controlling management egn 5622 enterprise systems integration spring, 2015 controlling management...

Controlling ManagementControlling Management

EGN 5622 Enterprise Systems Integration EGN 5622 Enterprise Systems Integration

Spring, 2015Spring, 2015


Concepts &Concepts & Theories Theories

33

FI (Financial Accounting (FI) and FI (Financial Accounting (FI) and Controlling Accounting (CO) 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.

January 2008January 2008

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Comparison between FI & CO Comparison between FI & CO

Controlling AccountingCost Element AccountingCost Center AccountingInternal OrdersProfit Center AccountingProduct CostingProfitability AnalysisABC Different ValuationsFlexibility

Financial AccountingExternal Accounting

◦ Balance Sheet◦ Profit & Loss Statement

Legal RequirementsStandards



Comparative ReportingComparative Reporting

Financial Accounting (FI)

External Reporting

Managerial Accounting (CO)ProductCostsReports

Internal Reporting

CostCenterReports

ProfitCenterReports

ProfitMargin

RetainedEarningsReport

LiquidityCalculation

Income Statement

BalanceSheet

66

Controlling Accounting 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.

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Controlling (CO) - continuedControlling (CO) - continued• Controlling accounting:

designed to collect the transactional data for preparing internal reports

that support decision-making.

• Internal reports include:1) Cost center performance2) Profit center performance3) Budgets analyses

88

Fundamentals of Cost ManagementFundamentals 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.



Income Statement Bal. Sheet

Financial Accounting

(FI) TransactionDocumentAmountG/L Account #Cost Center1900012432

(CO) Transaction DocumentCost Center Cost Element20000657 Controlling

100100

BankSupplies Exp.

Cost Center

100

Interrelated and Closely Interrelated and Closely Connected FI & COConnected FI & CO



Fundamentals of Cost ManagementFundamentals 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 cost centers.

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Target AudienceTarget Audience

1. Executives2. Senior Management3. Department Managers4. Controllers5. Cost Accountants

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Controlling Accounting TerminologyControlling Accounting Terminology

Controlling Area1. 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)

3. A controlling area may include one or more company codes; therefore, an enterprise can perform management accounting analyses and reports across several companies

4. Each company code can be assigned to one and only one controlling area

5. A way to identify and track where revenues and costs are incurred for evaluation purposes

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Controlling Accounting TerminologyControlling 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.

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Subcomponents of Controlling Subcomponents of Controlling AccountingAccounting

1. Cost Element Accounting2. Cost Center accounting3. Internal Orders, and 4. Profit Center Accounting

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1. Cost Element Accounting1. Cost Element Accounting1.1 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

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Cost Element Accounting 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.).

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Cost Element Accounting 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.

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2. Cost Center Accounting (CCA)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.).


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2. 2. Cost Center Accounting Cost Center Accounting 2.1 Cost Centers2.1 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)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).

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2. Cost Center Accounting 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.

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2. Cost Center Accounting 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.).

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2. Cost Center Accounting 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).

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2.Cost Center Accounting 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.

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2. Cost Center Accounting 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..

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2. Cost Center Accounting 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.

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2. Cost Center Accounting 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.

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3. Internal Order3. 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.

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Internal Order (- contimued)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

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4. Profit Center Accounting 4. Profit Center Accounting (PCA)(PCA)

Profit center accounting is used to analyze income and expenditure for profit centers that represent an independent subunit within an organization.

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4. Profit Center Accounting 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.

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Profit Center (- continued)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

3333

Profit Center (- continued) 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.)

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4. Profit Center Accounting4. 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.


SAP Implementation SAP Implementation

R/3

SAP Module ViewSAP Module View

Integrated SolutionClient / Server

Open Systems

FinancialAccounting

Controlling

Fixed AssetsMgmt.

ProjectSystem

Workflow

IndustrySolutions

ProductionPlanning

Sales &Distribution

MaterialsMgmt.

PlantMaitenance

QualityManagement

Human Resources

Controlling (CO)



Components of Managerial Components of Managerial AccountingAccounting

Controlling(CO)

CostElementAcct

CostCenterAcct

ProductCostControlling

InternalOrders

ActivityBasedCosting

ProfitCenterAcct

ProfitabilityAnalysis



Business Process IntegrationBusiness Process Integration

FI

MM/PP

SD

Org

Dat

a

Rules

FI

MM/PP

SD

Master D

ata

FI

MM/PP

SD

FI SDMMCO PP

COCO

CO

January 2007 (v1.0)January 2007 (v1.0)

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SAP CO ModuleSAP 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)




Org

Dat

a

CO

CO

4141

SAP CO Organizational ObjectsSAP 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

4242

SAP CO Organizational ObjectsSAP CO Organizational Objects• Client• Company Code • Chart of Accounts• Controlling Area• Cost Center Group• Cost Center• Profit Center Group• Profit Center



Client 570

Credit ControlArea

CompanyCode

Fiscal YearVariant

Chart ofAccounts

Global Bike Inc.

ControllingArea

Organizational Structure




Ma

ste

r Data

CO

CO



Cost Element OverviewCost Element Overview

• Cost Element Groups• Cost Elements• Primary Cost Elements• Secondary Cost Elements • Statistical Key Figures

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Cost Element GroupsCost Element Groups• Logical groupings of primary and

secondary cost elements• Facilitates reporting, planning, and

allocating costs

Total Costs

Total Primary Costs Total Secondary Costs

Wages Utilities MaterialsInternal Order

Settlement



Cost Elements (continued)

FinancialAccounting

General Ledger Accounts

RevenueAccounts

BalanceSheet

Income Statement

ExpenseAccounts

Controlling

Total Cost Elements

Primary CostElements

Secondary CostElements



Statistical Key FiguresStatistical 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



Cost CenterActivity

(20 Hours)

10 Hours

6 Hours

4 Hours

Work Center

MaintenanceDepartment

Information ServicesDepartment

Statistical Key Figures



Primary Cost Element for Rent Expense

Income BalanceStatement Sheet

Account AccountGeneral LedgerAccount Posting

Debit Credit

1,500

CostCenter

A

Primary Cost & Secondary Elements

Debit Credit

1,500

Rent Expense Acct. Payable



Secondary Cost Element

Income BalanceStatement Sheet Account Account

General LedgerAccount Posting

Debit Credit

1,500

CostCenter

A

Primary & Secondary Cost Elements (cont.)

Debit Credit

1,500

Rent Expense Acct. Payable

CC 2

CC 3

5252

Debit Credit

1,500

Rent Expense

Debit Credit

2,500

Supplies Expense

Debit Credit

2,000

Labor Expense

1,500

2,500

2,000

1,750

2,000

2,250

Primary Cost Element



Sec. Cost

Element

Sec. Cost Element

Sec. Cost Element

Cost Center A

Cost Center 2

Cost Center 4

Cost Center 3

Secondary Cost Elements (continued)

Allocation from CCA to CC2, CC3, and CC4 is based on headcount: CC2: 7, CC3, 8, and CC4: 9




CO



Cost Center AllocationsCost 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?)

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Cost Accounting AllocationCost 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.

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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.

.

5757


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.



Types of Allocations CyclesTypes of Allocations CyclesDistributions – primary cost elementsAssessments – combination of primary

and/or secondary cost elements



Distribution CycleDistribution CycleMethod for periodically allocating primary

cost elementsPrimary 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



A010 – 600 sq ft

A005 – 400 sq ftD010 – 550

sq ft

D005 – 900 sq ft

S010 – 100 sq ft

S005 – 200 sq ft

A020 – 100 sq ft

A015 – 150 sq ft

Sendingcost center

Primary cost elementmaintains its identity

Receivingcost centersDistribution Cycle

A010 – AdministrationRent Expense$1,500

Distribution



A015 $75A020

$50S005 – $100

S010 – $50

A010 – $300

D005 – $450

D010 – $275

A005 – $200

A010 – AdministrationRent Expense$1,500

Distribution

Sendingcost center

Primary cost elementmaintains its identity

Receivingcost centersDistribution CycleDistribution Cycle



Assessment CycleAssessment CycleA method of allocating both primary and

secondary cost elementsPrimary 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



A020 – 0%

A005 – 15%

A010 – 5%

A015 – 10%

S005 – 30%S010 – 10%

D005 – 20%

D010 – 10%

A020 – ITSoftware Expense$4,200

A020 – ITSupplies Expense$500

Assessment

Sendingcost center

Primary and secondary cost elements

Receiving cost centerAssessment CycleAssessment Cycle



S010 – $470

D010 – $470A005 – $705

A010 – $235

A015 – $470

A020 –$0

S005 – $1,410

D005 – $940

A020 – ITSoftware Expense$4,200

A020 – ITSupplies Expense$500

Sendingcost center

Primary and secondary cost elements

Receiving cost center

Assessment

Assessment CycleAssessment Cycle

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1 Process overview for cost center accounting process2 Create cost centers3 Create statistical figure4 Create secondary cost elements5 Create activity types6 Create cost center group7 Plan the number of employees8 Plan activity output9 Plan primary cost inputs10 Plan internal activity inputs11 Review planning12 Create assessment13 View assessment results14 Price calculation of activity types15 View price calculation results

Exercises: Exercises: (Due date 2/20/2015)(Due date 2/20/2015)

controlling management egn 5622 enterprise systems integration spring, 2015 controlling management...

Documents

internal accounting

accounting function

cost center1900012432

cost center100interrelated

cost elements

managerial accounting

fi financial accounting

rushmore group