Back to Basics: Primary Cost Elements 101
The accountants are talking about General Ledger accounts. The department managers are talking about cost elements.
What’s the difference?
As a follow up to Back to Basics: FI and CO 101 discussing the difference between FI and CO, a primary cost element is a master record in the CO module; it represents a P&L account (from FI), and is used in controlling processes (in CO). A primary cost element uses the same account number as its G/L counterpart.
When a posting is made to a P&L account, the system checks to see if a primary cost element exists. If so, it requires that a controlling object is entered. These controlling objects – including cost centers, projects, internal orders and production orders, to name a few – provide the capability of tracking the costs associated with these P&L accounts on a more detailed basis.
To illustrate this logic, the diagram below shows that if a posting is made to account 123, it has a corresponding cost element; therefore, the system requires a controlling object to be referenced, in this case project (WBS element) XYZ. If, instead, the posting is made to account 456, there is no primary cost element, and no controlling object is entered. Examples of P&L accounts for which cost elements are commonly created include resources that are used during manufacturing, such as salary expenses, material consumption accounts, and expense accounts for overhead costs such as utilities. Examples of P&L accounts that are not created as cost elements include the work in process offset account and manufacturing variance accounts that will be written off. (Note that the strategy of not creating variance accounts as cost elements may be different if you have implemented CO-PA, or profitabililty analysis – a topic for another time.)
You may want to limit which accounts/primary cost elements can post to particular controlling objects. The G/L account contains the field status group; the field status group determines which fields are open for entry. For P&L accounts with corresponding cost elements, you can define, by account, which controlling objects are available for posting. For example, some accounts used for product costing may only allow postings to (production) orders, while other accounts may allow postings to cost centers and to orders – and to projects.
For many financial entries, the controlling objects are entered manually during the creation of a journal entry. In logistics processes, such as production/product costing, the controlling object – such as a production order – is defaulted directly from the manufacturing processes. In this case, multiple documents are created:
- An inventory document to capture the material quantity posting.
- A financial journal entry to the inventory account on the balance sheet, and the material consumption account on the P&L.
- A CO document, which references the production order.
As a final point, when reporting on controlling processes, the source document is the CO document.