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Deciphering the CO Settlement

Process

Rohana Gunawardena
Quality Systems & Software

Produced by Wellesley Information Services,


LLC, publisher of SAPinsider. © 2015 Wellesley
Information Services. All rights reserved.
What We’ll Cover

• Introduction
• Process
• Postings
• Configuration
• Month-End Process
• Technical Settings
• Wrap-up

1
What Is CO Settlement?

• It is a functionality used by multiple CO processes to ensure


costs are posted to the correct accounts at period end

• Can be accomplished in one of two ways


 Movement of costs from one CO object to another CO object

 Movement of costs from CO to FI

• Posts critical period-end values


 Inventory

 Work-in-Progress

 Cost-of-Sales

 Reserves
2
What Is Not CO Settlement?

• The word settlement is used for multiple processes in SAP


 Evaluated Receipt Settlement (ERS)

 Vendor payment process

 Bill of Exchange Settlement

 Payment for bill of exchange on maturity

 Equipment and Tools Management (ETM) Settlement

 Automated SD order creation

 Intercompany Settlements

 Payments between group companies

 Financial Instrument Settlement

 Used in the Treasury Module for final payment

3
Why Is There a Settlement Process?

• Need to understand SAP CO philosophy


 Based on GPK cost accounting model

• SAP differs from most US legacy accounting systems


 SAP collects costs using a CO Object, posts to the P&L during
the period, and then settles to the Balance Sheet at period end
 This enables greater flexibility for value-added costs

 Inventory is not tracked using cost centers

 Cost centers track labor, machine, and overhead

 Inventory is tracked using CO Objects, e.g., production order

4
GPK Accounting

• Grenzplankostenrechnung (GPK) is a German management


accounting philosophy which is the basis for the CO module
 In early releases, CO functionality focused on GPK exclusively;
now, the functionality has been rounded out
 In the US, it is better known as Resource Consumption
Accounting (RCA), which is built on the foundation of GPK

• GPK accounting is very popular in Germany, but relatively


unknown in the US
 Much confusion on the functionality CO provides is due to
different management accounting philosophies

5
CO vs. FI

• Controlling (CO) and Financial Accounting (FI) are independent


modules of SAP
 There are strong dependencies between CO and FI

 Tight transactional integration

 Master data dependencies

All data relevant to costs flows automatically to CO


from FI
6
CO vs. FI — Objectives

Controlling (CO) Financial Accounting (FI)


Internal Accounting External Accounting
Management Accounting Financial Statements
Valuation Legal Requirements
Ad Hoc Analysis Regulatory Compliance
Planning/Forecasting Historical
Cost Accounting GAAP Reporting

7
Benefits of Settlement

• Some common questions about settlement:


 Why is there the added complexity of settlement?

 Why don’t costs just post to the correct account in the first
place?

• Provides added flexibility to use tools such as results analysis to


control cost postings based on object status
 Revenue Recognition

 Work-in-Progress

8
What We’ll Cover

• Introduction
• Process
• Postings
• Configuration
• Month-End Process
• Technical Settings
• Wrap-up

9
Typical Settlement Scenarios

• Manufacturing

Production Order General Ledger


• Project

WBS Element Fixed Asset


• Cost Collection

Internal Order Cost Center


• Make-to-Order Manufacturing

Sales Order CO-PA


10
Multi-Level Settlement

• It is possible to have processes with multiple levels of settlement

 Service Contract Execution

Service
Contract CO-PA
Order
 Make-to-Order Manufacturing

Production Sales
Material
Order Order

11
Order Types

• The word “Order” is used by several objects in SAP


• Many have the same CO functionality as an internal order
Same Different
Internal Order Purchase Order
Investment Order Sales Order
Manufacturing Order Stock Transport Order
Overhead Order Transfer Order
Plant Maintenance Order
Production Order
Service Order

12
Results Analysis

• Results analysis is a tool used to calculate WIP and cost of sales


for cost objects
 Production Orders WIP calculation
 Sales Orders Revenue/Cost recognition
 Project/WBS Revenue/Cost recognition

• Results analysis calculates values at period end in secondary


cost elements (type 31) as “notes”
 Settlement posts these values to the General Ledger

13
What We’ll Cover

• Introduction
• Process
• Postings
• Configuration
• Month-End Process
• Technical Settings
• Wrap-up

14
Settlement Transactions — Individual Object

• The following transactions can be used to settle an individual cost


object:
 CJ88 Settle Projects and Networks
 FO8C Real Estate CO Indiv. Settlement
 KK87 Actual Settlmnt: Prdn Cost Collector
 KK88 Actual Settlement: Cost Objects
 KO88 Actual Settlement: Order
 VA88 Sales Order Settlement

In practice, will use collective settlement transactions


and batch jobs at period end
15
Settlement Posting

• Moves cost and/or revenue from one cost object to another


 Uses same cost element for Dr & Cr postings

Internal Cost Center


Order 810421 1000-4110

Sender Object Receiver Object

Use transaction KSB5 to display any CO document


16
Document View

• Display from settlement transaction

• Display from KSB5

17
Primary vs. Secondary Cost Element

• Primary Cost Element Cost to be reflected in FI


 E.g., marketing expense posting

• Secondary Cost Element Cost is internal to CO


 E.g., settlement, allocation, distribution

 A secondary CE posting will always Dr and Cr the same


account, but with different cost objects

This reflects the GPK accounting philosophy that


management accounts and financials accounts serve
different purposes
18
G/L Accounts vs. Cost Elements
Financials Controlling

Balance
G/L Accounts

Sheet Acct

Adjustment

Cost Elements
Income Primary
Statement Cost
Accounts Elements

Secondary
Cost
Elements
19
Cost Element Categories for Settlement

• Every cost element has a cost element category


• The following are relevant for settlement:
 21 Internal Settlement CO  CO Secondary
 22 External Settlement CO  FI Primary

20
External Settlement

• Single-sided posting is possible in CO for external settlement

CO
Doc

FI
Doc

CO is not a double-sided system; single-sided entries


can occur. GL is always a double-sided ledger.
21
What We’ll Cover

• Introduction
• Process
• Postings
• Configuration
• Month-End Process
• Technical Settings
• Wrap-up

22
Configuration Overview

• Some configuration is very similar across many objects


• Other configuration can be object specific

23
Maintain Settlement Profile — OKO7

• Key definition of settlement with pointers to related config


 The settlement profile is assigned to objects using:

 Internal order type

 Requirements class, make-to-order SO

 Cost collector

 Project profile for Project/WBS

24
Maintain Settlement Profile — OKO7 (cont.)

• Defines
related
configuration
and valid
receiver
objects

• Will go into
related config
in more detail

25
Maintain Allocation Structures — OKO6

• Defines which cost elements are used as input for calculating the
values to be settled to the receiver object

Post go-live, the incorrect definition of source cost


elements is a common settlement error
26
Maintain Allocation Structures — OKO6 (cont.)

• There are multiple levels to configure


 Select an allocation structure and drill down to the detail

 Assignments allow detailed configuration by different cost


element groups, e.g., material vs. labor

27
Maintain Allocation Structures — OKO6 (cont.)

• The source defines the sender object cost elements to be used

• In most cases, an assessment cost element is not required

For flexibility, use a cost element group; it is


master data that can be updated in production
28
Maintain Allocation Structures — OKO6 (cont.)

• Define all valid receiver objects


 Can define settlement by original cost element or by a single
settlement cost element

Ensure all receiver objects defined in the settlement


profile are defined here to avoid errors
29
Settlement Detail — By Cost Element Checkbox

• Single Settlement Cost Element


 Reduces volume of postings

 Clearer reporting in receiver object

 Faster processing

• Settlement By Cost Element, Full Detail


 Provides more detail

 Keeps balances on origin cost elements in sender object

Best compromise between too much and too little detail


is to have multiple assignment groups with individual
settlement cost elements, e.g., material and labor
30
Maintain Source Structure — OKEU

• Primarily required for Joint Product, Combined Orders, By


Product

Not required in most cases. Leave source structure


field blank in settlement profile.
31
Maintain Source Structure — OKEU (cont.)

• Drill down to see configuration detail in cluster view


 Assign cost elements for definition of the source of different
cost types
 Will be used later for % distribution between products

32
Maintain PA Transfer Structure — KEI1

• Only required if you use CO-PA


 Assignments allow detailed configuration by different cost
element groups, e.g., material vs. labor

33
Maintain PA Transfer Structure — KEI1 (cont.)

• The source defines


the sender object
cost elements to be
used

Follow the configuration you used for the


allocation structure. Keep the two in sync.
34
Maintain PA Transfer Structure — KEI1 (cont.)

• Defines which CO-PA value fields to post to

• If you have more value fields than allocation structure


assignments, go back and update the allocation structure to
match

Follow the configuration you used for the


settlement structure. Keep the two in sync.
35
Assign Settlement Profile to Object Types

• Example for internal order types, KOT2

36
Settlement Rule Creation

• Each object to be settled needs a settlement rule defined

37
More Complex Settlement Rules

• In most cases, settlement rules have one receiver with 100%


allocation
• In the case of Assets Under Construction, the rules can be more
complex

38
Settlement Types

• There are multiple settlement types that can be selected for a


settlement rule
 Number of settlement types varies by object type

Impact of each settlement type varies based on the processing


type selected at settlement runtime and object type
39
Settlement Type Priority
Type Description Priority Period Comments
Settles only costs posted
PER Periodic 1 Must settle each period
in settlement period
Settles costs since
PRE Preliminary 2
inception
Asset Under Settles costs since Only applies to Asset
AUC 3
Construction inception Under Construction
Priority impacted by
Settles costs since
FUL Full 4 object status, e.g.,
inception
TECO

Actual behavior varies based on object type and


processing type at settlement time
40
Automated Creation of Settlement Rules

• A good option to simplify the creation of objects


 Common for internal orders, production orders, WBS elements,
and other cost objects created in large numbers

• When should you use Auto Settlement Rules?


 When consistency in rule creation is important

 When you want to limit the options users have for selecting a
receiver
 To simplify order creation

If automated settlement rule creation works for


your process, it will help reduce period-end errors
41
Strategies for Automatic Settlement Rules

• Standard strategies
 Predefined by SAP by receiver object type

 Strategy 01 is for manual creation

Custom strategies are possible, but require custom


coding, SAP enhancement
42
Strategy Sequences

• Defines a priority sequence of the previously listed strategies


 Select Strategy Sequences to drill down to the list of strategies

There are no transaction codes for automated


settlement rule configuration; must use IMG
43
Assign Strategy Sequence to Order Type

• Each cost object type that requires automated settlement rule


creation needs a strategy sequence assigned

44
Order Type Master with Strategy Sequence

• Strategy sequence is now visible in the order type master

45
What We’ll Cover

• Introduction
• Process
• Postings
• Configuration
• Month-End Process
• Technical Settings
• Wrap-up

46
Month-End Process

• Settlement is a key step in the month-end process


• Need to ensure other key steps are completed prior to settlement
 Final goods issue

 Final invoice posting

 Final costs for period

 Update object status

 WIP calculation

 Results analysis

It is critical to ensure that all costs have been posted to


cost objects prior to the final period settlement run
47
Collective Settlement Transactions

• CJ8G Actual Settlement: Projects/Networks


• CO88 Act. Settlment: Prod./Process Orders
• FO3C Real estate CO settlement
• KK89 Actual Settlement: Cost Objects
• KO8G Act. Settlment: Int.-/Maint. Orders
• VA88 Actual Settlement: Sales Orders

In practice, will run transactions using closing


cockpit or batch jobs at period end
48
Collective Settlement Transactions (cont.)

Need to create
selection variant

Helps reduce
error messages
49
Settlement Errors

• What are the most


common errors and
how do we address
them?

50
Maintain the Settlement Rule of the Sender — KD205

• Most likely issues:


1. Missing distribution setting

2. Rule type mismatch with transaction type

3. Outside validity dates

1 2 3

Worst case, settlement rule is missing completely


51
Detect Missing Settlement Rules

• KOSRLIST Collective Displ.: Settlement Rules


• KOSRLIST_OR Internal Orders: Coll. Displ. SettRu
• KOSRLIST_PP Prod. Orders: Coll. Displ. SettRules
• KOSRLIST_PR Projects/Nets: Coll. Displ. SettRules
• KOSRLIST_RE Real Estate: Coll. Displ. Sett.Rules
• KOSRLIST_VB Sales Doc.: Coll. Displ. Sett. Rules

52
Inconsistent Prof. Segment Number — KE396

• Need to update
the profitability
segment or
object master
data to match

• Note: In this
case, the order
settles to a
material then a
profitability
segment; look
at settlement
hierarchy
53
Complete Allocation Structure — KD503

• Cost element missing in source structure


 New cost element created or missed during configuration

 Add cost center to cost center group in OKO6

Using a cost element group helps resolve this error, as


it is master data that can be updated in production
54
Balance Not Zero — KO115

• Prevents closing object, set status CLSD


• Usually due to incorrect settlement profile on lower level, object
 E.g., profile on WBS in revenue project

• Apply a not for settlement profile to the lower-level object

55
There Is Nothing to Settle — KD213

• Cannot close object; object has balance


 Costs posted in prior period after period settlement

• Solutions
1. Add FUL rule to item

2. Settle prior period if possible

3. Run settlement with processing type Full Settlement

56
Batch Job Performance — Selection Variant

• Ensure selection variant is defined as narrowly as possible


 Use dynamic selections

57
Batch Job Performance — Check Transaction Data

• Select the Check Transaction Data checkbox


 Will exclude objects with no new postings

58
Test Settlements

• Run test settlements weekly or even daily


 Review for error messages in advance of period end

 Do be aware of predecessor steps:

 WIP calculation

 Overhead allocation

 Results analysis

 Run with FUL settlement

 It is always simpler to fix errors in advance than it is during


period close or reverse settlement after period close

For some cost objects and processes, daily live


settlement jobs can be run with cumulative effect
59
What We’ll Cover

• Introduction
• Process
• Postings
• Configuration
• Month-End Process
• Technical Settings
• Wrap-up

60
Controlling Area

• The Controlling Area is the key organizational element in CO


 Important to understand it is more wide-ranging than the FI
Company Code
 It sets the key currency code for reporting across the whole
Controlling Area
 This may cover multiple company codes with its own local
currency codes

It is common to have only one Operating Concern


and one Controlling Area for the whole enterprise
61
Controlling Area — Changing Structure

• Once CO is productive and transactions have been posted,


adding or changing Controlling Areas takes a lot of work
 Initially, CO was configured with one CoAr per CoCd; now, you
want a single CoAr
 This often occurs if analysts had an FI-centric view of CO and
now want to implement cross-company controlling
 Your company wants to activate Material Ledger, but the
required currency types are not in FI-GL or CO

You need to call SAP or a specialist consulting firm


to make the change for you

62
COBRA — Settlement Rule for Order Settlement

• There are two tables


 COBRA

 COBRB

• Can be considered as
settlement rule header
table and item table

63
COBRB — Distribution Rules Settlement Rule Order

64
Debit/Credit Indicator

• There are 4 (not 2) debit/credit indicators in CO


 Displayed indicators are O, C, S, and D in English

 Stored indicators are A, H, L, and S based on German names

 Important if looking at raw data in tables or writing specific


code
65
What We’ll Cover

• Introduction
• Process
• Postings
• Configuration
• Month-End Process
• Technical Settings
• Wrap-up

66
SAP Notes

• 76354 Settlement after Results Analysis


• 140672 Reverse settlement in previous periods
• 159850 Settlement within a Project
• 193586 What has been settled
• 372630 Information for settlement reversal
• 491782 Improving Settlement Rule Validation Performance
• 498446 Long runtimes with order settlement

67
Where to Find More Information — Knowledge Base

• SAP ERP Financials Knowledge Base


 http://service.sap.com/co *

 Contains a range of information on many aspects of SAP


Controlling modules
 Use your SAP Notes ID to log on to the website

* Requires login credentials to the SAP Service Marketplace 68


Where to Find More Information — SAP Help

• SAP Help Portal – Settlement (CO)


 https://help.sap.com/saphelp_erp60_sp/helpdata/en/d4/bfba538
c95b54ce10000000a174cb4/frameset.htm

69
Where to Find More Information — IDES

• IDES – Internet Demonstration and Evaluation System


 http://service.sap.com/ides *

 SAP system with sample transactions and configuration

 Website explains how to get an IDES system

* Requires login credentials to the SAP Service Marketplace 70


Where to Find More Information

• Rohana Gunawardena, “Reasons to Perform a Controlling Area


Reorganization” (Financials Expert, February 2013).
 http://sapexperts.wispubs.com/Financials/Articles/Reasons-to-
Perform-a-Controlling-Area-Reorganization

• Rohana Gunawardena, “Can’t Get There? Find the Right


Transaction to Display CO Documents” (Financials Expert, March
2007).
 http://sapexperts.wispubs.com/financials/quick%20tips/cant-
get-there-find-the-right-transaction-to-display-co-documents

71
Where to Find More Information (cont.)

• Rohana Gunawardena, “Do You Mean ‘CO Object’ or ‘Cost


Object’?” (Financials Expert, February 2003).
 http://sapexperts.wispubs.com/financials/quick%20tips/do-you-
mean-co-object-or-cost-
object?id=723ff1f6d819426186e24787e614c3ab

72
Where to Find More Information (cont.)

• Palani Swaminathan, “Speed Up Your Closing by Automating the


Generation of Settlement Rules” (Financials Expert, July 2012).
 http://sapexperts.wispubs.com/financials/articles/speed-up-
your-closing-by-automating-the-generation-of-settlement-
rules?id=a520cee3a9084bf3b556e6e316ed6e8f#.VLQnwSvF98E

• Birgit Starmanns, “A Guide to Selecting the Appropriate Cost


Object to Support Your Manufacturing Process” (Financials
Expert, July 2011).
 http://sapexperts.wispubs.com/financials/articles/a-guide-to-
selecting-the-appropriate-cost-object-to-support-your-
manufacturing-
process?id=f6d55dcc21834be59921477ccc3ae2a7#.VLQn5CvF9
8E
73
Where to Find More Information (cont.)

• Kurt Goldsmith, “Understand RCA Concepts to More Easily


Evaluate Your Ever-Expanding CO Module Functionality Options”
(Financials Expert, November 2002).
 http://sapexperts.wispubs.com/financials/articles/understand-
rca-concepts-to-more-easily-evaluate-your-ever-expanding-co-
module-functionality-
options?id=37f0bcd84b3a445aacc1200ff4793216#.VLQoLSvF98
E

74
Where to Find More Information — SAP PRESS

• SAP PRESS
 Janet Salmon, Controlling with SAP – Practical
Guide (SAP PRESS, 2014).
 Understand how your controlling processes
relate to SAP

• SAP PRESS
 John Jordan, 100 Things You Should Know
About ... Controlling with SAP (SAP PRESS,
2010).
 Tips and Tricks on working with
Controlling
75
Where to Find More Information — SAP

• SAP Guide
 Product Costing Scenarios Made Easy 3.x-4.x
(Johnson Printing Service, 1999).
 Typical costing scenarios for various R/3
Manufacturing processes

76
7 Key Points to Take Home

• The settlement process is based on the GKP accounting model


 This is a different philosophy to most US cost accounting

• Settlement adds flexibility to month-end postings to the G/L


 Can dynamically calculate complex postings such as revenue
recognition, reserves for losses, etc.

• Special cost elements are required for settlement


 Type 21 internal settlement and type 22 external settlement

• Carefully review settlement configuration


 There are few config transactions, but each has many settings
77
7 Key Points to Take Home (cont.)

• Setting up settlement test runs prior to close helps detect errors


 Can have daily live settlement runs for some processes

• CO has 4 Dr/Cr indicators, not 2


 This is a confusing part of CO data

• Controlling area assignment changes and mergers can be


performed post-go-live
 But it is complex and needs external assistance

78
Your Turn!

How to contact me:


Rohana Gunawardena
Rohana@QSandS.com

Please remember to complete your session evaluation


79
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