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Unit 4: CO Management Accounting Contains all the functions necessary for effective cost and revenue controlling Includes

des many tools for company management Uses financial reports from FI

Architecture

CO-PA (Profitability Analysis)


CO-PCA (Profit Center Accounting)
CO-OM (Overhead Cost Controlling) CO-PC (Product Cost Controlling)

Primary Cost Element

Secondary Cost Element

Costs from CO-OM and CO-PC can flow into CO-PA together with revenue data, can be used to calculate operating results FI, HCM, Logistics (MM, SD, PP) are integrated with CO FI is the primary data source for CO most expense postings in G/L result in a cost posting in CO can be journal postings, vendor invoices, depreciation postings from Asset Management SD is a primary source for revenue postings from billing documents to revenue postings in CO-PA, and COPCA HCM can generate cost postings in CO, by allocating labour costs to various controlling objects Planned personnel costs can be transferred and used for CO MM a goods issue transaction can create a cost posting in CO to whichever Cost Object is specified Manufacturing BOM, routings, can be used in CO-PCA

Organizational Levels Controlling Area the basic org. Unit in CO A closed entity used for cost accounting Can allocate costs ONLY within a controlling area Can assign more than 1 CC to a controlling area, enables controlling across CCs Must use same COA and Fiscal Year Variant Operating Concern used with CO-PA Represents the structure of external marketing segments for the enterprise Can assign multiple Controlling Areas to each operating concern, so you can analyze them together Company Code independent accounting unit Business Areas (BA) used to group strategic business units for reporting P/L and financial Statements Can also be cross-company code Not suitable for auditing, suitable for reporting purposes only) Plant represents a production unit and is the central organizational unit in MM and PP Purchasing Organization org. Unit used in MM Sales Organization org. Unit used in SD Multiple Assignment By assigning more than 1 CC to a controlling area, you can perform cross-CC cost accounting Must use same operating COA and Fiscal Year Variant Can allocate values in CO that affects more than 1 CC Controlling Area and CCs can use different currencies Three options: Controlling Area Currency CC Currency (default display as the Object Currency, cannot change) If 1 CC in CA, object currency can be assigned for each CO Object Transaction Currency (used for posting a document to CO) Cost Center Accounting (for overhead) G/L Accounts and Cost Elements Primary Cost Elements All Expense accounts grouped in Class 4 Expense Accounts to which costs are posted for Cost Accounting must also be created as Cost Elements in CO (ensures that all postings always arrive in CO @ same time) All Revenue accounts grouped in Class 8

Secondary Cost Elements Defined ONLY in CO Used for internal CO allocations (such as assessments or settlements) Do NOT have corresponding G/L accounts in FI Cost Centers Standard Hierarchy (Only 1 per Controlling Area) An organizational unit in a controlling area representing a clearly delimited location where costs occur Can make organizational divisions on the basis of Functional, Allocation Criteria, Settlementrelated, Activity or Service-related, Spatial/Geographic Location, and/or Area of Responsibility standpoints Typical approach would be to define a Cost Center for each low-level Org. Unit that has responsibility for managing costs As costs are incurred, they are assigned or posted to the appropriate Cost Center Ex. Payroll, rent and utility Use for differentiated assignment of Overhead Costs Organizational Activities based on the utilization of the relevant areas (Cost Determination Function) & for differentiated controlling of costs arising in an organization (Cost Controlling Function) Cost Center Accounting Component (CO-OM-CCA) tracks where costs occur in organization Cost Center Data (Master?) Basic Data fields for the Name and Description of the Cost Center, Name of the Responsible Person or Cost Center Manager, Department to which Cost Center is assigned, and Profit Center Cost Center Hierarchy displays the Standard Hierarchy Node to which the Cost Center is assigned filed MUST be filled so it can be used as a control feature in Cost Center Accounting Each Controlling Area must have a unique Standard Hierarchy that includes EVERY Cost Center created in that Controlling Area Profit Center Identifies the purpose of the Cost Center Ex. Production, Service, Sales, Administration Company Code & Business Area Represent the close ties between FI and CO IF Controlling Area has more than 1 CC, must specify the CC linked to each Cost Center IF Business Areas are used for that CC (as defined in FI), this must also be specified in Cost Center Master Record Activity Types (Master Data?) Classifies the activities that are to be performed within a company by one or several Cost Centers If a Cost Center provides activities for other Cost Centers, Orders, Processes, etc, this means its resources are being used Costs of these resources NEED to be allocated to the receivers of the activity Activity Types serve as Tracing Factors (How you quantify something) for this cost allocation

Internal Activity Allocations To enable, need to specify which Cost Centers provide which Activity Types at What Price Do this by planning the activity output/prices for a Cost Center In an Internal activity allocation, quantity of the activity is entered into SAP, either manually or automatically System calculates associated cost based on activity price, debits receiver and credits sender for both quantity and costs Allocated using Secondary Cost Elements, which are stored in the Master Data of the Activity Types as default values Can restrict use of Activity Type to certain types of Cost centers by entering the allowed Cost Center categories, or leave assignments unrestricted by entering an * For a Direct Activity Allocation, enter the quantity of activity manually Plan price for the combination cost center/activity type is used for valuating the allocated activity amount using the senders price for the activity type Can enter this Planned Price manually or have it calculated by the system automatically within Planning Statistical Key Figures A measurable quantity that can be assigned to: Cost Centers Activity Types Overhead Orders Business Processes Profit Centers Used as an allocation base (Tracing Factor) in Overhead Cost allocations and for Analysis Two Categories: Type 1 Fixed Carried over from period which its posted to all subsequent periods of the same fiscal year Useful for figures that remain constant Only need a new posting when value changes Type 2 Totals Not transferred to following period Must be entered for each individual period Preferable for SKF whose values tend to change each period (ex. Kilowatt hours) Can be linked to Logistics Information System (LIS) by linking a key figure from LIS to a SKF in CO Define some measurable value applicable to Cost Centers, Internal Orders or Processes Ex. # of employees Can post both Plan and Actual values for SKF Cost Center Planning Process Can be done manually OR with automatic procedures such as Formula Planning Planned Values (ex. Planned personnel costs & planned depreciation) can also be transferred automatically to Cost Centers from HR and FI-AA Both fixed and variable costs can be planned for each area of responsibility (ex. Cost center) Concerning Distributions and Assessments, costs planned on 1 Cost Center can be allocated according to Keys (ex. Percentages, amounts, SKF) Makes things easier to manage as the Keys, along with the sender and receiver relationships are defined only once Aim is to calculate planning costs to Define Deviations later AND to prepare the Allocation to Cost Bearers

Planning is based on absorption costing (when you try to allocate all costs in the Overheads area to the Cost Bearers in a company) Activity Type Planning is an important step, as Planned Activity Amounts can influence Planned Costs Amount of Activities can be determined manually or transferred from other modules Closing of Cost Center Planning also shapes price determination for the activities of the Cost Centers Price Per Cost Center/Activity Type is entered manually OR on basis of Planned Costs (with automatic price calculation) As activity amount is evaluated with this price, a combined quantity and value flow is the result of the allocation of an activity

Posting Logic When a FI document is created that posts to an expense or revenue account using a corresponding cost element, a CO document is also created: Has a unique #, and contains the following details: CO Object posted to Cost Element used Posted Amount When a Primary Cost is initially posted to CO, treated as a one-sided journal entry *Any transactions that create Cost Movements within CO are balanced entries When a cost is moved from one CO Object to another, the sending object is Credited and receiving object is Debited True and Statistical Objects in CO Posting costs and revenues to CO results in True (or real) and Statistical Postings Can settle True Postings w/ other CO Objects Statistical Postings are for info purposes ONLY True Objects: Can act as sending or receiving objects during cost allocation Cost Centers Real Internal Orders Real Projects Networks Make-to-Order Production Orders Cost Objects Profitability Segments Statistical Objects: CANNOT allocate costs to other objects Can make a Statistical Account Assignment to any # of CO Objects Profit Centers Statistical Orders Statistical Projects Posting from FI to a Cost Center When a journal entry is created in FI that includes an Expense Line Item, can be posted to CO as a cost if: Primary Cost Element has be created in CO that corresponds to the Expense Account used in entry Valid Cost Center is referenced in FI Line Item Two separate documents are created: FI/CO Each document has a unique Document # Possible to drill down either document to link to other

When an FI document is created that posts to an expense/revenue account having a corresponding Cost Element, & valid Controlling Object (ex. Cost Center) is IDd for the Expense Line Item, CO doc is ALSO created This CO doc has own unique # and contains: Controlling Object Posted to Cost Element Used The Amount

Posting from MM to a Cost Center Goods Issue transactions posted in MM can be assigned to a Cost Center From the aspect of the Cost Center, this type of transaction is called Material Consumption When you enter a Goods Issue in the system, must enter a Movement Type Movement Type is an ID Key which has important control function in IM, such as updating stock and consumption accounts Goods Issue to a Cost Center creates an FI transaction (Debit Material Consumption Expense Account Credit Material Stock (Inventory) Account) Cost Center is Debited with the value of goods issued using a Primary Cost Element Posting from HRM to a Cost Center Payroll Accounting in HRM calculated salary and wage amounts System then generates FI postings and posts costs to the Cost Centers to which employees are assigned Employee Master Data in HRM can be assigned to Infotypes Determines: CC Personnel Area Personnel Subarea Ex. Org. Ass. Infotype (Infotype 0001) enables you to determine the Cost Center to which personnel costs are Debited & to assign your employee to a Business Area Direct Activity Allocation Deals with the measurement, posting and allocation of an organizational activity Need to create corresponding (measurable) Tracing Factors in SAP Known as Activity Types in CO If you want to enter a Direct Activity Allocation: Enter the Cost Center that provides the Activity (Sender Cost Center) The Object that receives the activity (Receiver) Can be any Real CO Object such as a Cost Center, Order, Project, etc The type (Activity Type) Quantity of the Activity *ONLY 1 Cost Center from the Sender can be allocated to an Internal Activity Allocation To allocate activities directly, need to define which Cost Centers are to provide which Activity Types, by planning Activity Output During activity allocation: Sender Cost Center is Credited Receivers are Debited Debiting and Crediting are executed using a Secondary Cost Element, Category 43 Amount calculated by Activity Provided, multiplied by Activity Price The Cost Element used for Direct Allocation of an Internal Activity is derived from the Master Data for the Activity Type The Cost Element cannot be changed in the Allocation transaction

Direct Activity Allocation is recorded by line items on the Sender and Receiver sides

Periodic Allocations with Sender/Receiver Relationships Periodic Reposting use Original Cost Element Distribution Use Original Cost Element Assessment Use Secondary Cost Element Indirect Activity Allocation Template Allocation [Come back to page 170]

Internal Orders

An extremely flexible CO tool that can be used for a wide variety of purposes to track costs, in some cases revenues, within a Controlling Area Provide capabilities for planning, monitoring and allocation of costs 4 General Categories Overhead Orders Used to monitor Overhead Costs incurred for a particular purpose (ex. Conducting a trade fair, tracking costs of maintenance and repair work) Investment Orders Used to monitor costs incurred in the production of a fixed asset (ex. Building, storage facility) Accrual Orders Used to offset postings of accrued costs (costs calculated in CO) to Cost Centers Orders with Revenue Used to replace the Cost Accounting parts of SD Customer Orders if SD is NOT being used, so that both costs + revenues can be tracked, or to monitor revenues NOT affecting the Org.s core business

Planning Internal Orders Normally only planned for orders that have a long life cycle Three different Cost Planning Levels available for Planning Internal Orders: Overall Planning simplest level for planning order costs Can plan overall values and annual values irrespective of the cost elements Primary/Secondary Cost and Revenue Planning Can be used if you have detailed info about an Internal Order For manual planning purposes, primary/secondary cost and revenue planning comprises the planning of Primary Costs, Activity Inputs and Revenues Unit Costing Can be used to carry out more detailed planning than is possible on Cost Elements Posting to an Internal Order

An IO is a bucket that allows a better view of costs that could not be itemized in detail in a Cost Center Can be Real or Statistical If it is a Statistical Posting, the Cost Object that the IO is attached to would receive the real posting

Commitments IDs costs which will be incurred in the future for materials and services requested or ordered By recording both Commitments and Actual Costs, can compare the funds you have allocated to your planned or budgeted costs to determine Funds Availability Commitments for future costs created in Purchasing function of MM Recorded automatically when you assign an Overhead Order to a Purchase Requisition or Purchase Order line item Reduce the commitment by posting a Goods Receipt against a Purchase Order Actual costs are posted to IO Process continues until PO is closed and Commitment reduced to zero Must activate commitment management in CO for each Controlling Area

Order Settlement IOs are usually used as an interim collector of costs and an aid to the planning, monitoring and reporting processes When the task is complete, costs need to be passed on to their final destination: Cost Center Fixed Asset Profitability Segment Etc. This process is called Settlement Another form of Periodic Cost Allocation Settlement may occur at the end of each period, or at the end of the orders life Can be made to numerous different types of receivers, as long as receivers are defined as valid in customizing and no system restrictions prevent settlement Possible Settlement Receivers: Cost Centers Other Orders Projects Profitability Segments Fixed Assets G/L Accounts A settlement Rule must be defined for each order Defined in Order Master Record May specify all of the costs of the order are settled to a single receiver, or split to multiple receivers Can be structured quite flexibly with the use of many available settlement options Product Cost Accounting Concerned with all aspects of planning the cost of products or services, as well as tracking and analyzing the actual costs Consists of the following components: Product Cost Planning Used to estimate the costs to produce goods or services Cost Object Controlling Collects costs incurred during production of a product or service using cost objects such as Production Orders Actual Costing and Material Ledger Provides actual costs for each material at the end of the period

Overview Product Cost Accounting Product Cost Planning is used to estimate the costs to produce goods or services The system can automatically create a Cost Estimate IF a Quantity Structure (BOM + Routing) is available in PP If Quantity Structure isnt available, then can enter manually with the Unit Costing Tool or transfer them using Batch input In Cost Object Controlling, costs incurred during production of a product or service are collected on Cost Objects, such as production orders Several different types of Cost Objects are available, including: Sales Orders Production Orders

Process Orders Production Cost Collectors Focuses on simultaneous costing and period-end closing Actual production costs are gathered alongside Raw Material Consumption when completing the work This info allows you to compare Planned and Actual costs for any phase of Production process Period-end closing calculates the value of goods still in production (work in process) and the variances between the Cost Estimate and Actual Costs Then settles them to other components such as CO-PA and FI Actual Costing with the Material Ledger is used to provide Actual Costs for each material at the end of each period Materials and their movements are valuated with a standard price during the period Any variances from this standard are collected in the Material Ledger when invoices are received or orders settled During Period-end closing, these variances are used to calculate an Actual Price for the material in the closed period

Overview Product Cost Planning When you create a cost estimate with a quantity structure, must enter: Costing Variant Dates proposed from the Costing Variant specify: Period of validity of the Cost Estimate (from/to) Selection date for the BOM and Routing (Quantity Structure Dates) Pricing Data for Material Components and Activities (Valuation Date) Material Plant Lot Size Results can be saved and displayed as Itemizations, Cost Element itemizations or Component Splits Itemization shows detailed info about the origin of costs (ex. Prices of materials and internal activities used Cost Element Itemization groups individual costing items into Cost Elements, in order of appearance Cost Elements are determined via: Determination for materials Activity type master record Activity type planning for activities Process master record for processes Cost Component Split groups Cost Elements into Cost Components When a multilevel structure is costed, the Cost Component Split is rolled up so that the original identity of the costs is retained for analysis Price Update Making and releasing a standard cost estimate updates the standard price for the material in the Material Master Record This results in inventory being revaluated Following prerequisites must be met before a standard cost estimate can be marked or released: Must be free of errors (Status KA, costed without errors) Marketing and release must be allowed CC and period in which the standard cost estimate can be marked with a set Costing Variant are entered in the authorization for a marking

Authorization should be set up once per period by the employee responsible Once a standard cost estimate is marked, results are updated in the Material Master Records as the Future Standard Price Can release a standard cost estimate only ONCE per period, unless you delete the previously released standard cost estimate Should always check the standard cost estimate to ensure that its correct before you release it for a product Special reports in Info Systems allow this

Integration Standard Price and Standard Cost Estimate Price control plays a crucial role in Material Valuation When price control indicator set to S, inventory is valuated at standard price Goods movements are valuated directly in the system using a price selected in accordance with the Price Control Indicator If standard price was updated by a Standard Cost Estimate, it can be used in Cost Object Controlling The system can use the itemization of standard cost estimates to determine the target costs for manufacturing orders The difference between target cost and actual cost can be analyzed at the level of Variance Categories, such as quantity or price variances The saved itemization provides the basis for the variance calculation In Profitability Analysis, you can use Standard Cost Estimates (or other material cost estimates) to compare the revenues of the billed quantity with the cost component split of the product A standard price is also required in the Material Ledger to determine the actual price

Profit Analysis Profit Center Accounting An Internal View Goal is to measure the profitability of area of responsibility within the organization Dividing your company up into Profit Centers allows you to analyze area of responsibility and delegate responsibility to decentralized units, treating them as companies within the company EC-PCA lets you set up your Profit Centers according to: Product (product lines, divisions Geographical Factors (regions, sales offices, production sites) Function (production, sales) Allows you to calculate internal measurements of profitability This internal view reflects the success of a given Profit Center at meeting the profitability goal for which it was given responsibility Account Assignment Logic in CO: Each posting to a revenue or expense account that has been set up as a Cost Element requires an Account Assignment Object This specifies where the revenue or cost will reside in CO Examples of Real Account Assignment Objects (*Profit Centers are NOT): Cost Centers Internal Orders Production Orders Profitability Segments Master Records of CO Objects contain a Profit Center Field Various controlling objects are linked or assigned to the profit center identified in that field Causes the system to generate a Statistical Posting (additional posting) in EC-PCA to that Profit Center whenever there is a debit or credit posting to the object Typical Questions in PCA

Data Flows to Profit Center Accounting Before you can analyze your profits by Profit Center, the system must summarize all the profit-related postings in PCA The following data is transferred to PCA: All postings for revenue and cost elements (assignment to the profit center using the CO Account Assignment Object) Expense and Revenue accounts that are posted using Logistics transactions B/S accounts and other expense and revenue accounts (optional) Profit Center Accounting - Reporting Information System is used for evaluating plan and actual data Can use standard reports or create your own Reports can be executed for Profit Centers or Profit Center Groups Basic Terms in Profitability Analysis An application in CO Two versions available: Costing-Based Reports display values by Value Field (flexibly defined key figures) Can be expanded with other anticipated values (ex. Accrued Freight costs) Uses special database tables Produces revenues and cost of sales simultaneously when the billing document is calculated Account-Based Reports display values by Cost and Revenue Element Reconciles directly with FI at account level Shares data tables with other CO applications, such as Cost Center Accounting Posts revenues when billing document is created, but updates cost of sales at the point of Goods Issue Typical Questions in Profitability Analysis

Use COPA to analyze the profitability of segments in your external market Segments can be defined by: Product Customer Geographical area Other characteristics Internal organizational units (ex. CC or Business Areas) Aim is to provide the board of directors, SD, marketing, planning and other groups with market-oriented decision support

Data Flows in Profitability Analysis Data from SD is one of the key sources of info In Costing-Based PA, information can be taken at two points in the Sales Order Cycle: When an order is created or changed (optional) When an invoice is generated for an order In Account-Based PA: Goods Issue is posted When an invoice is generated for the Goods Issue Costs from other areas of CO can be transferred periodically to PA using: Activity and Template Allocations Settlements Assessments Direct assignments can be made manually from FI to PA To display all overhead costs in PA, allocate the overhead costs that were NOT allocated to PCA to PA Various options: Allocation of Internal Activities Assessment Order Settlement Project Settlement Profitability Analysis per Market Segment Can analyze the profitability of a particular Product Group that you are selling to a certain customer o Done by setting up PA so it uses characteristics that are relevant for defining the market segments of your enterprise Each unique combination of characteristic values defines a Profitability Segment o Also need to specify which of the values that affect profitability are to be analyzed for the particular Object These values are Key Figures o PA also gives you the option of choosing relevant values for the different users of your enterprise o Includes a multidimensional reporting tool for creating reports that analyze data for any market segment and any profitability measure