Controlling

1 Introduction
SAP Controlling deals with the cost calculation, cost analysis, cost planning and overhead management of the
business.

While SAP Finance (FI) deals with external reporting, SAP Controlling helps to report all costs and Profitability
Analysis to the internal management.

1.1 SAP Controlling Components

 Cost Element Accounting
 Cost Center Accounting
 Internal Order
 Product Costing
 Profitability Analysis
 Profit Center Accounting

2 Cost Element Accounting

Master data object that represents a type of expense or revenue. Cost elements are used to classify and allocate
costs and revenues in financial accounting and controlling.

Ex: Electricity Expenses. Can be added to relevant GL account in financing and can be assigned to a product for
cost analyze in controlling.

2.1 Types of Cost elements

Primary Cost: represent direct costs that can be directly assigned to a cost object, such as a product, a project,
or a customer.

Ex: material costs, labor costs, and overhead costs directly incurred in producing a product.

Secondary Cost: represent indirect costs that cannot be directly assigned to a cost object, but need to be
allocated.

Ex: rent, and utilities costs. These costs are incurred in the process of producing goods or services, but they
cannot be directly traced to a specific cost object.

3 Cost Center Accounting

Cost center is the lowest organizational unit in controlling Enterprise structure.

Department within an organization that does not directly add profit but still costs the organization money to
operate.

Cost centers only contribute to a company's profitability indirectly, unlike a profit center, which contributes to
profitability directly through its actions.

A cost center indirectly contributes to a company’s profit through operational efficiency, customer service, or
increasing product value.
Example:

1. Human Resource
2. Marketing
3. Accounting Department

Company classify business units according to responsibility into:

1. Cost Center: Recording costs with reference to plan values.

2. Profit Center: Calculating operating results.
3. Investment Center: Calculating Return on Investment.

Dividing organization into cost centers allows you to:

1. Determine where costs are incurred within the organization.

2. Plan costs at cost center level, and increase cost efficiency.
3. Check the profitability of individual functional areas and provide decision-making data for management.
4. Accounting lets, you analyze the overhead costs.

3.1 Types of Cost Centers

Goal of a cost center is to isolate information for better internal data collecting and reporting.

1. Operational Cost Center: IT Department (employees, hardware, and software).

2. Personal/People Cost Center: HR Department (excluding HR software).
3. Impersonal/Machinery Cost Center: Manufacturing Plant (omitting headcount).
4. Locational Cost Center
5. Product Cost Center
6. Project Cost Center: ERP
7. Service Cost Center:

3.2 Features of Cost Centers in SAP

1. Entering actual costs:
Primary costs transferred to Cost Accounting from other components, Ex: Materials Management (MM).
2. Allocating actual costs:
The system distinguishes between transaction-based allocations, which occur within one period.
3. Planning activities and costs: You can plan costs and activities to determine allocation (activity) prices.
4. Activity Accounting: Uses the activity produced by a cost center as the tracing factor for the costs.

4 Master Data in Cost Center Accounting

Master data of cost centers determines the structure of your organization. It generally remains constant over
long periods.

1. Cost elements
2. Cost centers
3. Business processes
4. Activity types
5. Statistical key figures
6. Resources
4.1 Time-Dependency of Master Data
You can maintain master data for cost centers, cost elements, activity types, and business processes with
time-based dependencies. You can make changes at any time for any time interval. The saving of data is
also time-dependent. This can result in multiple database records for a master record, with different
information stored in each database record.

4.2 Standard Hierarchy

Tree structure representing all cost centers belonging to a controlling area from a Controlling perspective.

5 Activity Type
Classification of activities that are produced in cost centers.

SAP activity types are used in production orders to determine the cost of machine, labor. And, also in product
costing.

Examples of SAP activity types:

 Machine hours
 Units produced
 Labor charges
 Power
You can assign single, many or no activity types to a cost center.

SAP activity types with similar activities can be grouped into activity type groups for internal reporting,
assessment and planning purposes.
SAP activity types are planned and allocated by recording the quantities which are measured in units known as
activity units.
Activity type categories
The activity type category lets you determine whether, and how, an activity type is allocated.

1. Manual entry, manual allocation

2. Indirect determination, indirect allocation
3. Manual entry, indirect allocation
4. Manual entry, no allocation
5. Calculation and allocation via target=actual activity allocation

Price Indicator
Used for determination of how prices will be calculated for the activity type. These are of two types of price
indicator: actual and planned.

Planned

1. Planned price, automatically based on activity

2. Planned price, automatically based on capacity
 3. Determined manually

Actual

4. Actual price, automatically based on activity

5. Actual price, automatically based on capacity
6. Manually determined for actual allocations

Cost Accounting for Dummies Summary

Cost accounting: is the process of analyzing and planning what it costs to produce or supply a product or service.

Fixed Cost: Remain the same regardless of production output. Include lease and rental payments, insurance, and
interest payments.

Variable Cost: Change based on the amount of output produced. Include labor and raw materials.

Direct Cost: Costs you can trace (or tie) to your product or service. Ex: Material and labor.

Indirect/ Overhead Cost: Can’t be traced directly to the product or service. Instead, indirect costs

are allocated by assigning a cost per unit (amount of cost per product).

Ex1: Rent building for $2,000, therefore allocate rental cost/ unit product for price determination.

Ex2: Machine work for 1000 hours a year and costs $2,000 for repair and maintenance, therefore you could
allocate machine repair cost = 2000/ 1000= $2/ hr.

Fitting Together:

Direct costs

1. Variable direct costs, such as material, where denim jeans is a cost object.
2. Fixed direct costs, such as a supervisor salary at an auto plant, where an automobile produced is the
cost object.

Indirect costs

1. Variable indirect costs, such as utility costs for a television plant, where a television produced is the cost
object.
2. Fixed indirect costs, such as insurance for a plumbing vehicle, where a plumbing job is a cost object.

Cost object is anything that causes you to incur costs. No cost object means no costs incurred. Direct costs are
traced to the cost object, and indirect costs are allocated to the cost object.

Job costing: Assesses costs by the job and allows you to provide detailed price estimates based on the product
constructed or service provided.
Process costing: Assumes that individual product costs are nearly the same for every customer.

Cost Pool: Several costs grouped into on group for allocation or tracing purpose.

Cost hierarchy

1. Unit-level costs
2. Batch-level costs
3. Customer-level costs
4. Product-sustaining costs
5. Facility-sustaining costs

Activity-based costing (ABC) is a methodology that focuses on activities. When compared to other costing
methodologies, it assigns indirect costs (overhead) more accurately. More accurate costing and product pricing.

Cost smoothing, or peanut butter costing spreads costs over a broad range of cost objects. The trouble is, costs
won’t be assigned as accurately as they should be.

There are three tasks for the refined ABC costing system:

1. Direct cost tracing: Review your direct costs and categorize more costs as direct costs, if possible.
2. Cost pools: Review cost pools and create more pools, if necessary.
3. Cost-allocation bases: Decide on cost-allocation methodology.

Support and Common Costs

Support costs are costs incurred for activities that assist other company departments.

Common costs are costs shared by multiple departments.

Note: Support department (cost center) is a department generating cost by supporting other departments and
not generating revenue.

An operating department (Profit center) is a department generating cost and revenue.

Single rate cost allocation

Single rate allocation, all costs are grouped in one cost pool and allocated using the same rate per unit.

Single rate budgeted cost allocation rate = cost pool ÷ No. of Units

Dual rate cost allocations

Categorizes cost into two types of cost pools: fixed costs and variable costs. You calculate a different cost
allocation rate for each cost pool.

Support Costs (Cost Centers)

1. Direct Cost Allocation

Support costs directly to each operating department. Direct allocation doesn’t allow you to allocate support
department costs to other support departments.

2. Step Down Cost Allocation

First, allocate a support department to all departments (including to the other support department). Then,
allocate the second support department to the operating departments only.

3. Reciprocal Cost Allocation

Allocate costs between support departments. Ex: Legal and HR Departments, they support each other.

Common Costs

Common costs shared by more than one department. As you pay to be in business. You have to insure assets like
buildings, equipment, etc.

1. Stand-alone Cost Allocation

The stand-alone cost allocation method collects information from the users of a common cost. You assess how
much of the total common cost is used by each entity and then you make the cost allocation based on how
much each party uses.

2. Incremental Cost Allocation

The basic method of allocation of incremental cost is to assign a primary user and the additional or incremental
user of the total cost.