Controlling Management
EGN 5622
Enterprise Systems Integration
Spring, 2015
Controlling Management
Concepts & Theories
FI (Financial Accounting (FI) and
Controlling Accounting (CO)
• Most companies divide their accounting
function into 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
◦ Balance Sheet
◦ Profit & Loss Statement


Legal Requirements
Standards
Cost Element Accounting
 Cost Center Accounting
 Internal Orders
 Profit Center Accounting
 Product Costing
 Profitability Analysis
 ABC
 Different Valuations
 Flexibility

January 2008
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4
Comparative Reporting
Liquidity
Calculation
Financial Accounting (FI)
Balance
Sheet
External
Reporting
Managerial Accounting (CO)
Product
Costs
Reports
Internal
Reporting
January 2008
Retained
Earnings
Report
Income
Statement
Cost
Center
Reports
Profit
Center
Reports
Profit
Margin
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5
Controlling Accounting
• Objective of controlling accounting is
how to cut cost and add value.
• Controlling accounting:
Process of identifying, measuring,
analyzing, and communicating
information in pursuit of an organizations
goals.
6
Controlling (CO) - continued
•
Controlling accounting:
designed to collect the transactional
data for preparing internal reports that
support decision-making.
•
Internal reports include:
1)
2)
3)
Cost center performance
Profit center performance
Budgets analyses
7
Fundamentals of Cost Management
•
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.
•
Internal (cost management) accounting
system and the external (financial) accounting
system are fully integrated.
8
Interrelated and Closely
Connected FI & CO
(FI) Transaction
Document
Amount
G/L Account #
Cost Center
1900012432
(CO) Transaction
Document
Cost Center
Cost Element
20000657
Income Statement
Supplies Exp.
Bank
100
Bal. Sheet
100
Financial Accounting
Cost Center
100
Controlling
January 2008
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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
appear in all
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cost centers.
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10
Target Audience
1.
2.
3.
4.
5.
Executives
Senior Management
Department Managers
Controllers
Cost Accountants
11
Controlling Accounting Terminology
Controlling Area
1.
A self-contained, organizational element serves to broadly
define a managerial accounting and reporting system.
2.
A controlling area is the highest level organizational entity
within the Control module in which cost and profit
analysis takes place (except for PA analysis which takes
place within an operating concern)
A controlling area may include one or more company
codes; therefore, an enterprise can perform management
accounting analyses and reports across several
companies
Each company code can be assigned to one and only
one controlling area
A way to identify and track where revenues and costs are
incurred for evaluation purposes
3.
4.
5.
12
Controlling Accounting Terminology
Controlling Area (- continue)
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
7.
Internal financial (controlling) reporting and
analysis focuses on measuring the cost or profit
results of components of a controlling area, such
as cost centers or profit centers.
13
Subcomponents of Controlling
Accounting
1.
2.
3.
4.
Cost Element Accounting
Cost Center accounting
Internal Orders, and
Profit Center Accounting
14
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
15
Cost Element Accounting
1.2 Primary Cost and Revenue Element
•
Primary cost and revenue elements are created
in the FI module and are used both in the FI
and CO modules to account for cost and
revenue flows with parties external to the
organization.
•
Both flows are first recorded in FI and then
transferred automatically to a cost object or
revenue object within the CO module (e.g., cost
center, internal order, profitability segment, etc.).
16
Cost Element Accounting
1.3 Secondary Cost Element
•
Secondary cost elements are created in
the CO module 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.
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
identify and track where costs are incurred for
evaluation purposes
Responsible for cost containment, not responsible
for revenue generation
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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. Cost Center Accounting
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. Cost Center Accounting
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
2. Cost Center Accounting
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, or it may be calculated
automatically using an iterative routine that explicitly
takes into account “cross allocations” (i.e., allocations
back and forth among two or more cost centers).
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.
•
Most companies use direct labor-hours or
indirect labor cost as the allocation base for
manufacturing overhead,
•
Typical cost driver types: activity types and
statistical key figures, such square feet or head
count.
24
2. Cost Center Accounting
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
standard cost, future cost, tax cost, or commercial cost
estimate. These estimates may be used for a variety of
purposes, including product pricing, production planning
and control, inventory valuation, and income measurement
(cost of goods sold).
•
Product cost is developed after the material is defined, a
bill of materials is created, and a routing is determined..
25
2. Cost Center Accounting
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
that cut across areas of responsibility within an
organization. The costs assigned to a business process can
in turn be allocated to those cost objects (products,
services, customers, etc.) that utilize the business process.
•
Cost center resources can allocate to business processes
based on their true utilization of activities.
26
2. Cost Center Accounting
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
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.
28
Internal Order (- contimued)
•
Temporary cost center responsible for cost
containment, not responsible for revenue
generation
•
It is used to plan, collect, and monitor the
costs associated with a distinct short-term
event, activity, or project
•
•
•
Company picnic
Trade show
Recruiting campaign
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.
30
4. Profit Center Accounting
4.1 Profit Center
•
•
•
Profit centers are similar to business areas, in the
sense that they are set up for internal reporting
purposes. Profit centers, however, are formally defined
as components of a controlling area, not as
components of one or more company codes.
Income statements may be created for profit centers,
and selected assets may also be reported for profit
centers, but not complete balance sheets (which can be
done for business areas).
Profit centers are linked to cost centers with one-to-one
or one-to-many relationship.
31
Profit Center (- continued)
•
Responsible for revenue generation and
cost containment
•
Evaluated on profit or return on
investment
•
Enterprises are commonly divided into
profit centers based on
•
•
•
Region
Function
Product
32
Profit Center (- continued)
•
Profit centers generally involve subdivisions of
companies that are set up for internal planning
and control purposes.
•
Taken together, all profit centers within a
controlling area constitute the “standard profit
center hierarchy.”
•
(There is one and only one standard profit center
hierarchy for a controlling area.)
33
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.
•
This provides great flexibility in defining, both the market
characteristics that are of interest to managers, and the
related performance measures (e.g., gross margin,
contribution margin, segment margin) that managers use
to evaluate market segments.
34
Controlling Management
SAP Implementation
Controlling (CO)
SAP Module View
Financial
Accounting
Sales &
Distribution
Materials
Mgmt.
Controlling
R/3
Production
Planning
Human
Resources
Quality
Management
Plant
Maitenance
Fixed Assets
Mgmt.
Integrated Solution
Client / Server
Open Systems
Project
System
Workflow
Industry
Solutions
Components of Managerial
Accounting
Internal
Orders
Cost
Element
Acct
Controlling
(CO)
Cost
Center
Acct
Profitability
Analysis
Activity
Based
Costing
Product
Cost
Controlling
January 2008
Profit
Center
Acct
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Business Process Integration
FI CO MM PP SD
Rules
CO
FI
MM/PP
SD
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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)
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Business Process Integration
CO
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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
41
SAP CO Organizational Objects
•
•
•
•
•
•
•
•
Client
Company Code
Chart of Accounts
Controlling Area
Cost Center Group
Cost Center
Profit Center Group
Profit Center
42
Organizational Structure
Client 570
Chart of
Accounts
Global Bike
Inc.
Credit Control
Area
Fiscal Year
Variant
Controlling
Area
Company
Code
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Business Process Integration
CO
Master Data
CO
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Cost Element Overview
•
•
•
•
•
Cost Element Groups
Cost Elements
Primary Cost Elements
Secondary Cost Elements
Statistical Key Figures
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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
Utilities
Internal Order
Settlement
Wages
January 2008
Materials
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2007. All rights reserved.
46
Cost Elements (continued)
Controlling
Financial
Accounting
Total Cost Elements
General Ledger Accounts
Income
Statement
Secondary Cost
Elements
Primary Cost
Elements
Balance
Sheet
Expense
Accounts
Revenue
Accounts
January 2008
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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
January 2008
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Statistical Key Figures
Cost
Center
Activity
(20 Hours)
6 Hours
Work Center
10 Hours
Maintenance
Department
4 Hours
Information Services
Department
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Primary Cost & Secondary Elements
Income
Statement
Account
General Ledger
Account Posting
Rent Expense
Debit Credit
Balance
Sheet
Account
Acct. Payable
Debit Credit
1,500
1,500
Cost
Center
A
Primary Cost Element for
Rent Expense
January 2008
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Primary & Secondary Cost
Elements (cont.)
Income
Statement
Account
General Ledger
Account Posting
Balance
Sheet
Account
Rent Expense
Acct. Payable
Debit
Debit
Credit
Credit
1,500
1,500
Cost
Center
A
CC 2
CC 3
Secondary
Cost Element
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Secondary Cost Elements
(continued)
Cost Center 2
Rent Expense
Debit
Credit
1,500
Cost Center A
Supplies Expense
Debit
1,750
Credit
2,500
Cost Center 3
1,500
Sec. Cost Element
2,500
2,000
Cost Center 4
Labor Expense
Debit
2,000
Credit
2,250
2,000
Allocation from CCA to CC2, CC3, and
CC4 is based on headcount: CC2: 7,
CC3, 8, and CC4: 9
52
Business Process Integration
CO
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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?)
January 2008
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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.
55
Cost Accounting Allocation
Posting Types of Cost Allocation (continued)
•
In Percentage Allocation, the amount that is to be
allocated is split up among multiple cost centers based on
a predetermined percentage. For instance, assume that
there are two services, and 70% of the cost is to be
assigned to one service, while 30% is assigned to the
other. In addition, the total costs to be allocated equal
$2,500. Because the first service is to be allocated 70% of
the cost, it will be allocated $1750. Likewise, the second
service which is to be allocated 30% of the cost will be
allocated for the remaining $750.
.
56
Cost Accounting Allocation
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. Nevertheless, the
allocation approach is quite similar. A lump sum amount
associated with the service department is allocated to a user
department in proportion to the relative amounts of the SKF
associated with each receiver.
57
Types of Allocations Cycles
Distributions – primary cost elements
 Assessments – combination of primary
and/or secondary cost elements

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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

January 2007 (v1.0)
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Receiving
cost centers
Distribution Cycle
Sending
cost center
Primary cost
element
maintains its
identity
A010 – Administration
Rent Expense
$1,500
Distribution
D010 – 550
sq ft
D005 – 900
sq ft
A005 – 400
sq ft
A010 – 600
sq ft
A015 – 150
sq ft
A020 – 100
sq ft
S010 – 100
sq ft
January 2007 (v1.0)
S005 – 200
sq ft
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Distribution Cycle
Receiving
cost centers
Sending
cost center
Primary cost
element
maintains its
identity
A010 – Administration
Rent Expense
$1,500
Distribution
D010 –
$275
D005 –
$450
S010 – $50
January 2007 (v1.0)
A005 –
$200
A010 –
$300
A015
A020 $75
$50
S005 –
$100
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61
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

January 2007 (v1.0)
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reserved. SAP University Alliance.
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62
Assessment Cycle
Receiving
cost center
Sending
cost center
A020 – IT
Software Expense
$4,200
A020 – IT
Supplies Expense
$500
Primary and
secondary
cost elements
D010 – 10%
A005 – 15%
A010 – 5%
D005 – 20%
A015 – 10%
Assessment
A020 – 0%
S010 – 10%
January 2007 (v1.0)
S005 – 30%
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63
Assessment Cycle
Sending
cost center
A020 – IT
Software Expense
$4,200
A020 – IT
Supplies Expense
$500
Primary and
secondary
cost elements
Receiving
cost center
A005 – $705
D010 – $470
D005 – $940
A010 – $235
A015 – $470
Assessment
A020 –$0
S010 – $470
January 2007 (v1.0)
S005 – $1,410
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64
Exercises:
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
(Due date 2/20/2015)
Process overview for cost center accounting process
Create cost centers
Create statistical figure
Create secondary cost elements
Create activity types
Create cost center group
Plan the number of employees
Plan activity output
Plan primary cost inputs
Plan internal activity inputs
Review planning
Create assessment
View assessment results
Price calculation of activity types
View price calculation results
January 2008
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2007. All rights reserved.
65