Controlling Management EGN 5622 Enterprise Systems Integration Fall, 2015 Controlling Management EGN 5622 Enterprise Systems Integration Fall, 2015

Controlling ManagementControlling Management

EGN 5622 Enterprise Systems Integration EGN 5622 Enterprise Systems Integration

Fall, 2015Fall, 2015


Concepts &Concepts & Theories Theories

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

• Accounting function can be divided into two: internal and external.

• External accounting is called financial accounting, and

• Internal accounting is often called controlling accounting or managerial accounting.

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Comparison between FI & CO Comparison between FI & CO Controlling Accounting Internal Accounting not required by law Flexible

Objective of controlling accounting is how to cut cost and add value.

Process of identifying, measuring, analyzing, and communicating information for organizations goals.

Financial Accounting External Accounting

◦ Balance Sheet◦ Profit & Loss Statement

Legal Requirements Standards

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Comparative ReportingComparative Reporting

Financial Accounting (FI)

External Reporting

Managerial Accounting (CO)ProductCostsReports

Internal Reporting

CostCenterReports

ProfitCenterReports

ProfitMargin

RetainedEarningsReport

LiquidityCalculation

Income Statement

BalanceSheet

66

Fundamentals of Cost ManagementFundamentals of Cost Management

• Internal (cost management) accounting system and the external (financial) accounting system are fully integrated.

• 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.

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Cost Elements assigned in Prod Cost Elements assigned in Prod OrderOrder



Income Statement Bal. Sheet

Financial Accounting

(FI) TransactionDocumentAmountG/L Account #Cost Center1900012432

(CO) Transaction DocumentCost Center Cost Element20000657 Controlling

10001000

BankSupplies Exp.

Cost Center

1000

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

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Cost Center

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 for

managerial accounting and reporting system.2. A controlling area is the highest level organizational

entity within the Control module3. 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

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

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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.

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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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Cost Element Accounting Cost Element Accounting

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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

• 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.

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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.

• 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).

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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. 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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4. Profit Center Accounting (PCA)4. Profit Center Accounting (PCA)Profit center accounting is used to analyze income and

expenditure for profit centers that represent an independent subunit within an organization.

• Profit centers are linked to cost centers with one-to-one or one-to-many relationship.

• Responsible for revenue generation and cost containment• 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.


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

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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

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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

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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 635

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

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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.

.

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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.



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 results

Exercises: Exercises: (Due date 10/3/2015)(Due date 10/3/2015)

Documents

Controlling Management EGN 5622 Enterprise Systems Integration Fall, 2015 Controlling Management EGN 5622 Enterprise Systems Integration Fall, 2015