AC605 Profitability Analysis

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CO
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Cost Center Accounting

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Content developed by

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Ajay Maheshwari, India
B.com, CMA
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Course Prerequisites
Prerequisites
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SAP ECC Overview (recommended)

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Cost Management and Controlling

Basic knowledge and experience in cost accounting

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Good working knowledge of the Microsoft Windows
operating environment
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Course Goals
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This course will prepare you to:
 Understand why Controlling component of SAP is required

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 Understand SAP Enterprise Structure
 Set up a controlling area
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 Gain understanding of key business processes of SAP CO-OM
(Controlling - Overhead Management)
 Cost center accounting

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 Summary (key points)

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SAP Modules - Overview

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Overhead
Management
SD
Sales &
Distribution
FI
Financial
Accounting

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PP
Product
MM
Materials
Mgmt.

e s CO
Controlling
AM

h
Fixed Asset
Planning Mgmt.

QM
Quality
Mgmt.
SAP R/3
a PS
Project

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System
PM OC
Plant Maint. Office &
Comm.
HR

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IS
Human Industry
Resources Solutions

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Controlling -Overhead Management

 The Controlling - Overhead Management component (CO-OM) helps you to

a r i
plan, allocate, control, and monitor overhead in your organization
 By planning in overhead areas, you can develop standards, that allow you

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to control costs and valuate internal activities.
 Key components of CO-OM
– Cost Centre Accounting

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 Cost Center Accounting analyzes where overhead occurs within the organization
 Costs are assigned to the sub-areas of the organization where they originated.
 SAP offers a wide variety of methods for allocating posted amounts and quantities.

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– Internal Order Accounting
 Internal Orders collect and analyze costs based on individual internal jobs.

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 SAP can monitor and automatically check budgets assigned to each job.

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Scenario: P&L Account of ABC Ltd for Jan 20XX

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Finance P&L Account What information does this provide?
Salary
Wages
Electricity
6,000
25000
8000
60,000

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 ABC Ltd has incurred total expense of

s
Through FI-GL, we come to know of the
Depreciation
Travel
Others
10000
10000
1000

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individual heads of expenses like salary,
wages, dep, travel, etc

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 This does not tell us
What portion of expense has been incurred
by various functions like Mfg, Sales,
Purchase, Production, Accounts, etc

y M Assuming there was a budget of 50,000 –

The management does not know who has
spent more than the budget

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Total
a 60000

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The following slide explains what value does CO-OM add to an organization

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 Finance P&L Account
Salary 6,000
CO-OM ->
Salary
Mfg
2000
Mktg
3000
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Fin
1000
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Wages
Consumables
25000
8000
Wages
Consumables
Depreciation
10000
2000
5000

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7000
5000
2500
8000
1000
2500

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Depreciation 10000
Travel 10000 Travel 1000 7000 2000
Others 1000 Others

h e200 200 600

Total 60000
a 20200 24700 15100

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CO-OM (through cost center accounting) lets you know the expense incurred
by each responsibility area like Mfg, Mktg, Fin, etc

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Assuming there was a budget of 50000 divided between the 3 depts, we now

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know which dept has over exceeded their budget in respective heads of expense
(salary, wages, consumables, etc)

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SAP Enterprise Structure
Operating
Concern
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Controlling
Area

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Profit Profit
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Profit
Centers Centers Centers

Company
Codes
a
Company
Codes
Company
Codes

Cost Center

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Sales Organization

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Cost
CostCenter
Center

Aj Order Cost Object

Project
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Distribution Channel

Division
 …Continued

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 The operating concern is the highest reporting level within CO-PA; it defines the limit of
sales and marketing information that can be reported together from this module. One or

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more controlling areas are assigned to an operating concern when organizational structures
are defined. Often, corporations have only a single operating concern, which is
recommended for the sake of simplicity and convenience if all controlling areas and company
codes share the same fiscal calendar

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 The controlling area is an organizational unit delimiting the organization's independent cost
accounting operations (cost center accounting, profit center accounting, and order

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accounting). A controlling area can incorporate several company codes provided they share

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same Fiscal year & Chart of Accounts. It can also have multiple profit centers under it
 The company code is an independent accounting unit. The legal requirements of a balance
sheet or profit and loss statement are fulfilled on the company code level. Plants are

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assigned to company codes when organizational structures are defined.
 The profit center is an organizational unit responsible for its own revenues, expenses &

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assets. A profit center can cut across multiple company codes

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 The plant represents a production facility. It is the primary organizational unit in the SAP

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ECC Materials Management and Production Planning application components.

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Setting up Controlling area

Setting up a controlling area involves the following steps

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 Creating the controlling area
 Maintaining the controlling area

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 Maintaining the number ranges
 Maintaining the planning versions
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Each of these steps is explained in further slides followed by demo

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a
It is advisable to create a controlling area by copying from controlling area

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0001. This copies various control tables and reduces a lot of further tasks

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… Continued

Creating controlling area (Copy)

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h
choose the template “Controlling area / Company code”. This will copy the
w
 Controlling area can be copied only with reference to a template. Preferably,

controlling area as well as the company code

 After copying, you can change the parameters like name, description,

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currency, fiscal year, chart of accounts in the next step

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… Continued
Maintaining controlling area involves
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 Changing the name of the controlling area as desired
 Choosing the assignment control: This has an impact on the currency type

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– Controlling area same as company code (1:1)

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 This is used when there is only one company code in a controlling area
 The company code must use the same currency as controlling area
 System defaults currency type 10, which cant be changed.
– Cross company code cost accounting (1:n)

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 You can assign more than one company code to the controlling area, provided they
share same chart of accounts and fiscal year variant

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 If you choose currency type 10 – All the company codes must use same currency
 If you choose currency type 20/30 – The company codes can have a different currency
than controlling area
 Assigning the chart of account, fiscal year variant and a cost centre standard

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hierarchy

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… Continued
 Activating the components and control indicators
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– Here you activate the required components like cost centers (With activity type),
order management, commitment management, profit center accounting, projects
and sales orders (if need be)

h
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– COPA need not be activated here. It is activated while configuring COPA
– All currencies indicator: It is advisable to switch ON this indicator so that system

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updates the values not only in controlling area currency, but also in Object
currency and transaction currency
 Assignment of company codes

a
– Here you assign the various company codes under the controlling area

variant

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– As mentioned before, they must share the same chart of account and fiscal year

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… Continued

Maintaining number ranges

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 Here you maintain the number ranges for various business transactions.

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– In Controlling, each type of transaction is denoted by a business transaction. Eg:
COIN for Primary postings from FI

Copying. The number ranges are automatically copied

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 This step is not required when you are creating a controlling area by way of

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… Continued

Maintaining planning versions

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the basic version which records plan as well as actual.

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 Planning versions are required for planning expenses in CO-OM. Version 0 is

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 You can have other plan versions like V1, V2, V3, etc for having say, a rolling
plan every quarter. However, V0 is the basic version and ideally the planned

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expenses in V0 must not be changed

a
 In this step you assign the plan versions to your controlling area. To enable
actual postings in CO-OM, you must maintain V0 for the respective fiscal
years. Similarly, to be able to plan expenses in any version, it must be

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maintained for the respective fiscal year

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… Continued

 Important indicators while maintaining plan versions

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… Continued

 Important indicators while maintaining plan versions

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System Demo:

a r i
Area Demo

h wT Code
(s)
Configuration
Settings
Create and maintain controlling area
Maintain number ranges

e s OKKP
KANK
Maintain Plan versions

a h OKEQ

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CO-OM Processes

Master Planning Actual Period End

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Reporting
Data Posting Closing

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Cost Element
Cost Centre
Activity Type
Resource



Planning preparation
Cost Centre Planning
Internal Order Planning



Manual entries
SKF entry
Direct activity allocation


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s Reposting
Actual Cost distribution
Actual Cost Assessment
Cost Splitting



Plan Vs Actual
Actual Vs Actual
Budget Vs Actual

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 Plan cost distribution
 Statistical Key Figures  Calculate Actual Activity
 Plan cost assessment Prices
 Internal order

a
 Other Planning activities  Settlement of Overhead
 Groups Orders
 Manual Cost Allocation

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CO-OM Processes

Master Planning Actual Period End

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Reporting
Data Posting Closing

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Cost Element
Cost Centre
Activity Type
Resource



Planning preparation
Cost Centre Planning
Internal Order Planning



Manual entries
SKF entry
Direct activity allocation


e



s Reposting
Actual Cost distribution
Actual Cost Assessment
Cost Splitting



Plan Vs Actual
Actual Vs Actual
Budget Vs Actual

h
 Plan cost distribution
 Statistical Key Figures  Calculate Actual Activity
 Plan cost assessment Prices
 Internal order

a
 Other Planning activities  Settlement of Overhead
 Groups Orders
 Manual Cost Allocation

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Cost Element

Description
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 A cost element classifies the organization's valuated consumption of
production factors within a controlling area

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 Primary Element - costs that originate outside the company; relate directly to
the income statement in FI and must be included in the FI Chart of Accounts

a h
 Secondary Element - costs that result from internal allocation activities; NO
relation to G/L accounts in FI. These accounts are exclusively for cost
accounting and are only maintained in CO

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Cost Element Vs GL Account

Financial Controlling
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Accounting
•Cost Centre Accounting
Chart of Accounts Balance
Sheet
Accounts
•Internal Orders

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•Product Costing

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•Profitability Analysis
A
co ll pr
st
Inc lin lem ary
e
im

n ce
Adjustment
Accounts

h e om ked en
Ac
e S to ts
co tatem
un
t s e nt
B ala t
No Shee ts in
c oun ling
l
Income
a Primary

Cost Elements
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Ac ntro Statement Cost
Co Accounts Elements
ar y

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d
n nts
co
e me
•General Ledger S

a No t Ele ncial
Secondary
•Accounts Payable s

j Co Fina nting
•Accounts Receivable Cost
•Fixed Assets Elements In ou
c
•Treasury Ac

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Cost Centre

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Description
 Organizational unit within a controlling area that represents a defined location
of cost incurrence. The definition can be based on:
– Functional requirements

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– Allocation criteria
– Physical location

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– Responsibility for costs

a
 Defines the smallest area of responsibility within the company that causes

direct and indirect costs

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and influences costs; the lowest level to which you can meaningfully assign

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Cost Centre Standard Hierarchy

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Enterprise
A group
Company

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9101000 – Production Common

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ABC Ltd
Standard 9101011 – EG-
EG- 1 Plant
9100

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Hierarchy 9110000 – Finance
9111000 – Human Resources

PQR Ltd
9200

a h 9111001 – Housing Services

9111002 – Training Centre

XYZ Ltd
9300

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s t Ob
j e cts

No
d es

j a LMN Ltd
9400

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Activity Type

Description
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Labour hrs, machine hrs for a production cost centre

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Unit in a controlling area that classifies the activities performed in a cost centre, e.g.

 Used in activity allocation process

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Statistical Key Figure

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 Used to track quantities and values for various operating activities
 Designed to be used in reporting and allocation of costs


Eg: Head count in each dept to allocate admin related expenses
There are 2 types of SKFs

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–
– Total: Fresh SKF value must be entered each month

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Fixed : SKF value entered in one month remains static over an year

a
You can link SKF to LIS (Logistic Information System) for populating various LIS data
into SKF like actual Production, actual machine hrs consumed, etc

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Internal Order

Description
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marketing trade fairs, sales campaign, road shows, building an asset, etc

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 Used to plan, collect and settle the costs of internal jobs or temporary tasks like

 Internal orders are categorized as either:

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– Orders used purely to monitor objects within Cost Accounting (such as advertising, training, or
trade fair orders) and

house construction of an assembly line).

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– Productive orders that are value-added, that is, orders that can be capitalized (such as in-

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Groups

Description
a r i
OCM master data can be grouped together, for example
– Cost Centre Groups

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– Cost Element Groups
– Activity Type Groups

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– Statistical Key Figure groups
– Internal Order Groups

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 Master data groups are used in reporting, planning, allocation, etc.

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 You can divide complex groups into manageable sections by separating them
into sub-groups

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 You can create and maintain sub-groups separately and then combine them
in larger groups

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System Demo:

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Area Demo

h wT Code
(s)
Configuration
Settings
Creating standard hierarchy

e s OKEON

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CO-OM Processes

Master Planning Actual Period End

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Reporting
Data Posting Closing

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Cost Element
Cost Centre
Activity Type
Resource



Planning preparation
Cost Centre Planning
Internal Order Planning



Manual entries
SKF entry
Direct activity allocation


e



s Reposting
Actual Cost distribution
Actual Cost Assessment
Cost Splitting



Plan Vs Actual
Actual Vs Actual
Budget Vs Actual

h
 Plan cost distribution
 Statistical Key Figures  Calculate Actual Activity
 Plan cost assessment Prices
 Internal order

a
 Other Planning activities  Settlement of Overhead
 Groups Orders
 Manual Cost Allocation

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Cost center planning

a
 Cost center planning involves entering plan figures for costs, activities, prices
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or statistical key figures for a particular cost center and planning period.
 You can then determine the variances from these figures when you come to

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s
compare these plan values with the costs actually incurred and take
appropriate action

is a prerequisite for product costing

h e
 Cost center planning forms part of the overall business planning process, and

enter the plan figures.

 The standard planning layouts provided by SAP record the values in a
 To plan the costs, activites, SKF- you need a planning layout using which you

Controlling area currency.

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 If you need to enter the values in other currencies (comp code currency), you

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can create your planning layout and assign it to the planning profile. (A planning

a
profile is a cluster of various planning layouts and utilities)

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 You can enter the plan values manually, upload them through excel or using
tools like LSMW

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System Demo:

a r i
Area Demo

h wT Code
(s)
Configuration
Settings
Expense planning
Activity planning

e s KP06
KP26
SKF planning
Creating user defined plan layouts
Planner profile
a h KP46
KP65/75
KP34

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CO-OM Processes

Master Planning Actual Period End

a r i
Reporting
Data Posting Closing

h w




Cost Element
Cost Centre
Activity Type
Resource



Planning preparation
Cost Centre Planning
Internal Order Planning



Actual expense accounting 
SKF entry
Direct activity allocation

e



s Reposting
Actual Cost distribution
Actual Cost Assessment
Cost Splitting



Plan Vs Actual
Actual Vs Actual
Budget Vs Actual

h
 Plan cost distribution
 Statistical Key Figures  Calculate Actual Activity
 Plan cost assessment Prices
 Internal order

a
 Other Planning activities  Settlement of Overhead
 Groups Orders
 Manual Cost Allocation

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Actual expense postings

a r
 Actual cost entry enables you to capture the costs incurred by your company as they
i
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arise. This allows you to identify variances quickly and take appropriate action to deal
with them.

sh
 Actual cost entry involves transferring the primary costs recorded in Financial
Accounting (FI) to the Controlling (CO) application component. Once a GL account is
created as cost element, it becomes mandatory to enter a cost object (cost center /

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internal order) in the transaction
 Primary postings include the following key transactions
– Payroll
– Material Usage
– Travel
– Goods Receipt / Invoice receipt from vendors
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– Goods issue/ Invoice raised on customers
– Inter / Intra Accounting Journals
– Depreciation, etc

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CO
PA
Operating concern (9100 – A group)

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Profitability
segment
i EC -
PCA

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Profitability Analysis
Profitability Analysis
CO
CO

s
Product Cost
h

Profit Center Accounting

OM
OM Overhead Cost Controlling
Controlling
Cost centers Internal
orders

Internal Orders

h eCOarea
Controlling Production
(9100 – A group)
Order

a
Activity
types
Standard
Cost Estimate
CO
CEL Cost Element Accounting

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a
Financial Asset Revenues

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FI Accounting
Financial Expense Company Code (9100 A Ltd, 9200 A1 Ltd)
Accounting

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A HR Human
Resources
MM
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Materials
Materials
Management
Management
SD Sales and
S&D
Distribution
SKF Entry

 SKF can be manually entered in the system or they can be automatically

a r i
transferred from LIS

h w
 If admin related costs are to be allocated to each dept based on actual no of

s
employees each month, SKF for head count need to be entered for each dept

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Direct activity allocation

 A cost center might be providing service to various other cost centers

a r i
h w
 Direct activity allocation helps to account for the services provided by one cost
center to another. The “sender” cost center gets a credit and the “receiver”

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cost centers gets a debit for the services provided/consumed respectively
 This function can also be used between cost centers and other cost objects

h
like Internal orders, production orders, etc

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System Demo:

a r i
Area Demo

h wT Code
(s)
Configuration
Settings
SKF entry
Direct activity allocation

e s KB31N
KB21N

a h
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CO-OM Processes

Master Planning Actual Period End

a r i
Reporting
Data Posting Closing

h w




Cost Element
Cost Centre
Activity Type
Resource



Planning preparation
Cost Centre Planning
Internal Order Planning



Manual entries
SKF entry
Direct activity allocation


e



s Reposting
Actual Cost distribution
Actual Cost Assessment
Cost Splitting



Plan Vs Actual
Actual Vs Actual
Budget Vs Actual

h
 Plan cost distribution
 Statistical Key Figures  Calculate Actual Activity
 Plan cost assessment Prices
 Internal order

a
 Other Planning activities  Settlement of Overhead
 Groups Orders
 Manual Cost Allocation

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 A period end closing activity involves a series of steps for rectification, adjustments and
mutual settlements between cost centers/cost objects for services rendered to each other
 Reposting:
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correct cost center without making a fresh entry in FI again

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– If an expense has been accounted in a wrong cost center, it can be transferred with in CO, to the

– Note that reposting is meant to rectify the cost objects and not cost element (GL account). For
rectifying a GL account, you need a fresh journal entry in FI

e s
 Cost allocation: involves allocating the cost from one cost center to another cost object
(cost center, order, project, etc). Two important methods of allocation are

h
– Distribution: Where the allocations are made using original primary cost element (GL Account)

a
The sender cost centers is credited with the primary cost elements and the receiver cost centers
gets a debit with the same
The identity of the original cost element is retained throughout. However, it increases the no of line
items and taxes the database

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– Assessment: Where the allocations are made using secondary cost element
The sender cost centers is credited with a secondary cost elements and the receiver cost centers
gets a debit with the same

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a
The identity of the original cost element is not retained. This method is widely used because it
reduces the no of line items

40

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Note that distribution & assessment cycles are created separately for plan and actual allocations

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Distribution
Company General
Administration
Materials
Staff Salaries
60
120
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Debit:
Materials 100
Repairs Production Support

h
Staff Salaries 200 Materials 40

s
Repairs Staff Salaries 80
Travelling 12
Travelling 20 Repairs
Hotels 18

e
Hotels 30
Travelling 8
Total

Credit:
350
Total

a h 210
Hotels 12

Materials
Staff Salaries
Repairs
Travelling M
-100
-200

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-20
Total 140

a
Hotels -30
Identify of original cost element retained

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Total -350

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In sender & receiver
Assessment
Company General
Administration
Materials
Staff Salaries
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Debit:
Materials 100
Repairs Production Support

h
Staff Salaries 200 Materials

s
Repairs Staff Salaries
Travelling
Travelling 20 Repairs
Hotels

e
Hotels 30
General Overhead 210
Travelling
Total

Credit:
350
Total

a h 210
Hotels
General Overhead 140

General Overhead

y M-350 Total 140

j a
Total -350
original cost elements clubbed under single
secondary cost element

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System Demo:

a r i
Area Demo

h wT Code
(s)
Configuration
Settings
Creating an assessment cycle
Executing an assessment cycle

e s KSU1
KSU5
Creating a distribution cycle

a h KSV1

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Key Points

a r i
w
 Controlling module assists in tracking and analyzing the expenses per function,
location, etc


FI-GL feeds the controlling (CO) component of SAP with actual postings

sh
Secondary postings in CO are meant for allocations/apportionments with in the CO

e
objects

h
 Note the “assignment control” and its impact on currency type while maintaining
controlling area


Switch ON the “All currencies” indicator in controlling area

a
Note the importance of “value date” and “integrated planning” in plan version

M
maintenance
 Note the relevance of various price indicators (periodic, average, cumulative) in

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plan version maintenance

a
 Primary cost element Vs secondary cost element


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Distribution and assessment as the basis of allocations

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