Controlling: definitions

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Controlling: helps us to manage the cost structure of company. It helps management make decisions related to controlling the costs of business.

We can perform certain functions or transactions such as Product costing, Cost Center Accounting, Profit Center Accounting and Profitability Analysis.

Some definitions on the basic components of controlling:

1.       Cost element refers to carrier of costs. Cost element accounting records and groups the costs incurred.

          Primary cost/Revenue element: is a cost carrier for transferring of costs from FI to Co module. Primary Cost  elements are closely related to the general ledger accounts used in Financial Accounting (FI). For e.g. material cost, personnel cost, energy cost. This helps to reconcile the values from Controlling and Financial Accounting.

Note: All cost & revenue transactions occurring directly or indirectly through cross module integration in FI will be carried to respective Cost object through primary cost element.

           Secondary cost element:  are cost carriers within CO module. Secondary cost element is used to allocate cost for internal cost allocation, overhead costs, settlement transactions  and assessment. Secondary cost element do not correspond to any G/L account in FI. So, when costs need to flow within CO module (for e.g. one cost center to another cost center) it is done using secondary cost element.

            Cost element categories determines which costs can be used for which business transactions

            Primary Cost element category

01 : Primary Cost/Cost-reducing revenues  : FI to CO posting of expenses

11: Revenues : FI to CO posting of revenues

90 : Cost Elements for balance sheet accounts in FI : Budget checking for capital procurement

             Secondary Cost Element category:

21: Internal Settlement : Cost object to Cost object settlement within CO

31: Order/Project related analysis : WIP calculation for production orders & Project System

41: Overhead rates : Overhead cost sheet

42: Assessment : Allocation cycle in CO (cost center)

43 : Internal Activity Allocation: Used in Activity Allocation to Production Orders

2.       Cost centers refers to units or divisions within a company where costs are incurred. For e.g. R&D, marketing, production, customer service.

Helps in evaluation of expenses incurred while performing the production operation w.r.to cost centers (there could be direct costs and indirect costs) . Cost Center Accounting lets you analyze the overhead costs according to where they were incurred within the organization.

Dividing an organization into cost centers allows you to follow several goals, depending on the cost accounting method.

• Assigning costs to cost centers lets you determine where costs are incurred within the organization.
• If you plan costs at cost center level, you can check cost efficiency at the point where costs are incurred.

Hierarchy Structure can be created consisting of Cost Center groups or Cost Centers .

For e.g. the cost incurred for electricity component is recorded in the electricity cost element . However, when you want the total cost of all elements – salary, telephone, electricity, stationary incurred by a business unit such as production would come under the cost center component using the code for that cost center.

3. Product Costing refers to product costs i.e. costs occurred during manufacture of a product.

   e.g.  Total Cost of the product = cost of material + operational cost + Overheads (%)  + any additive costs.

4. Profit centers refers to organization unit used for evaluating profit/loss , used for internal controlling purposes. Helps in evaluating the Revenue generated along with expenses w.r.to profit centers. Every profit center is assigned to the organizational unit Controlling area. You can analyze operating results for profit centers using either the cost-of-sales or the period accounting approach.

Profit Center Accounting lets you set up your profit centers according to product (product lines, divisions), geographical factors (regions, offices or production sites) or function (production, sales).

A cost center represent the unit where costs arises but profit center represents both costs and revenues.

5. Controlling area : organization unit within a company for cost accounting purposes. Can have one or  more than company codes in it. These company codes must use the same operative chart of accounts.

The link between FI (financial) and CO (controlling) is established through the assignment of Company Codes to the controlling area. The Controlling Area consists of Cost Centers and Profit Centers.

6. Internal Orders: enables to plan, track and calculate the cost of performing a specific task – displaying a product in a trade fair or advertising the product. The cost incurred to perform these task is settled through internal orders.

7. Operating Concern: is a sales structure defined by the company to calculate the revenues of company. The Sales structure consists of the Sales organization, product, customer, price and location. You can assign one or more controlling areas toan operating concern. So, when you do profitability analysis, you need to refer to company code and sales structure-operating concern w.r.to the organization structure component.

Cost Center Accounting	Company code and Controlling Area	Cost element code and Cost Center code
Product Costing	Company code and Controlling Area	Cost Center Code
Profit Center Accounting	Company code and Controlling Area	Profit Center code
Profitability Analysis	Company code and Operating Concern

8. Activity type: A unit in a controlling area that classifies the activities performed in a cost center. Example Activity types in production cost centers are machine hours or finished units or no. of employees.

9.Statistical key figures:  This is for Reporting and analysis purpose for e.g. no. of seats, area sq mt to get Profit per sq mt.

10. Master Data: Can maintain records in master databases w.r.to profit centers. Can maintain information on cost elements, cost element groups, cost centers, standard hierarchy.

11. Planning : We can evaluate plan and actual data(i.e. variances) at the cost center level or at the profit center level. These variance calculations enable you to control business flows.

Navigation Path:

Sap Screen  > Accounting > Controlling > Cost Element Accounting, Cost Center Accounting, Product Cost Controlling, Profit Center Accounting

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