controlling management egn 5622 enterprise systems integration spring, 2015 controlling management...
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Controlling ManagementControlling Management
EGN 5622 Enterprise Systems Integration EGN 5622 Enterprise Systems Integration
Spring, 2015Spring, 2015
Controlling ManagementControlling Management
Concepts &Concepts & Theories Theories
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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.
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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
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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
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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
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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.
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Income Statement Bal. Sheet
Financial Accounting
(FI) TransactionDocumentAmountG/L Account #Cost Center1900012432
(CO) Transaction DocumentCost Center Cost Element20000657 Controlling
100100
BankSupplies Exp.
Cost Center
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Interrelated and Closely Interrelated and Closely Connected FI & COConnected FI & CO
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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
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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.
Controlling ManagementControlling Management
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)
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Components of Managerial Components of Managerial AccountingAccounting
Controlling(CO)
CostElementAcct
CostCenterAcct
ProductCostControlling
InternalOrders
ActivityBasedCosting
ProfitCenterAcct
ProfitabilityAnalysis
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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)
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Business Process IntegrationBusiness Process Integration
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
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Client 570
Credit ControlArea
CompanyCode
Fiscal YearVariant
Chart ofAccounts
Global Bike Inc.
ControllingArea
Organizational Structure
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Business Process IntegrationBusiness Process Integration
Ma
ste
r Data
CO
CO
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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
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Cost Elements (continued)
FinancialAccounting
General Ledger Accounts
RevenueAccounts
BalanceSheet
Income Statement
ExpenseAccounts
Controlling
Total Cost Elements
Primary CostElements
Secondary CostElements
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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
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Cost CenterActivity
(20 Hours)
10 Hours
6 Hours
4 Hours
Work Center
MaintenanceDepartment
Information ServicesDepartment
Statistical Key Figures
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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
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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
Primary Cost Element
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
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Business Process IntegrationBusiness Process Integration
CO
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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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Cost Accounting AllocationCost Accounting Allocation
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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Cost Accounting AllocationCost Accounting Allocation
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.
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Types of Allocations CyclesTypes of Allocations CyclesDistributions – primary cost elementsAssessments – combination of primary
and/or secondary cost elements
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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
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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
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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
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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
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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
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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)