Controlling Management Concepts & Theories EGN 5622 Enterprise Systems Integration (Professional MSEM) Fall, 2011.

Controlling Management EGN 5622 Enterprise Systems Integration (Professional MSEM) Fall, 2011

Controlling Management Concepts & Theories EGN Enterprise Systems Integration (Professional MSEM) Fall, 2011

Controlling Accounting
ECC 6.0 January 2008 Controlling Accounting Most companies divide their accounting function into internal and external, and controlling accounting represents the internal accounting. Controlling (managerial) accounting is the process of identifying, measuring, analyzing, and communicating information in pursuit of an organizations goals. The controlling accounting objective is to show how the system adds value by structuring information in a certain way. 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

Version 1.0 Controlling (CO) January 2007 Managerial accounting – termed controlling – is designed to collect the transactional data that provides a foundation for preparing internal reports that support decision-making within the enterprise. These reports are exclusively for use within the enterprise and include: Cost center performance Profit center performance Budgets analyses The Rushmore Group, LLC

Fundamentals of Cost Management
ECC 6.0 January 2008 Fundamentals of Cost Management Financial (external) accounting system and the cost management (internal accounting) system are fully integrated. Every cost is linked to an expense booked in the financial accounting system and to a cost element in the 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

Fundamentals of Cost Management
ECC 6.0 January 2008 Fundamentals of Cost Management A cost object is a classification of costs that is desired by the user. It could be a cost center (a department where the cost is incurred), a production order (costs to produce unit ), or a special project (installation of an ERP system), etc. A cost object is simply a way 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. 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 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 serves to broadly define a managerial accounting and reporting system for which the management of revenues and expenses can be performed A controlling area is the highest level organizational entity within the Control module in which cost and profit analysis takes place (except for PA analysis which takes place within an operating concern. 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 The Rushmore Group, LLC

Controlling Accounting Terminology
ECC 6.0 January 2008 Controlling Accounting Terminology Controlling Area (- continue) A controlling area is also broken down into two different “standard” hierarchical structures: 1) standard cost center hierarchy; and 2) standard profit center hierarchy Internal financial (controlling) reporting and analysis focuses on measuring the cost or profit results of components of a controlling area, such as cost centers or profit centers. External reporting does not take place for a controlling area. Neither income statements nor balance sheets are created for an entire 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

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

Cost Element Accounting
ECC 6.0 January 2008 Cost Element Accounting Cost Elements Cost and revenue accounts within a chart of accounts that are involved in cost accounting are referred to as “elements,” which are further divided into primary cost elements, primary revenue elements, and secondary cost elements (there are no secondary revenue elements). 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 Element Accounting
ECC 6.0 January 2008 Cost Element Accounting Cost Elements (- continued) Primary cost and revenue elements 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. Primary cost and revenue flows are first recorded in FI and then transferred automatically to a cost or revenue object within the CO module (e.g., cost center, internal order, profitability segment, etc.). Secondary cost elements are created in the CO module and are used exclusively within CO to account for internal cost flows among cost objects within a controlling area (e.g., cost allocations among 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

Cost Center Accounting (CCA)
ECC 6.0 January 2008 Cost Center Accounting (CCA) Created for internal controlling purposes and provides a tool that can collect costs. The cost center accounting (CCA) module within CO provides the means for assigning 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. The 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

Cost Centers ECC 6.0 January 2008 Units that are distinguished, for example, by area of responsibility, location, or type of activity 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 A way to identify and track where costs are incurred for evaluation purposes Responsible for cost containment, not responsible for revenue generation One or more value-added activities are performed within each cost center January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 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. A controlling area is broken down into cost centers, which are organized in a “standard cost center hierarchy.” 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

Cost Center Accounting
ECC 6.0 January 2008 Cost Center Accounting 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. This is important because if the factor, or base, that is used to compute overhead is not what is actually causing the overhead costs, there will be inaccurate overhead rates and distorted product costs. Most companies use direct labor-hours or direct labor cost as the allocation base for manufacturing overhead, however, major shifts are being made in the way cost is structured. With the increased usage of sophisticated and complex equipment in manufacturing, there is less direct labor relative to overhead as a component of product costs. Typical cost drivers types: activity types and statistical key figures. 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 Cost Center Accounting 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. The measure of the activity type quantity (e.g., hours worked), which is essentially a cost driver measure, 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 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 Cost Center Accounting Activity types (-continued) The 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.” The allocation is based on an “activity (transfer) price” that is developed for the activity type. The activity price may be set manually by management, or it may be calculated automatically using an iterative routine that explicitly takes into account “cross allocations” (i.e., allocations back and forth among two or more 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

ECC 6.0 January 2008 Cost Center Accounting 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

ECC 6.0 January 2008 Cost Center Accounting Product Costing (PC) The product costing (PC) is a CO module 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). The product cost is developed after the material is defined, a bill of materials is created, and a routing is determined. This product cost reflects the cost structure of the product on a standard costing basis prior to manufacturing. The product cost structure is normally defined for one unit and can be broken out by individual material parts and further defined as variable or fixed. 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 Cost Center Accounting Value-added activity Any activity that increases the worth of a product or service. Non-value-added-activity Any activity that adds cost to, or increases the time spent on, a product or service without increasing its market value. Product-level activities Activities that are performed for and are identifiable with an entire product line. 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 Cost Center Accounting Activity Based Costing (ABC) The activity based costing (ABC) module within CO provides the means for assigning planned costs and actual costs incurred at the cost center level to business processes that cut across areas of responsibility within an organization. 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. It is generally used as a tool for understanding product and customer cost and profitability. ABC has predominantly been used to support strategic decisions such as pricing, outsourcing and identification and measurement of process improvement initiatives. 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 Cost Center Accounting Each cost center is assigned to a controlling area, profit center, company code, and business area. Taken together, all cost centers within a controlling area constitute the “standard cost center hierarchy.” (There is one and only one standard cost center hierarchy for a controlling area.) The cost center standard hierarchy is a special type of cost center group. All cost centers in that controlling area must be assigned to a level of the standard hierarchy. 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 Cost Center Accounting Each cost center is assigned to a controlling area, profit center, company code, and business area. Taken together, all cost centers within a controlling area constitute the “standard cost center hierarchy.” (There is one and only one standard cost center hierarchy for a controlling area.) Profit centers generally involve subdivisions of companies that are set up for internal planning and control purposes. Taken together, all profit centers within a controlling area constitute the “standard profit center hierarchy.” (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

Organizational Structures -cost center standard hierarchy
Plant (Pxxx) Client (760) Chart of Accounts (Cxxx) Company Code (Cxxx) Fiscal Year Variant (2011) Credit Control Area (Cxxx) Purchasing Organization (Pxxx) Group (xxx) Shipping Point (Sxxx) Controlling Area (Cxxx) SL10 SL20 Cost Center Standard Hierarchy (PENINCxxx) ADMINxxx A005 A010 A015 A020

ECC 6.0 January 2008 Cost Center Accounting 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. All manufacturing processes are routed through work centers. Each work center is connected to a 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. The amount of work that can take place at a work center is represented as its capacity. When a capacity is used, the operations are evaluated by charge rates. Generally, a work center is combination of the following resources: • Machinery, Equipment, and Vehicles • Employees • Production Lines • Assembly Lines 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 Internal Order A 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). 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. 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

Internal Order (- contimued)
Version 1.0 Internal Order (- contimued) January 2007 Temporary cost center responsible for cost containment, not responsible for revenue generation It is used to plan, collect, and monitor the costs associated with a distinct short-term event, activity, or project Company picnic Trade show Recruiting campaign The Rushmore Group, LLC

Profit Center Accounting (PCA)
ECC 6.0 January 2008 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. 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

Profit Center Accounting
ECC 6.0 January 2008 Profit Center Accounting Profit Center Profit centers are similar to business areas, in the sense that they are set up for internal reporting purposes. Profit centers, however, are formally defined as components of a controlling area, not as components of one or more company codes. Income statements may be created for profit centers, and selected assets may also be reported for profit centers, but not complete balance sheets (which can be done for business areas). Profit centers are linked to cost centers with one-to-one or one-to-many relationship. 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

Profit Center (- continued)
Version 1.0 Profit Center (- continued) January 2007 Responsible for revenue generation and cost containment Evaluated on profit or return on investment Enterprises are commonly divided into profit centers based on Region Function Product The Rushmore Group, LLC

Profit Center Accounting
ECC 6.0 January 2008 Profit Center Accounting Profitability Analysis (PA) The profitability analysis (PA) module within CO 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. This provides great flexibility in defining, both the market characteristics that are of interest to managers, and the related performance measures (e.g., gross margin, contribution margin, segment margin) that managers use to evaluate market segments. 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

Accounting and Control within Production Planning (PP)
ECC 6.0 January 2008 Accounting and Control within Production Planning (PP) For each operation created in a routing, a work center must be identified for where the operation is to be performed. A work center is allocated to one and only one cost center. Cost centers are organizational units within a controlling area that represent a defined location of cost incurrence. Organizational divisions can be made on the basis of functionality, settlement-related, activity-related, spatial, and/or responsibility-related business requirements. 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

Accounting and Control within Production Planning (PP)
ECC 6.0 January 2008 Accounting and Control within Production Planning (PP) Accounting and Control within PP (- continued) You plan standard activity costs in the corresponding cost centers using activity types. When an activity type is allocated to a cost center, it is given a value, for example, in dollars per hour. The work center specifies production activity availability for operations at the work center. One work center can perform up to six different production activities within different charge rates. Examples of activity types are labor, machine, materials, setup costs, quality costs, and resource consumption. 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 Estimate Cost For management to make the best decisions possible, managers must be able to estimate costs as close to actual costs as possible. When considering product costs, there are several costs that can be traced directly to the product. These will give an estimate that is near the actual costs of making the product. Examples of these costs are direct material and direct labor. By using material requisition forms and payroll time sheets, these costs can easily be traced to a product. The costs that are harder to trace are called overhead costs. They are indirect costs because they cannot be specifically traced to a product. Estimates must be used to allocate overhead to products and services. 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 Estimate Cost The most difficult part of estimating product costs is calculating the amount of overhead that must be allocated to each product, service, or job. Many times a predetermined overhead rate is used. A predetermined overhead rate refers to a single rate that is used to apply overhead to all products produced. When using job order costing systems, direct labor cost is generally the base used to apply overhead to each job. In process costing, machine hours would be an example of an activity base that is used to allocate overhead. In the following example, 150 units of a motorcycle were produced. Of the finished units, 30 have been sold thus far. This is seen in the figures below. 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

Example of Cost Accounting
ECC 6.0 January 2008 Example of Cost Accounting Debit Credit 150 Work is completed 150 Ending 0 Work in Process Beginning Debit Credit 0 Work is completed 150 Units sold 30 Ending 120 When the units are completed, work in progress must be credited for the 150 units, and the finished goods inventory must be debited the same. Finished Goods Inventory Beginning 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 Example of Cost Accounting Units sold Debit Credit 0 Work is completed Units sold 30 Ending 30 When the 30 units are sold, the Units Sold must be debited for the units and the finished goods inventory must be credited. Beginning 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 Terminology
ECC 6.0 January 2008 Cost Accounting Terminology When looking at a financial point of view, there are actual costs of $233,211.00, $336.11, and $ The standard cost of creating the motorcycles is $240,000. This can be found by taking the price of $1600 per motorcycle and multiplying it by the 150 units. When the 30 units are sold, they have a cost of $48,000, and there is $192,000 remaining in the finished goods inventory. This can be seen in the figures below. 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 Example of Cost Accounting Debit Credit $233, $240, Total Cost $233, $240,00.00 Production variance -$6,296.32 Work in Process Beginning Finished Goods Inventory Debit Credit $0.00 Work is completed $240, Units sold $48,000 Ending $192,000.00 Beginning 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 Example of Cost Accounting Units sold Debit Credit $0 Work is completed Units sold $48,000 Ending $48,000 Because of the difference between the standard cost and the actual cost, there is a Production variance of $6, When broken down by units, this variance is $41.98/pc. Was the production of these motorcycles efficient? Beginning 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 EGN Enterprise Systems Integration (Professional MSEM) Fall, 2011

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 Maintenance Open Systems Workflow Plant Management 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 All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Comparison Financial Accounting Managerial Accounting
ECC 6.0 January 2008 Comparison Financial Accounting External Accounting Balance Sheet Profit & Loss Statement Legal Requirements Standards Managerial Accounting Cost Element Accounting Cost Center Accounting Internal Orders Profit Center Accounting Product Costing Profitability Analysis ABC Different Valuations Flexibility 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 All rights reserved. © 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 All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Interrelated and Closely Connected
ECC 6.0 January 2008 Interrelated and Closely Connected (FI) Transaction Document Amount G/L Account # Cost Center (CO) Transaction Cost Element Income Statement Bal. Sheet Financial Accounting Supplies Exp. Bank 100 100 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) 100 January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 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 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

SAP CO Organizational Objects
Version 1.0 SAP CO Organizational Objects January 2007 These represent the legal and/or organizational views of an enterprise They form a framework that supports the activities of a business in the manner desired by management Permit the accurate and organized collection of business information 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 Internal Order Profit Center The Rushmore Group, LLC

Organizational Structure
ECC 6.0 Organizational Structure January 2008 Client 765 Chart of Accounts Fiscal Year Variant Pen Inc. Credit Control Area Controlling Area Company Code January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

ECC 6.0 Standard Hierarchy January 2008 An organizational unit that serves to refine and focus a managerial accounting and reporting sub-system A mapping of responsibility to individual managers Mapping of cost centers facilitates expense Collection Tracking Reporting January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Standard Hierarchy (- continued)
ECC 6.0 Standard Hierarchy (- continued) January 2008 Standard hierarchies are maintained in Cost Center Accounting (CCA) master data maintenance A specific name is assigned to identify a standard hierarchy Each standard hierarchy is attached to the appropriate Controlling Area All cost centers of interest must be entered in the Standard Hierarchy January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

ECC 6.0 Cost Center Groups January 2008 Logical groupings of cost centers in the standard hierarchy to establish accountability and responsibility for one or more cost centers Facilitates reporting, planning, and allocating costs at a more aggregated level January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

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

Version 1.0 Cost Elements January 2007 A one-to-one linkage (mapping) between General Ledger expense accounts and CO cost elements is established to permit the transfer of FI expense information to CO Postings in FI that impact cost accounts lead to an posting in CO to a cost element In other words, expense account = cost element – just different words depending on whether FI object or CO object The Rushmore Group, LLC

Cost Elements (- continued)
ECC 6.0 Cost Elements (- continued) January 2008 Used to categorize costs Primary cost elements originate with Financial Accounting (FI) postings and are linked in whole to Controlling (CO) objects (maintain their source and identity) Secondary cost elements are used exclusively in Controlling (CO) for allocations and settlements to and between Controlling (CO) objects (may not maintain their source and identity) January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

ECC 6.0 Primary Cost Elements January 2008 Linked to expenditure accounts in the chart of accounts (not just expense accounts, may include capital acquisition accounts) Costs are automatically posted to assigned Controlling (CO) objects (e.g., cost center or internal order) upon posting in Financial Accounting (FI) The elements source identity - salaries, utilities, selling expenses - is maintained within Controlling (CO) January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Secondary Cost Elements
Version 1.0 Secondary Cost Elements January 2007 Used exclusively in CO for allocations and settlements between and amongst cost centers The Rushmore Group, LLC

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 All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Primary Cost Element for
ECC 6.0 January 2008 Primary 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 Primary Cost Element for Rent Expense Cost Center A January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Secondary Cost Elements (cont.)
ECC 6.0 January 2008 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 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 January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC 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 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 All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Version 1.0 Revenue Elements January 2007 A one-to-one linkage (mapping) between General Ledger revenue accounts and CO revenue elements is established to permit the transfer of FI revenue information to CO Posting in FI that impact revenue accounts lead to an posting in CO to a revenue element In other words, revenue account = revenue element – just different words depending on whether FI object or CO object The Rushmore Group, LLC

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

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

ECC 6.0 January 2008 Cost Accounting Allocation Posting Types of Cost Allocation (- continued) Statistical Key Figures (SKFs) are used in the R/3 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. Nevertheless, the allocation approach is quite similar. A lump sum amount associated with the service department is allocated to a user department in proportion to the relative amounts of the SKF associated with each receiver. 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: Review cost center standard hierarchy Review cost elements
ECC 6.0 January 2008 Exercises: Review cost center standard hierarchy Review cost elements Review cost element groups Display individual line items Create G/L document entry Repost expense (cost) between cost centers Post statistical key figure Create distribution cycle Review actual line item report Post supplies expense Post information technology expense Create assessment cycle January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Exercises: PP 17. Convert planned order into production order
ECC 6.0 January 2008 Exercises: PP 17. Convert planned order into production order PP 18. Issue goods to production order PP 19. Review production order status and documents PP 20. Confirm production completion PP 21. Receipt of goods from production order PP 22. Review costs assigned to production order PP 23. Settle costs of production order January 2008 © SAP AG - University Alliances and The Rushmore Group, LLC All rights reserved. © SAP AG and The Rushmore Group, LLC 2008

Controlling Management Concepts & Theories EGN 5622 Enterprise Systems Integration (Professional MSEM) Fall, 2011.

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Controlling Management Concepts & Theories EGN 5622 Enterprise Systems Integration (Professional MSEM) Fall, 2011.

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Presentation on theme: "Controlling Management Concepts & Theories EGN 5622 Enterprise Systems Integration (Professional MSEM) Fall, 2011."— Presentation transcript:

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