Lab 4 EGS - 5622 Controlling Management Spring 2016 Final

Controlling Management
EGN 5622 Enterprise Systems Integration
Spring, 2016
Concepts & Theories

FI (Financial Accounting (FI) and
Controlling Accounting (CO)
• Accounting function can be divided into
two: internal and external.
• External accounting is called financial

accounting, and
• Internal accounting is often called

controlling accounting or managerial
accounting.
3
Comparison between FI & CO
Financial Accounting Controlling Accounting
 External Accounting  Internal Accounting
◦ Balance Sheet  not required by law
◦ Profit & Loss Statement  Flexible
 Legal Requirements
 Standards Objective of controlling
accounting is how to cut cost and
add value.
Process of identifying,
measuring, analyzing, and
communicating information
for organizations goals.
4
Comparative Reporting
Liquidity
Calculation Retained
Financial Accounting (FI) Earnings
Balance
Report
Sheet
Income
External Statement
Reporting
Cost
Center
Reports
Product
Managerial Accounting (CO) Costs Profit
Reports Profit Margin
Center
Internal Reports
Reporting © SAP AG - University Alliances and
The Rushmore Group, LLC 2008. All
January 2008 rights reserved. 5
Fundamentals of Cost Management
• Internal (cost management) accounting
system and the external (financial) accounting
system are fully integrated.
• Every cost is linked to an expense booked in the

financial accounting system and to a cost
element in managerial accounting system.
• Cost elements are in turn assigned to cost

objects.
6
Cost Elements assigned in Prod Order
7
Interrelated and Closely
Connected FI & CO
(FI) Transaction
Document Income Statement
Supplies Exp. Bank
Bal. Sheet
Amount
1000 1000
G/L Account #
Cost Center
1900012432 Financial Accounting
(CO) Transaction Cost Center

Document
Cost Center 1000
Cost Element
20000657 Controlling
© SAP AG - University Alliances and
Interrelated and Closely
Connected FI & CO
Cost Center
9
Fundamentals of Cost Management
• Cost object is a classification of costs desired by the
user. It could be a cost center (a department where the
cost is incurred), a production order (costs to produce unit
10004232), or a special project (installation of an ERP
system), etc.
• Cost object is used to aggregate costs for some

decision purpose at a later time. For instance,
sales/marketing, finance/accounting, and general
administration could be three cost centers (objects) in the
headquarters under the direction of three different VPs or
EVPs.
• A cost element can be assigned to multiple cost

objects. For example, travel as a cost ©element may
SAP AG - University Alliances and
appear in all cost centers. The Rushmore Group, LLC 2008. All
Target Audience
1. Executives
2. Senior Management
3. Department Managers
4. Controllers
5. Cost Accountants
11
Controlling Accounting Terminology
Controlling Area
1. A self-contained, organizational element for
managerial accounting and reporting system.
2. A controlling area is the highest level organizational
entity within the Control module
3. A controlling area may include one or more
company codes; therefore, an enterprise can perform
management accounting analyses and reports across
several companies
4. Each company code can be assigned to one and only
one controlling area
5. A way to identify and track where revenues and costs
are incurred for evaluation purposes
6. A controlling area is also broken down into two different
“standard” hierarchical structures:
1) standard cost center hierarchy; and
2) standard profit center hierarchy 12
Subcomponents of Controlling
Accounting
1. Cost Element Accounting

2. Cost Center accounting
3. Internal Orders, and
4. Profit Center Accounting
13
1. Cost Element Accounting
1.1 Cost Elements
Cost and revenue accounts within a chart of
accounts but involved in cost accounting are
referred to as “elements,” which are further
divided into
• primary cost elements,
• primary revenue elements, and
• secondary cost elements
14
Cost Element Accounting
1.2 Primary Cost and Revenue Element
• Primary cost and revenue accounts are created
in the FI module first, then the primary cost
and revenue accounts created in CO module
with the same numbers. The primary cost and
revenue accounts/elements are used in the FI
and CO modules to account for cost and
revenue flows with parties external to the
organization.
15
1.3 Secondary Cost Element
• Secondary cost elements are created in

the CO module only and are used
exclusively within the CO to account for
internal cost flows among cost objects
within a controlling area (e.g., cost
allocations among cost centers).
• There are no secondary revenue

elements.
16
17
2. Cost Center Accounting (CCA)
1) Cost center accounting (CCA) module is used to
assign planned costs and actual costs incurred to
areas of cost responsibility within an organization.
For example, if a manager wants to know how much it
costs to run his department for the month of April, this
module can be used to provide the answer.
2) 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.).
18
2. Cost Center Accounting
2.1 Cost Centers
• Cost center is created for internal controlling purposes and
provides a tool for collecting costs. It may be a unit
distinguished, for example, by area of
responsibility, location, or type of activity, such as
• Copy center, Security department, Maintenance department
• Can be permanent or temporary (e.g., internal

order)
• Operates as a collector and assignor of

responsibility for expenditures
• Responsible for cost containment, not responsible

for revenue generation
Cost Center (- continued)
• A cost center is the basic organizational
responsibility component of a controlling area.
• There is one and only one standard cost center
hierarchy for a controlling area.
• Cost centers may also be linked to a specific

business area, company code, and profit
center (i.e., business areas, company codes,
profit centers and controlling areas may all be
viewed as collections of cost centers).
20
2.2 Activity
• Any event, action, or transaction that causes a
cost to be incurred in the production of a
product or the providing of a service.
21
2.3 Activity types
• Activity types are production or service activities
rendered to a work center or cost center that are used
to allocate costs.
• Activity types generally include different types of labor

(e.g., setup, production labor, machine labor, etc.) that are
performed by personnel within a work center or cost center.
• Measure of activity type quantity (e.g., hours worked),

which may be used to allocate all or a portion of the costs
of a cost center to other cost objects (e.g., other cost
centers, production orders, profitability segments, etc.).
22
Activity types (-continued)
• Cost center in which the activity is performed is
referred to as the “sender,” and the cost objects
receiving the allocated costs are called “receivers.”
• Allocation is based on an “activity (transfer) price” that

is developed for the activity type. The activity price may
be set manually by management.
23
2.Cost Center Accounting
2.4 Cost Drivers
• A cost driver is a factor, such as machine
hours, beds occupied, computer usage
time, flight hours, or any other factor that
causes overhead costs.
• Typical cost driver types: activity types and

statistical key figures, such square feet or
head count.
24
2.5 Product Costing (PC)
• Product costing (PC) is a CO module function which
provides the means for developing different types of cost
estimates for a particular product or subassembly, such as
current (standard cost), future cost, previous 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).
25
2.6 Activity Based Costing (ABC)
• Activity based costing (ABC) module provides the
means for assigning planned costs and actual costs
incurred at the cost center level to business processes.
The costs assigned to a business process can in turn be
allocated to those cost objects (products, services,
customers, etc.) that utilize the business process.
• Cost center resources can allocate to business processes

based on their true utilization of activities.
26
2.7 Work Center
Work centers are organizational units that perform
operation functions within a plant.
• A work center might include a production line, quality
checkpoint, packaging line, and warehouse. For each
operation created in a routing, a work center must be
identified. All manufacturing processes are routed
through work centers.
• Each work center is connected to only one cost

center as defined in Work Center Master Records. This
way allows costing, scheduling, and capacity planning to
be done for each functional production area individually.
27
28
3. Internal Order
• A method of internal cost allocation by which valuated
activities from cost centers can be assigned to cost
receivers in accordance with the cause of the cost.
• The activities or allocation bases represent the output
of a cost center (such as production hours or machine
hours).
• In internal activity allocation, the activity produced by the

cost center is multiplied by the activity price. The result is
the cost to be allocated.
• Sender cost center is credited with this amount and
the receiver object is debited.
• Internal orders support task-oriented planning,

monitoring, and allocation of costs.
29
4. Profit Center Accounting (PCA)
Profit center accounting is used to analyze
income and expenditure for profit centers
that represent an independent subunit
within an organization.
• Profit centers are linked to cost centers

with one-to-one or one-to-many
relationship.
• Responsible for revenue generation and

cost containment
• There is one and only one standard profit
center hierarchy for a controlling area.
30
4. Profit Center Accounting
4.2 Profitability Analysis (PA)
• Profitability analysis (PA) module provides the means
for assigning planned and actual revenues and costs to a
variety of profitability segments, including customers,
sales territories, sales employee groups, product groups,
etc.
31
SAP Implementation
Controlling (CO)
SAP Module View

Financial
Sales &
Accounting
Distribution
Materials Controlling
Mgmt.
R/3
Production Fixed Assets
Planning Mgmt.
Human
Integrated Solution
Project
Resources Client / Server System
Quality Open Systems
Management Workflow
Plant Industry
Maitenance Solutions
Components of Managerial
Accounting
Internal
Orders
Cost
Profitability
Element
Analysis
Acct
Activity
Controlling Based
(CO) Cost
Costing
Profit
Center Center
Acct Acct
Product
Cost
Controlling

Business Process Integration
FI CO MM PP SD
Rules
CO
FI
MM/PP
SD © SAP AG - University Alliances and

SAP CO Module
• 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)
© 2007 by SAP AG. All rights

reserved. SAP University Alliance.
January 2007 (v1.0) The Rushmore Group, LLC 36
CO

SAP CO Organizational Objects
• These objects represent the legal and/or
organizational views of an enterprise
• They form a framework that supports

business activities in the manner desired by
management
• They permit the accurate and organized

collection of business information
• They support the development and

presentation of relevant information in
order to enable and support business
decisions
38
SAP CO Organizational Objects
• Client
• Company Code
• Chart of Accounts
• Controlling Area
• Cost Center Group
• Cost Center
• Profit Center Group
• Profit Center
39
Organizational Structure
Client (620)
Chart of Global Bike Fiscal Year

Accounts (GL##) Inc. Variant (K1)
Credit Control Controlling

Area (GL00) Area (NA##)
Company
Code (US##)

CO
Master Data
CO

Cost Element Overview
• Cost Element Groups
• Cost Elements
• Primary Cost Elements
• Secondary Cost Elements
• Statistical Key Figures

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
Internal Order
Wages Utilities Materials
Settlement
© SAP AG - University Alliances and The Rushmore Group, LLC

January 2008 2007. All rights reserved. 43
Cost Elements (continued)
Financial
Controlling
Accounting
Total Cost Elements General Ledger Accounts
Income Balance
Statement Sheet
Secondary Cost Primary Cost Expense

Elements Elements Accounts
Revenue
Accounts
Statistical Key Figures
• 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 © SAP AG - University Alliances and
Statistical Key Figures
6 Hours Work Center
Cost
Center Maintenance
10 Hours
Activity Department
(20 Hours)
Information Services
4 Hours
Department

Primary Cost & Secondary Elements
Income Balance
Statement General Ledger Sheet
Account Account Posting Account
Rent Expense Acct. Payable

Debit Credit Debit Credit
1,500
1,500
Cost Primary Cost Element for

Center Rent Expense
A
Primary & Secondary Cost
Elements (cont.)
Income Balance
Statement General Ledger Sheet
Account Account Posting Account
Rent Expense Acct. Payable

Debit Credit Debit Credit
1,500
1,500
Cost CC 2
Center Secondary
A CC 3
Cost Element
CC 4 January 2008 48
Secondary Cost Elements
(continued)
Cost Center 2
Rent Expense
Debit Credit 1,750
1,500 Cost Center A
Cost Center 3
Supplies Expense 1,500
Debit Credit Sec. Cost Element
2,500 2,000
2,500
2,000
Labor Expense
Cost Center 4
Debit Credit
2,250
2,000
Allocation from CCA to CC2, CC3, and
CC4 is based on headcount: CC2: 7, 49
CC3, 8, and CC4: 9

CO

Cost Center Allocations
• 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?)

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.
52
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.
.
53
Posting Types of Cost Allocation (-
continued)
• Statistical Key Figures (SKFs) are used in the ERP system
to allocate costs from a service department to a user
department at the closing of a period. These cost drivers,
which are often referred to as tracing factors, are used in
allocation methods that do not involve the explicit
development of activity (transfer) prices.
54
Types of Allocations Cycles
 Distributions – primary cost elements
 Assessments – combination of primary
and/or secondary cost elements

Distribution Cycle
 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
56
Receiving
Distribution Cycle cost centers
Sending
cost center
Primary cost
element A005 – 400
maintains its D010 – 550 sq ft
sq ft
identity
A010 – Administration A010 – 600
Rent Expense Distribution sq ft
D005 – 900
$1,500 sq ft
A015 – 150
sq ft
A020 – 100
sq ft
S010 – 100 S005 – 200

sq ft sq ft
57
Distribution Cycle Receiving
cost centers
Sending
cost center
Primary cost
element A005 –
D010 – $200
maintains its $275
identity
A010 –
A010 – Administration
$300
Rent Expense Distribution D005 –
$1,500 $450
A015
A020 $75
$50
S010 – $50 S005 –
$100
58
Assessment Cycle
 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

Assessment Cycle Receiving
cost center
Sending
cost center
D010 – 10%
Primary and A005 – 15%
secondary
A020 – IT cost elements A010 – 5%
Software Expense D005 – 20%
$4,200 A015 – 10%
Assessment
A020 – IT A020 – 0%
Supplies Expense S010 – 10%
$500 S005 – 30%
60
Assessment Cycle Receiving
cost center
Sending
cost center
Primary and
secondary A005 – $705
cost elements D010 – $470
A020 – IT
Software Expense A010 – $235
$4,200 D005 – $940
Assessment A015 – $470
A020 – IT A020 –$0
Supplies Expense
$500 S010 – $470
S005 – $1,410
61
Lab 4-1 Exercises: (Due date 2/24/2016)
1 Process overview for cost center accounting process

2 Create cost centers
3 Create statistical figure
4 Create secondary cost elements
5 Create activity types
6 Create cost center group
7 Plan the number of employees
8 Plan activity output
9 Plan primary cost inputs
10 Plan internal activity inputs
11 Review planning
12 Create assessment
13. View assessment results
14 Price calculation of activity types
15 View price calculation results

Lab 4-2 Exercises: (Due date 2/24/2016)
1. Process overview for product costing
2. Create variant finished good for product costing
3. Create variant raw material for product costing
4. Create bill of material for product costing
5. Create routing for product costing
6. Create cost estimate
7. Mark price updates
8. View prices changes
9. Release price updates
10.View prices


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Controlling Management

EGN 5622 Enterprise Systems Integration

Concepts & Theories

• External accounting is called financial

• Internal accounting is often called

• Every cost is linked to an expense booked in the

• Cost elements are in turn assigned to cost

(CO) Transaction Cost Center

• Cost object is used to aggregate costs for some

• A cost element can be assigned to multiple cost

1. Cost Element Accounting

• Secondary cost elements are created in

• There are no secondary revenue

2) CCA module contains a variety of methods for

• Can be permanent or temporary (e.g., internal

• Operates as a collector and assignor of

• Responsible for cost containment, not responsible

• Cost centers may also be linked to a specific

• Activity types generally include different types of labor

• Measure of activity type quantity (e.g., hours worked),

• Allocation is based on an “activity (transfer) price” that

• Typical cost driver types: activity types and

• Cost center resources can allocate to business processes

• Each work center is connected to only one cost

• In internal activity allocation, the activity produced by the

• Internal orders support task-oriented planning,

• Profit centers are linked to cost centers

• Responsible for revenue generation and

SAP Module View

© SAP AG - University Alliances and

SD © SAP AG - University Alliances and

© 2007 by SAP AG. All rights

© SAP AG - University Alliances and

• They form a framework that supports

• They permit the accurate and organized

• They support the development and

Chart of Global Bike Fiscal Year

Credit Control Controlling

© SAP AG - University Alliances and

© SAP AG - University Alliances and

© SAP AG - University Alliances and

Total Primary Costs Total Secondary Costs

© SAP AG - University Alliances and The Rushmore Group, LLC

Total Cost Elements General Ledger Accounts

Secondary Cost Primary Cost Expense

• Utilized to support internal cost allocations

• Examples: number of employees,

6 Hours Work Center

© SAP AG - University Alliances and

Rent Expense Acct. Payable

Cost Primary Cost Element for

Rent Expense Acct. Payable

CC3, 8, and CC4: 9

© SAP AG - University Alliances and

© SAP AG - University Alliances and

• In Direct Reposting, an amount of money is allocated

© 2007 by SAP AG. All rights

S010 – 100 S005 – 200

© 2007 by SAP AG. All rights

1 Process overview for cost center accounting process

© SAP AG - University Alliances and The Rushmore Group, LLC

© SAP AG - University Alliances and The Rushmore Group, LLC

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