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Author's profile photo Birgit Starmanns

Back to Basics: Secondary Cost Elements 101

How do you move costs between controlling objects in SAP, for example between cost centers, or from a cost center to a production order?

In most legacy systems, costs would be moved between cost centers by posting a financial journal entry. Instead, in SAP, we have a separation between FI and CO in SAP ERP that I described in my Back to Basics: FI and CO 101 blog. Primary cost elements mirror the P&L accounts for which you want to track costs at a more detailed level, as I showed in my Back to Basics: Primary Cost Elements 101.

When costs are moved between controlling objects in SAP, a document is posted only within the CO module, not in FI.

How? Enter the secondary cost element.

A secondary cost element represents postings that occur between controlling objects within CO. A secondary cost element is essentially an account that exists only in the CO module, not in FI. When costs are moved (e.g., from one cost center to another using an assessment, or from a cost center to a production order), no postings are made to the FI P&L. Instead, a secondary cost element is used to track that posting in a CO document.

It is up to each individual company to decide to what level of detail these CO postings should be posted. The diagram below illustrates a common design used by many companies. While it is possible to create only very few secondary cost elements to allow allocations to take place, most companies want tracability to reflect a certain amount of detail in their allocations to identify the source of these postings. For that reason, multiple secondary cost elements are typically created, which allow tracking on a more detailed level in CO reporting.

There is no direct mapping between the primary cost elements and secondary cost elements. The dotted line in the diagram below indicates that there is logic, but it is defined in the set-up of the type of allocation taking place.

To name only a few examples:

  • For allocations between cost centers using assessments, the secondary cost element is defined in the assessment cycle, or in an allocation structure, that maps the source cost element(s) to the assessment cost element(s). This is the example shown in the diagram below.
  • For activities that are posted from a production cost center to a production order, secondary cost elements reflect the differnt activities that take place during the manufacturing process. The activity type master record contains the secondary cost element used for posting. If desired, the activities can be tracked by different secondary cost elements, including labor time, machine time, and set-up time.
  • For applying overhead, the secondary cost elements are defined in a costing sheet; if desired, different secondary cost elements reflect the different types of overhead, such as material overhead, labor overhead, and administrative overhead.

 

The diagram above shows a very simple example to illustrate the difference  between primary and secondary cost elements. A debit of $50 is made to P&L account (and primary cost element) 123, which is posted to cost center AB. A second debit is made to P&L account (and primary cost element) 901, which is also posted to cost center AB.

As part of a month-end assessment, the total amount, $100, is assessed out to two different cost centers; the allocation can be based on data captured for the receiving cost centers, such as direct costs or the usage of a resource. While the same secondary cost element can be used, in our example, we will use a different secondary cost element for tracability.

Let’s look at the posting to cost center AB. For different primary cost elements, a different rule can be used for the allocation out of AB to cost centers CD and XY. For costs originally posted with primary cost element 123, cost centers CD and XY each receive $25; the secondary cost element 623 traces this allocation. For primary cost element 901, cost center CD receives $40, while cost center XY receives $10; the secondary cost element 601 captures this allocation. From a G/L standpoint, the P&L accounts 123 and 901 still contain the original expense of $50 each.

And as with any rule, there is always an exception. You can retain the original primary cost element if you use a special type of allocation, a “distribution,” to move costs from an originating cost center to one or more receiving cost centers. The distribution is captured in a CO document, a journal entry in FI is still not necessary.

Ultimately, the design of how you choose to use secondary cost elements can be as simple, or as complex, as you need in order to gain enough visibility to manage your costs. 

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      Author's profile photo Former Member
      Former Member
      Thanks Birgit for posting this great blog series - I look forward to future posts!
      Author's profile photo Birgit Starmanns
      Birgit Starmanns
      Blog Post Author
      Thank you, Jim, I'm glad you're enjoying them!
      Author's profile photo ANANDAKRISHNAN KRISHNAN
      ANANDAKRISHNAN KRISHNAN

      THANKS MAM ..FOR YOUR DETAILED EXPLANATION

       

      Author's profile photo Former Member
      Former Member
      Birgit,

      great series!

      upgrading to the New GL and having a closer look at FAGLFLEXA table brings these CO-centric "accounts" to a new level as the COFI integration may or may not allow for the management view to be reflected in the financial books of record for reporting purposes. CO-OM becomes more and more complex with the size of the organization and puts assessments on the critical path of the financial close.

      @greg_not_so

      Author's profile photo Birgit Starmanns
      Birgit Starmanns
      Blog Post Author
      Thank you, Greg!

      I think there will always be a place for CO-OM, since the allocation base for indirect costs are often hot topics in an organization!

      Best,
      *Birgit

      Author's profile photo Former Member
      Former Member

      Very good blog Birgit.  Is it possible to post Overhead Costs (Secondary Cost Element Type 41) from an Order to a Cost Center as part of a month-end process?

      I have investigated Reposting and Distribution (neither handles secondary cost elements) as well as Assessment (does not handle Order as a Sender) and none seem to fit this requirement.

      Thank you for any input you can offer.

      Author's profile photo Former Member
      Former Member

      Thanks Birgit for the explanation.

      Very Good Blog....

      Author's profile photo Anna Katarzyna Szczepaniak
      Anna Katarzyna Szczepaniak

      Hi Brigit,

      Maybe you have met the topic I am searching.


      movement 309 or 413 product on sales order stock - not moving cost elements

      Problem is that company have stock on sales order level, but when making posting between materials on customer stock level, then cost element from standard price are not moved to second material. Variances from pices are shared between cost element but standard price have no cost elements details.

      Any idea?

      regards

      Author's profile photo Former Member
      Former Member

      This is the best & simplest every article to explain primary & secondary cost elements. Thanks a ton. Diagram explanation nails it. Brilliant.

      Author's profile photo Birgit Starmanns
      Birgit Starmanns
      Blog Post Author

      Thank you so much, I'm glad you found it valuable!

      Author's profile photo Raj A
      Raj A

      Hi Brigit,

      Thank you for your valuable time and the information you have shared here. I am reading this document more than few times . Today I understood how exactly the primary and the secondary cost element co-related. Thank you so much.

      Kind regards,

      Raj

      Author's profile photo Reshma Sawant
      Reshma Sawant

      So wonderful explanation.. Thank you after 11 Years its still valid.

      Author's profile photo Jeff Lu
      Jeff Lu

      always impressive blog and always appreciated great sharing !!!

       

      thanks a ton,Birgit