiver relationships. January 2007 (v1.0) © 2007 by SAP AG. All rights reserved. SAP University Alliance. The Rushmore Group, LLC The Rushmore Group, LLC

Distribution Cycle Receiving cost centers Sending cost center Version 1.0 January 2007 Distribution Cycle Receiving cost centers Sending cost center Primary cost element maintains its identity A010 – Administration Rent Expense $1,500 Distribution In this example the distribution of the rent expense is by square footage occupied by each of the cost centers. By the pie chart we see that distribution and administration have the most square footage. January 2007 (v1.0) © 2007 by SAP AG. All rights reserved. SAP University Alliance. The Rushmore Group, LLC The Rushmore Group, LLC

Distribution Cycle Receiving cost centers Sending cost center Version 1.0 Distribution Cycle January 2007 Receiving cost centers Sending cost center Primary cost element maintains its identity A010 – Administration Rent Expense $1,500 Distribution Distribution and administration having most of the square footage thus have the majority of the distribution costs. January 2007 (v1.0) © 2007 by SAP AG. All rights reserved. SAP University Alliance. The Rushmore Group, LLC The Rushmore Group, LLC

Version 1.0 Assessment Cycle January 2007 A method of allocating both primary and secondary cost elements Primary and/or secondary cost elements are grouped together and transferred to receiver cost centers through use of a secondary cost element Sender and receiver cost centers are fully documented in a unique Controlling (CO) document Assessments are to Secondary Costs Distributions are to Primary Costs Assessment  Use Assessment is a method of allocating primary and secondary costs in Cost Center Accounting and Activity-Based Costing. The following information is passed on to the receivers: The original cost elements are assigned cumulatively, or in groups, to assessment (secondary) cost elements. The original cost elements are not recorded on the receivers. Sender and receiver information (sender cost center, receiver cost center, or business process) appears in the Controlling (CO) document. Allocation through assessment is useful when the composition of the costs is unimportant for the receiver. For example, the assessment of cafeteria costs to a cost center need not be broken down further. You can use the information system to analyze the assessment results by assessment cost element according to sender and receiver relationships. A method of internal cost allocation by which you allocate the costs of a sender cost center to receiver CO objects (such as orders and other cost centers) using an assessment cost element. The system supports the following: Hierarchical method (where the user determines the assessment sequence) Iterative method (where the system determines the sequence of assessment using iteration). Example: The costs from the cafeteria cost center could be assessed based on the statistical key figure "employee", which was set up on the receiver cost center. Receiver cost center I has 10 employees, receiver cost center II has 90. The costs of the cafeteria cost center would be transferred (assessed) to receiver cost center I (10%) and receiver cost center II (90%). The credit on the cafeteria cost center and the debit of the two receiver cost centers are posted using an assessment cost element. Depending on the system setting, the total costs or some of the costs for the cafeteria cost center would be debited. January 2007 (v1.0) © 2007 by SAP AG. All rights reserved. SAP University Alliance. The Rushmore Group, LLC The Rushmore Group, LLC

Assessment Cycle Receiving cost center Sending cost center Primary and Version 1.0 Assessment Cycle January 2007 Receiving cost center Sending cost center Primary and secondary cost elements A020 – IT Software Expense $4,200 Supplies Expense $500 Assessment In this example IT expenses are accumulated. Periodically, the costs are reallocated to the primary and secondary cost elements based upon the budgeting and expense policy of the company. Notice how Sales now has a much larger portion than the other departments. January 2007 (v1.0) © 2007 by SAP AG. All rights reserved. SAP University Alliance. The Rushmore Group, LLC The Rushmore Group, LLC

Assessment Cycle Receiving cost center Sending cost center Primary and Version 1.0 Assessment Cycle January 2007 Receiving cost center Sending cost center Primary and secondary cost elements A020 – IT Software Expense $4,200 Supplies Expense $500 Assessment The reallocation in Dollars January 2007 (v1.0) © 2007 by SAP AG. All rights reserved. SAP University Alliance. The Rushmore Group, LLC The Rushmore Group, LLC

Exercises: (Due date 10/3/2015) ECC 6.0 January 2008 Exercises: (Due date 10/3/2015) 1 Process overview for cost center accounting process 2 Create cost centers 3 Create statistical figure 4 Create secondary cost elements 5 Create activity types 6 Create cost center group 7 Plan the number of employees 8 Plan activity output 9 Plan primary cost inputs 10 Plan internal activity inputs 11 Review planning 12 Create assessment View assessment results January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 2007. All rights reserved. © SAP AG and The Rushmore Group, LLC 2008