Controlling Notes.docx

CONTROLLING MODULE (CO) INTRODUCTION

Cost: cost means already incurred all price, another meaning exact price. Cost accounting: cost accounting is a process of recording, classifying, analyzing, summarizing, allocating and evaluating various alternative courses of action for the control of cost. Cost center: Cost center is the place where you have exactly incurred. Q. What is the highest report in FI ? Balance Sheet

What is the highest report in Controlling ? Ans: Costing Sheet Purpose of balance sheet: 1. 2. 3. 4.

To Know Financial worthiness Submit to stock exchange Submit to authorities Distribute to share holders Balance sheet is an external report.

Purpose of cost sheet in controlling: 1. 2. 3. 4. 5.

Planning/actual/comparison/variance/controls Compare with other company in the same industry Compare with Industry norms Actual to actual(compare after 2years) To know the production cost to determine selling price

Cost sheet is an internal report.

FI

CO

Direct expenses

Primary cost

Indirect expenses

secondary cost

Variable cost: over and above the target/ capacity utilization whatever the quantity extra produced, on that whatever cost incurred for extra quantity is called variable cost. Fixed cost: up to the capacity utilization/ target production whatever the cost incurred or going to be incurred whether single unit produced or not is called fixed cost. Controlling module: Controlling module is primarily oriented towards managing and reporting cost/ revenue and mainly used in internal decision making. The controlling module focuses on internal usages and helps management by providing reports on cost centers, contribution margins and profitability. Controlling module in SAP provides supporting information to the management to the purpose of planning, actual reporting as well as monitoring the operations of their businesses. Some of the components of controlling module are as follows 1. 2. 3. 4. 5. 6.

Cost element accounting Cost center accounting (CCA) Internal orders(IO) Product cost controlling(PCC) Enterprise controlling Profit center accounting(ECPCA) Controlling Profitability analysis(COPA)

Explanation: 1. Cost element accounting: cost element component provides information which includes the cost and revenue for an organization. Cost elements are used to pick up the data from FI module to Controlling, for updating the information in controlling module automatically. The cost elements are the base for the cost accounting and enable the users, the ability to display cost for each of the accounts(Business transactions) that has been assigned to the cost element. Example: For accounts that can be assigned to cost centers, internal orders, WBS elements (Work Breakdown structures). Cost elements are of two types: A. Primary cost element: Primary cost element means the expenditure G/L accounts directly related in producing/ manufacturing a finished product B. Secondary cost element: Secondary cost elements are used to allocate, distribution, assessment of overhead expenses to the relevant cost centers  Distribution means distribution of primary cost to the relevant cost centers.  Assessment means distribution of primary and secondary cost to the relevant cost centers.  Primary cost elements created at controlling level and FI level also.  Secondary cost elements can be created at controlling level only  For creation of primary cost element, G/L account is must. All income G/L accounts related to sale of finished goods, trading goods, services are called revenue elements.

2. Cost center accounting: Cost center accounting provides information where cost incurred in the business. Within SAP you have the ability to assign cost centers to departments, for managers responsible for the certain areas of the business, as well as functional areas within the organization. Cost center can be created for functional areas like marketing (SD), Purchases (MM), HR, Logistics, Legal shipping (transportation), Internal system administration etc,… Some benefits of cost center accounting: a. Top management can set budget (expected expenditure and cost center targets) b. Planning c. Availability of cost allocation methods d. Assessment/ distribution of cost to other objects. Definition of cost center in SAP: Cost center is an organization element within controlling area. Cost center can be defined according to specific needs of the client. The most common approach to define a cost center for the departments like production, marketing, management, logistics, development etc,… After defining individual cost centers you assign each one of the cost centers to one of the cost center category. All the cost centers of the controlling area are assigned to a standard hierarchy What is cost center category? A cost center category is an indicator in the cost center master record, which identify what kind of activity a particular cost center can have. SAP defines default cost center categories: a. Administration b. Production

c. d. e. f.

Logistics Marketing R&D Management etc,….

If necessary we can create also. The categorization is useful for assigning certain standard categories into a group of cost centers pertaining to similar activities. What is Standard Hierarchy? A standard hierarchy helps in easy maintenance of the cost centers/ cost center groups for creation of new names/ changing existing ones. We may go for alternative hierarchy like groups but practically all clients operate standard hierarchy only. 3. Internal orders: Internal orders provide soft tracking the costs of a specific job, service task. Internal orders are used as a method to collect those costs and business transaction related to a particular job/ particular task. These levels of monitoring can be very detailed but allows the management ability to review internal orders activity for decision making purpose 4. Product cost controlling: Product cost controlling allows the management the ability to analyze their product cost to make a decision on the optimal price to market their product It is within this module of controlling it can be planned, actual, target values for analysis purpose. Some components of the module of product cost planning which include material costing, cost estimates with quantity structure, cost estimates without quantity structure, master data for mixed cost estimate price for updates. Cost object controlling includes product cost by order, product cost by period.

In a nut shell product cost controlling deals with the estimates/ actual to produce a finished product. Product cost controlling gives the ability to know cost of material and cost of processing to find out cost of goods manufactured/ cost of goods sold. In Product Cost Controlling we also find out Material cost and Processing Cost. 5. Profit center accounting: The basic purpose of creating of profit center is to analyze the revenues and basically be used as a tool for internal reporting purpose. Profit center will be assign in cost center master record and also in material master record. Sales order created for the finished product, picks up the profit center from the material master and also all revenues and costs coming from the particular sales order for the finished product is passed on to profit center. Q. what is business area and profit center. As an FI/CO consultant what you recommend for the client. A. Business area results are analyzed products wise and use for FI reporting purpose(external). Profit center results are analyzed product wise and used for internal decision making purpose.

6.

Profitability analysis: It Allows management the ability to review the information with respect to the company’s profit/ contribution margin by segment. Profitability analysis can be obtained by the following methods. a. Accounts based profitability. b. Cost based profitability. Accounts based analysis which uses account based valuation approach. In this analysis cost and revenue elements are used accurately.

Cost based analysis uses a costing based valuation approach which is defined by the user. Profitability analysis helps you to determine how profitable clients’ market segments are. The analysis is on the external side of the market with multidimensional drill down capability, clients will have all the flexibility need for reporting with the segment like customer product, geography, sales organization etc,…