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Project STARK SSS project

Business Process Document

Business Process Document Cost


Centre Accounting

Version 1.0
JulyApril 20076

Enterprise Area : Financial Accounting


Scenario : Cost Centre Accounting
Process Group : Cost Centre Accounting
Business Process : General Explanation
Master Data in Cost Centre Accounting
Cost Centre Planning
Cost Centre- Actual Value flow
Period End Activities

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Document Sign-off sheet

Document Sign-off sheet

________________ ________________
Mr. Girish Ketkar Mr. Ketan Pendse
Finance Department Core Team
TKII TKII

________________ ________________
Mr. Dhananjay Joshi Mr.
IBM Team Manager Controlling
IBM IBM

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Document Control:

Author Swati Kothari & Dhananjay Joshi


File Name BPD Process Document for Cost Centre
Accounting
Created 15-Jun-07
Last Edited 1526-Junl-07
No. of pages 22

Versi Revision Revision Author/ Sign-Off


on Date Description Process Owner
V1.0 Author: Swati
Kothari &
Dhananjay
Joshi

Process
Owner :

Target Readership
Project Management
Project Team
Procurement Process Owners
Functional Heads

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Table of Contents

1. Scenario: Cost Centre Accounting.......................................................................................5


1.1 Cost Centre Accounting...................................................................................................5
1.1.1 General Explanation................................................................................................5
1.1.2 Master Data in Cost Centre Accounting..................................................................6
1.1.3 Cost Centre- Actual Value flow.............................................................................11
1.1.4 Period End Activities.............................................................................................14
1.1.5 Overhead planning and actual calculations...........................................................16
A. Integration Points...............................................................................................................18
B. Performance Measures.......................................................................................................18
C. Interface.............................................................................................................................18
D. Gaps and Solutions............................................................................................................19
E. Configuration.....................................................................................................................19
F. Reporting Requirement......................................................................................................19
G. As-Is Reference.................................................................................................................20
H. Authorization.....................................................................................................................20
I. Division ness Controls.......................................................................................................21
J. Division ness Continuity Requirements............................................................................21
K. Process Change Impact......................................................................................................22
1. Scenario: Cost Centre Accounting.......................................................................................5
1.1 Cost Centre Accounting...................................................................................................5
1.1.1 General Explanation................................................................................................5
1.1.2 Master Data in Cost Centre Accounting..................................................................6
1.1.3 Cost Centre- Actual Value flow.............................................................................11
1.1.4 Period End Activities.............................................................................................14
A. Integration Points...............................................................................................................18
B. Performance Measures.......................................................................................................18
C. Interface.............................................................................................................................19
D. Gaps and Solutions............................................................................................................19
E. Configuration.....................................................................................................................19
F. Reporting Requirement......................................................................................................19
G. As-Is Reference.................................................................................................................20
H. Authorization.....................................................................................................................20
I. Division ness Controls.......................................................................................................21
J. Division ness Continuity Requirements............................................................................21
K. Process Change Impact......................................................................................................21

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1. Scenario: Cost Centre Accounting

1.1 Cost Centre Accounting

1.1.1 General Explanation

This section gives a general explanation of the Cost Centre Accounting


module of SAP.
Cost Centre accounting is used for controlling purposes within an
organization. The Cost Centre Accounting component tracks where costs
occur in the organization. The cost centre is an organizational unit in a
controlling area. Cost centres can be defined for each low-level
organizational unit that has responsibility for managing costs. As costs are
incurred, they are assigned or posted to the appropriate cost centre. These
costs could include payroll costs, admin and utility costs, facility, training or
any other costs assignable to a given cost centre.

Dividing an organization into cost centres will allow TKII to achieve several
goals, depending on the cost accounting method.
Assigning costs to cost centres will let us determine where costs are
incurred within the organization.
If the costs are planned at cost centre level, cost efficiency can
be checked at the point where costs are incurred Important for
TKII since planning may not be at cost centre level currently for all
costs
If overhead costs are to be assigned accurately to individual products,
services, or market segments, it is required to further allocate the
costs to those cost centres directly involved in the creation of the
products or services. From these cost centres then different methods

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will be used to assign the activities and costs to the relevant products,
services, and market segments.

1.1.2 Master Data in Cost Centre Accounting

Master data determines the structure of the given application component in


the SAP
In cost centre accounting the master data is maintained generally once. It is
either entered manually or transferred from legacy or external systems.
In the subsequent section we will see the master data to be maintained in
the SAP system in TKII.

1.1.2.1 Cost Elements

Cost Element Accounting classifies the costs and revenues that are posted to
CO (Controlling module). A cost element describes the nature of cost. A cost
element corresponds to a cost-relevant item in the chart of accounts. The
cost elements can be distinguished into primary cost and revenue elements
and secondary cost elements.

Primary Cost/Revenue Elements

A primary cost or revenue element is a cost or revenue-relevant item


in the chart of accounts, for which a corresponding general ledger
(G/L) account exists in Financial Accounting (FI). A cost or revenue
element can only be created if has been defined as a G/L account in
the chart of accounts in FI. The SAP System checks whether a
corresponding account exists in Financial Accounting.

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In TKII, all the P&L GL will be created as cost element in CO module.


Depending upon the nature of the cost/revenue, the GL will be created
in cost element category 1(cost), 11 (Revenue) or 12 (sales
deduction/discount)

Secondary Cost Elements

A cost element which is used to allocate costs for internal activities is


defined as Secondary cost elements.

Secondary cost elements do not correspond to any G/L account in


Financial Accounting. They are used only in Controlling and
consequently cannot be defined in FI as an account.

Secondary cost elements can only be created and administrated in cost


accounting (CO). They portray internal value flows, such as those
found in internal activity allocation, overhead calculations and
settlement transactions.

In TKII the following secondary cost elements will be created:

Assessment Cost Elements: These cost elements will be used for


allocation of Cost Centre costs to the different cost centres/WBSe.
These cost elements are of type 42 and their number range will be
from 920000 to 929999. (Distribution/Allocation of service cost
centres to production cost centres)

Internal Activity Allocation Cost Elements: These Cost Elements will


be used for allocation of employee cost to Projects. These Cost
Elements are of type 43 and their number range will be from
930000 to 939999. (Absorption of

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Internal Order Settlement Cost Elements: These Cost elements are


required when we settle an internal order to any receiver (e.g.
Profitability Segment, Cost Centre, and other Order etc.) These
Cost Elements are of type 21 in SAP and their number range will
be from 910000 to 919999.
1.1.2.2 Cost Centres

Its an organizational unit within a controlling area that represents a clearly


delimited location where costs occur. The organizational divisions (cost
centres) can be based on the basis of functional, settlement-related, activity-
related, special, and/or responsibility-related standpoints.

The cost centre structure should serve the following purposes:

All reporting requirements which require costs to be displayed


separately for a department / function.

All allocation requirements that require costs to be identified


separately and put in separate buckets such that they could be directly
picked up for different basis of allocation.

In TKII, the cost centres will be created department wise and will be
grouped function wise for each location such as
In TKII, the cost centre code will be of 8 characters. The coding logic for cost
centres is as below:

First 2 character will connote legal entity same as first 2 character of


company code.

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Next 2 Character will connote the location of the Cost Centre.


Next 4 characters will connote the department such as M.ds office ,
Book Keeping , controlling

Standard hierarchy is a tree structure representing all cost centres belonging


to a Controlling area from a Controlling perspective. It is mandatory in cost
centre accounting. It is the organization structure from the cost controlling
point of view.

In TKII the Standard Hierarchy will be TKII. The levels in the hierarchy will
be as follows:

1st level will represent the cost at company code level such as TKII.
2nd level will represent the cost at Corporate, TKII(TKF) & POL India
3rd level will represent the cost at profit centreMother Department level
such as Boiler, Sugar, MHE, Cement, Polysius, Manufacturing, Services
& CommonFinance etc.
4th level will represent the cost at actual department level
Separate groups will be created at function group level such as project
execution, selling, design, etc.

The Cost centres can be grouped together into decision, control, and
responsibility units. SAP provides facility to create multiple cost centre group
to cater the management requirement. Further cost centre groups can be
created as per reporting requirements.

1.1.2.3 Activity Type

Activity types are output of a Cost centre. It classifies the activities


produced in the cost centres within a controlling area. To plan and allocate

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the activities, the system records quantities that are measured in activity
units (e.g. hours, man month). Activity quantities are valuated using a
price (allocation price).

In TKII context, activity type will be created for fitting, welding,


machinesing, design & engineers, draftsman, project execution, Quality
assurance & electrical instrumention. Separate rate will be calculated for
salary (normal and overtime) & overheads. The Salary & other expenses will
be planned in the cost centre & the rate will be calculated through the
system. & Activity type will be created for machine expenses based on the
direct expenses of the machine for example fuel, water charges, electricity
charges etc. These expenses will be planned in the cost centre & the rate will
be calculated through the system.

At month end, actual activity rate will be calculated & posted into the system
& Revaluation will be done for Projects.

1.1.2.4 Statistical Key Figures

Statistical Key Figures are the figures which describe cost centres, activity
types, order, profit centres etc. SKF can be used as basis for internal
allocation such as distribution & assessment.

SKF can be defined as Total value or Fixed value. SKF defined as fixed values
are valid as of the posting period, and in all subsequent posting periods of
the fiscal year. SKF defined as Totals values are valid only in the posting
period in which they are entered.

Statistical key figures such as number of employees in each cost can be used
to determine ratios in cost and as an allocation base for assessments and

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distributions (e.g.:- canteen costs are allocated to individual cost in the


company).

In TKII, SKFs will be used for

Distributing the cost from common cost centre to function specific cost
centres. Example Design , Civil, Erection etc. This cost will be used for
calculation of overhead rate in SAP.

1.1.3 Cost Centre- Actual Value flow

1.1.3.1 Actual cost Flow

Actual Cost entry involves transferring primary costs from upstream


components to the Controlling (CO) application component. In the CO
component, this transfer occurs real-time from the components - Financial
Accounting (FI), Asset Accounting (FI-AA), Materials Management (MM)
and Payroll Accounting (In TKII since Payroll is outside the system so the
values will flow from FI JV). This is achieved by entering a cost accounting
object (such as a cost centre or an internal order) during account
assignment.

Primary costs entered are allocated further using internal activity


allocations. Amounts are posted real-time to the sender (Cost Centre) and
receiver (WBS Element) object(s) (debit and credit postings).

Monitoring of costs is available on an ongoing basis. These postings will


enable us to recognize variances at an early stage, and to take the
necessary counter measures.

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Apart from available standard cost centre accounting reports, the


functionality of Report Writers and Report Painters (to create reports) can
be used for easy user-definable reports, which would cover periodic actual
cost statements, plan/actual comparisons, and comparison reports based
on periodic actual/actual comparisons. These reporting for example will be
used to compare the actual costs of the previous period with the actual
costs of the current period.

For example in In TKII context, for the cost booking below given rule will
be followed to book cost to a CO object

1. first to WBS element if possible for example all direct costs like
Freight outward, Commission, Royalty, Engineering fees etc

2. If not then to specific cost centre Salary, depreciation, consumables


etc

3. If not then to common cost centre electricity, canteen expenses,


telephone charges, house keeping charges etc.in the cost centres directly
from other modules will be as follows:

Cost head Source Remarks


Modules
Salary and Payroll, FI The cost will be uploaded in the system by using the
wages of Billable appropriate cost centre i.e. design sugar Cost Centre
resources

Printing and FI The Cost will be booked to the cost centre for all Division
Stationary
Telephone and FI The Cost will be booked to the cost centre for all Division
Communication
Travelling and FI The Cost will be booked to the cost centre for all Division
Conveyance and project related travel expenses will be directly booked
to the Projects.

Consumables MM, FI Consumables will be directly procured against an account


assignment which will be a Cost Centre.

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General FI The Cost will be booked to the common cost centre for all
Expenses Division
Depreciation FI Automatic calculation and allocation of depreciation from
the Fixed Assets module based on the Books depreciation
area. Depreciation from FI would be reposted Cost Centre
wise if needed in CO.

Purchased FI Cost will be booked against the Common Cost Centre.


Power
Repair and FI Will be directly booked against the Common Cost Centre.
Maintenance
Construction of PS, FI All the costs incurred during the construction of Asset will
Assets be posted to Projects Systems and subsequently will be
settled to AUC at period end. Upon completion the AUC
will be settled to asset and automatically capitalized.

1.1.3.2 Manual Reposting of Costs

Primary costs can be reposted manually using transaction-based reposting,


whereby the original cost element is always retained. This function is
designed mainly to adjust posting errors. It is advisable to adjust the posting
error in the application component where they occurred so that external &
internal accountings are always reconciled e.g. if FI posting is done to
wrong cost centre then it should be rectified through reversal of original FI
posting and again make a correct FI posting instead of correcting the error
in CO component .

In TKII, manual allocation of cost from one cost centre to another will be
avoided.

Reposting is generally used for allocation of primary cost, for example, in the
case of telephone, while booking the original cost in FI , the cumulative

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amount maybe be posted in one cost centre only. Later, the reposting
functionality could be used to allocate the telephone cost to different cost
centre based on the place of origin of the cost.

1.1.3.3 Reposting of Line items

Reposting line items enables to adjust posting errors of costs and revenues.
Reposting line items corresponds to a reversal posting on the sender object.
This is because the system takes the debit/credit indicator from the line item
and updates it immediately for the sender and receiver account assignment
objects. Repost line items can be done in two steps:

Select the line item that you want to repost


Enter the reposting and execute them

1.1.3.4 Direct Activity Allocation

Direct activity allocation involves the measuring, recording, and allocating of


business services performed. This can be done by creating the relevant
(measurable) tracing factors (allocation bases which can be used as cost
drivers) i.e. activity types. Activity allocation occurs, for example, when
Business transactions are confirmed or when posting activity quantities to
accounts. The system multiplies the activity produced by the price of the
activity type for e.g. when activity allocation (Service hours Activity Type)
is done from Service cost centre to the Divisioniness Process - Projects
respective WBS element (projects) is debited with the planned activity price
of Service hours and the sender cost centre is credited.

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This transaction will debit the Cost Centre related to the project against
which the employee has booked his time in the time sheet in the same
proportion & credit the cost centre to which one is assigned.

1.1.4 Period End Activities

Period-end closing in Overhead Cost Controlling is part of the work carried


out at period-end throughout the entire organization. The procedure for
period end closing is as follows:-

Period close for FI postings

Enter allocation basis

Execute allocation cycles in Cost centre accounting

Actual activity price calculation

In TKII all the costs booked to the Common cost centres will be allocated to
the Divisionwise profit centre wise Cost Centres on relevant basis (SKF).
The following table lists down the basis for allocation of all the costs:
For example following is the list of common cost centres and its indicative
allocation basis
Sr. Cost Description Basis (SKF)
No. Centre
1 5203 Watch & Ward Number of employees
2 5204 Canteen production Same as above
3 5302 Workshop electrical maintainence Number of employees
(proposed to use number
of electric power points)
4 7001 House keeping Number of employees

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5 7002 Garage Number of employees


6 7003 Printing room Number of employees
(except production
employees)
7 7007 Civil Maintenance Number of employees
(except production
employees)

Cost Elemets Particulars Cost Divisioniness


Centre/ Unit
Project
Unit
Direct Costs :-
Personnel Expenses Personnel Exp Actuals Actuals
Material Cost Consumption Exp Actuals Actuals
Direct Expenses related Travel , fright , Actuals Actuals
project commission
Royalty Expenses Actuals Actuals
Engineering Fees Actuals Actuals
Erection expenses
Indirect Costs :-

Personnel Expenses Personnel Exp Overhea Overhead


(Support/Corporate) d
Personnel Expenses Personnel Exp Overhea Overhead
(Management) d
Bonus Personnel Exp Overhea Overhead
d
Donation Admin exp Overhea Overhead
d
Traveling Travel Expenses Overhea Overhead
(Support/Corporate) d
Communication Admin exp. Overhea Overhead
Expenses d

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Auditors Remuneration Admin exp. Overhea Overhead


d
Advertising & Publicity Selling Exp. Overhea Overhead
d
Legal & Professional Admin Exp. Overhea Overhead
Charges d
Sales & Marketing Selling Exp. Overhea Overhead
Expenses d
Miscellaneous Expenses Admin. Exp. Overhea Overhead
d
Tool & patterns Prod. Exp. Overhea Overhead
consumption d
Insurance Mediclaim Admin Exp Overhea Overhead
d
Staff Recruitment Admin. Exp. Overhea Overhead
Expenses d
Interest & Bank Interest Admin. Exp. Overhea Overhead
d
Electricity Charges Admin. Exp. Overhea Overhead
d
Rates and Taxes Admin. Exp. Overhea Overhead
d
Rent Charges Admin. Exp. Overhea Overhead
d
Vehicle Expenses Admin Exp Overhea Overhead
d
Repairs building Admin. Exp. Overhea Overhead
d
Repairs Plant & Mach Prod. Exp Overhea Overhead
d
Repairs Other Admin. Exp. Overhea Overhead
d
Depreciation

Dep. Plant & Mach Prod. Exp Overhea Overhead


d
Dep. Other Admin. Exp / selling Overhea Overhead
Exp. d

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1.1.4.1 Periodic Reposting

After this, reposting is used to adjust any values that are incorrect or had
been posted to allocation cost centres for reasons of simplification. Then the
primary costs are distributed according to their source. The primary costs
can now be used as the basis for the accrual calculation of valuation
differences and additional costs.

1.1.4.2 Periodic Allocations

The periodic allocation includes the transfer of the cost from

cost centre to the cost centre


Project to profitability analysis through settlement

The distribution in SAP is used to allocate the primary cost to other


controlling object by retaining the original cost element whereas the
assessment is used to allocate the primary/secondary cost to other
controlling object through secondary cost element. So the cycles are to be
created & executed as per the requirement. The cycles must be executed in
the correct sequence so that the costs are not allocated the cost centre
which is already allocated.

In TKII context, the assessment cycle will be used to transfer the common
cost such as infosystem, HR, purchase etc to profitability analysis whereas
the Distribution cycle will be used to transfer the project related cost from
cost centre to respective Project.

1.1.4.3 Variances

After allocation, the variances of the actual costs from the planned costs can
be analyzed. These variances lead to cost centre under- or over-absorption.
The variances of the cost centres, the costs of the sales and distribution and

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the administration cost centres are transferred to Profitability Analysis (CO-


PA). In CO-PA, the overhead costs can be assigned to any level of the
contribution margin scheme. This is the final step in actual cost accounting.

1.1.5 Overhead planning and actual calculations.

1.1.5.1 Overhead planning

In Controlling module GL code wise and cost centre wise plans will be
maintained. Planning versions will be created for different fiscal year plans.

These planned figures can be further processed for following

1. distribution cycles
2. assessment cycles

3. internal activity allocation

to arrive at planned overhead rates for various functions.

SAP standard reports of cost centre accounting can be used for GL and
cost centre plan. Separate functionality of planning aids is available in
SAP under controlling module. Planning aids functionality helps in future
period planning using past period plan / actual data.

Actual Overheads calculation :

The costs collected at the cost centre are allocated as overheads to the
projects by applying the specific overhead rates. The basis for absorption
of overheads can either be the amount of particular direct costs such as
direct material costs, it can be a sales turnover or it can be actual labor
hours booked against defined activities.

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We can calculate percentage or quantity-based overhead rates, which


lead to an actual credit being posted to a cost center and a debit to the
order, project etc.

Indirect expenses which need to be absorbed on Projects will be grouped


under seven functions / heads as -

1 Material

2 Production - Pimpri

3 Production - hyderabad overheads

4 Project execution overheads

5 Design overheads

6 Civil overheads

7 Erection overheads

8 Electrical instrumentation overheads

9 Quality Assurance overheads

A. Integration Points
MM-CCA
1. At the time of creation of account assigned Purchase requisition,
Purchase order & contract, appropriate Project or the Cost centre
should be used.
FI-CCA

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1. At the time of booking of expenses in FI the relevant cost


centre/Project will also be mentioned to facilitate the correct posting

B. Performance Measures
A. Allocation of all the direct and indirect costs to the Division units
strictly based on the guidelines given in the Manual
B. Matching of Total Expenses as per financial statements with that as
per management reports.
C. Ensure that all the reports required today for accounting,
management, corporate and analyst reporting is getting generated
after implementation of the CO module. These reports should
automatically get emailed to the intended recipients. (A list of all
such reports is attached with this document)
D. Automation of detailed variance analysis of all costs (Actual vs.
Planned/ Estimated). This is required for explanation of MIS
effectively.

C. Interface
2. None

D. Gaps and Solutions


Gaps Workaround Enhancements

E. Configuration
Controlling Area
Cost Centre Standard Hierarchy

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F. Reporting Requirement

Cost centre wise Plan/Actual comparison report


Cost centre wise Actual period wise comparison report

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G. As-Is Reference
COM/CO/Overhead Calculation/02 Overhead Calculation
COM/FI/G/L Planning/01 General Ledger Planning

H. Authorization

Controlling Manager Director


Transaction T-code CFO
Accountant Finance Finance
Create Cost
Centre
KS01
Change Cost
Centre
KS02
Display Cost
Centre
KS03
Create Primary
Cost Element
KA01
Create
Secondary KA06
Cost Element
Create Cost
Element Group
KAH1
Change Cost
Element Group
KAH2
Delete Cost
Element
KA04
Change
Standard OKEON
Hierarchy
Create Cost
Centre Group
KSH1
Change Cost
Centre Group
KSH2
Create Activity
Type
KL01
Change
Activity Type
KL02
Create
Statistical Key KK01
Figures

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Controlling Manager Director


Transaction T-code CFO
Accountant Finance Finance
Change SKF KK02
Change CCN KP06
Input Planning

Display CCN
Input Planning
KP07
Change Plan
CCN
Activity/Output
KP26
Prices
Display Plan
CCN
Activity/Output
KP27
Prices
Change
Planned SKF
KP46
Direct Activity
Allocation
KB21N
Posting of SKF KB31N
Run
Assessment KSU5
Cycle
Run
Distribution KSV5
Cycle
Reports
Information
System

I. Division ness Controls


1. Checks and controls
Person wise access to cost centre information

J. Division ness Continuity Requirements


1. List of activities as a part of this process, which are mission critical
in case of SAP downtime

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K. Process Change Impact

1. List of activities as a part of to-be process, which are undergoing a


change from its current scenario

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