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ABC Engineering (India) Ltd

Controlling

ABC Engineering (India) Ltd.To Be Document

Prepared by xyz


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1. Organizational Structure

1.1 Organization Units

1.1.1 Client

General ExplanationThe client is the highest level in the SAP System hierarchy. Specifications that you make, ordata that you enter at this level are valid for all company codes and for all other organizationalstructures. You there fore only needs to make these specifications, or enter this data once.This ensures that the data is consistent.

A commercially, organizationally, and technically self-contained unit within an SAP System.Clients have their own master records and se of tables.

1.1.2 Operating concern

General ExplanationAn operating concern represents an organizational unit in your company for which the salesmarket has a uniform structure. It is the valuation level for Profitability Analysis (CO-PA).

Business Requirementoperating concern shall be centralized

Suggested Business Process:

CO-PA is a tool for analyzing Profits by segments of business. Segments of business are

levels to which we wish to breakdown the revenues and Costs. Eg. Profit by Products.

OperatingConcern Description Controlling Area Controlling Area Name

ABCE ABC Engineering (India) Ltd. ABCE ABC Engineering (India) Ltd.

Operating Concern ABCE would be assigned to the Controlling Area.

1.1.3 Controlling Area

General ExplanationThe controlling area is the central organizational unit of the Controlling(CO) component. Youuse the controlling area to carry out cost accounting.

Postings are forwarded from Financial Accountingto Controlling. During posting, you canspecify any additional account assignments relevant for cost accounting (for example, costcenter or internal order). Controlling area is assigned to your company code to ensure thatthis data is forwarded to Controllingfor further processing for cost accounting.

Business RequirementControlling shall be centralized

Suggested Business Process:Internal business transactions will be portrayed in the controlling area. Primary costs will betransferred from external accounting and classified according to managerial accountingperspectives. If the primary costs are direct costs, then they will be assigned to cost objects. If

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they are overhead costs, then they will be assigned to cost centers or overhead cost orders.The system will then allocates them using internal allocation techniques, according to theirsource. When you create master data, the system will always assign the Controlling objects toa controlling area and a company code.

The level of detail provided by the Controlling component will enable you to track specificinformation for cost monitoring, business decisions and sales control. For example, theControlling component will contain subdivisions such as cost centers and internal orders inaddition to accounts. The coding will be as follows:

Controlling Area Description Assigned Company Code Company Name

ABCE ABC Engineering (India) Ltd. ABC ABC Engineering (India) Ltd.

ABCE ABC Engineering (India) Ltd. DLF DLF Engineering Ltd.

Controlling Area ABCEwould be assigned to the Company Codes.

1.1.4 Company Code

General ExplanationThe smallest organizational unit for which individual financial statements are createdaccording to the relevant legal requirements. A company can include one or more companycodes.

All of the company codes within a company must use the same chart of accounts and fiscalyear. However, each company code can have a different local currency.

Business RequirementThere should be one centralized Company Code


One Company Code shall be maintained as ABC Engineering (India) Ltd and Jubliant

Engineering Ltd. and accounting and reporting for PALM, KRPM and JUBI shall be dealt with

Profit center concept (explained later). The coding shall be as follows:

Company Code Company Name

ABC ABC Engineering (India) Ltd.

DLF DLF Engineering Ltd.

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1.2 GENERAL

COST AND REVENUE ACCOUNTING

Cost elements classify an organizations valuated consumption of production factors within aControlling area. A cost element corresponds to a cost-relevant item in the chart of accounts.

We distinguish between primary cost and revenue elements and secondary cost elements.

Primary Cost/Revenue Elements: A primary cost or revenue element is a cost or revenue-relevant item in the chart of accounts, for which a corresponding general ledger (G/L) accountexists in Financial Accounting (FI). You can only create the cost or revenue element if youhave first defined it as a G/L account in the chart of accounts and created it as an account inFinancial Accounting. The SAP System checks whether a corresponding account exists inFinancial Accounting.

Secondary Cost Elements: Secondary cost elements can only be created and administratedin cost accounting (CO). They portray internal value flows, such as those found in internalactivity allocation, overheadcalculations and settlement transactions.

When you create a secondary cost element, the SAP System checks whether acorresponding

Account already exists in Financial Accounting. If one exists, you can not create thesecondary Cost element in cost accounting.

Cost Element Categories: The cost element category has a technical control function. Itdetermines whether you can Post to a cost element directly or indirectly.

Direct posting means: You post a fixed amount to an account by specifying the accountnumber. You can post directly to all primary cost elements.

Indirect posting means: The R/3 System determines the account automatically at the time of

posting You can not enter the account number with the posting transaction. You can only postindirectly to secondary cost elements.

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1.2.1 Cost Element Master

General Explanation:Cost and revenue elements describe the origin of costs, revenues. Cost elements are defined

as either primary cost elements or secondary cost elements.

Primary cost and revenue elements in Controlling are created with reference to correspondingexpense or revenue accounts in Financial Accounting. It is a prerequisite to create relevantgeneral ledger accounts in FI, in order to create corresponding primary cost elements in CO.Examples for primary cost elements are material costs, salary costs. To be able to post to aprimary cost element, you require cost carrying object such cost centre or internal order etc.to identify the origin of the cost.

Secondary cost elements are used exclusively in CO to record internal value flows likeassessments, activity allocations and settlements. Secondary cost elements can be createdonly in Controlling and they do not have any corresponding general ledger accounts in FI.

When you create a cost element, you must assign a cost element category. This assignmentdetermines the transactions for which you can use the cost element.

ABC can define primary cost elements based on requirements under the followingcategories:

Primary costs/cost reducing revenues,Revenues,Sales deductions andExternal settlement

Similarly you can define secondary cost elements under the following categories:

Internal Settlement,Order/project results analysis,Overheads,Assessment andInternal activity allocation

Cost Element Groups are created to group together the cost elements of similar kind of natureto process the cost elements collectively in cost centre planning, assessment etc. Thesegroups also useful in information system to see the totals group wise.

Business Requirement:ABC Engineering (India) Ltd. expects cost accounting records should be updatedautomatically when the corresponding financial documents are posted in Financial Accountingto know what costs incurred within organization.

Suggested Business Process:Presently GL account is treated as Cost Elements. Ref: - G/L master Creation.Create Primary Cost Element (KA01)Create secondary Cost element (KA06)

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Create Cost Element

Primary OR

Secondary ?

Select

T.Code KA01

Select

T.Code KA06

Specify

Cost Elementand

Validity Period

Specify

Basic Data

Specify

Cost Element

Category

Specify CostCentre, if assigned

to one cost centre

Save

Need for creation

of Cost Element

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1.2.2 Cost Element Master Group

General Explanation:Organizational unit storing a group of cost elements. Cost elements with similar

characteristics may be grouped together in cost element group. You can define any numberof cost element groups for valuation, planning and allocation purposes as part of master datamaintenance. You can also arrange cost element groups in further cost element groups,creating a cost element hierarchy.

Request for a Cost Element Grouping: These groups could be used for consistency and easeof use in reporting, planning, allocations, etc

Changing of Cost Element Group: This process is for changing a Cost Element Group. Thisallows for values to be added or deleted from the group, or for other groups to be added ordeleted from the cost element group (when the group is a hierarchy).

Display a Cost Element Group: This process is for displaying a Cost Element Group. This

would apply to a Standard Hierarchy or an Alternative Hierarchy. This allows for various costelement groups to be viewed along with their values.

Business Requirement:Cost element are grouped the Overheads.


Creation of Cost Element Group (KAH1)Changing of Cost Element Group (KAH2)Display a Cost Element Group (KAH3)

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COST CENTER ACCOUNTING

You use Cost Center Accounting for controlling purposes within your organization. CostCenter Accounting lets you analyze the overhead costs according to where they wereincurred within the organization.

Cost Centers enables you to valuate semi-finished and finished products in Product CostControlling (CO-PC), and to calculate contribution margins in Profitability Analysis (CO-PA).The activities of cost centers represent internal resources for business processes inActivity-Based Costing.

The costs of each cost-accounting-relevant business transaction portrayed in the R/3 Systemcan be assigned through Cost and Revenue Element Accounting to an account assignmentobject in the Controlling component (CO).

For overhead costs this can be cost centers, internal orders, business processes, or overheadprojects.

Recording and assigning overhead costs allows you to control costs and prepare informationfor the subsequent areas of Cost Accounting.

You can use the methods of activity allocation, assessment or distribution to further allocateCosts.

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1.2.3 Cost Center Master

General Explanation:Cost centers are locations at which costs are incurred or revenues are generated. Cost

centers are designed based on functional requirements, activities provided and areas ofresponsibility. In ABC Engineering (India) Ltd. cost centers are created according to the costcentre categoriesCost center categoriesCost centres have been classified into the following categories: -

1. Production2. Service3. Sales4. Administration5. Management6. Research & development7. Allocation cost centre

For over head cost controlling, cost centers are of similar type are grouped in to Cost CentreGroups, for instance, Inventory Management, Information Systems, Accounting etc., toprocess the group of cost centers together in cost centre planning, assessment, informationsystem to generate reports.

Cost Center master Creation: A cost center is an organizational unit within a controlling areathat represents a clearly delimited location where costs occur. You can make organizationaldivisions on the basis of functional, settlement-related, activity-related, spatial, and/orresponsibility-related standpoints.

You use cost centers for differentiated assignment of overhead costs to organizationalactivities, based on utilization of the relevant areas and for differentiated controlling of costsarising in an organizationMaster datadetermines the structure of the given application component in the SAP Systemand remains essentially unchanged in a live system, that is, in the current settlement periods.

The system displays the master data fields on different tab pages on the basic screen.Afterinitial entry, the system displays the basic data tab page, which is ready for input. On this tabpage, the system generally displays all fields that need to be edited.

You can edit more fields by selecting the appropriate tab page. You can use pushbuttons onthe tab pages to go from one maintenance transaction or display transaction to another

Business Requirement:ABC Engineering (India) Ltd. expects to compare actual operating results (cost) with theplanned and identify the variance that serve as signals to take corrective measures at costcentre level, by updating cost centre records automatically on online real time basis whenever corresponding business transaction takes place.


The relevant cost centers are updated automatically whenever there is corresponding

postings FI and upon implementation of cost centre accounting, actual data relating to a cost

center is available on online real time basis.

Create standard hierarchy to attach all the cost centers.

Manager (costing) shall be authorized to create cost centre master records

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Create Cost Centre

Specify

Cost Centre ID

and

Validity Date

Specify

Person

Responsible

CCtr Category,

Hierarchy,

Business Area in

Basic Data

Specify

Desired Control

Data

Specify details in

template if other

than Standard is

used in planning

Save

Need for creation

of Cost Centre

Specify details in

address &

Communications

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1.2.4 Cost Center Group

General Explanation:You can collect cost centers according to various criteria into groups. This enables you to usecost centers to depict the structure of the organization in the SAP System.

You can use the groups to build cost center hierarchies, which summarize the decision-making, responsibility, and control areas according to the particular requirements of theorganization. The individual cost centers form the lowest hierarchical level.

There must be at least one group that contains all cost centers and represents the entirebusiness organization. This cost center group is described as the standard hierarchy. You canassign more cost center groups to the standard hierarchy.

Cost Center Group Creation: A Cost Center Group is an organizational unit storing a group ofcost centers. Cost Centers with similar characteristics may be grouped together in costcenter group. You can define any number of cost center groups for valuation, planning andallocation purposes as part of master data maintenance. You can also arrange cost centergroups in further cost center groups, creating a cost center hierarchy.Request for a Cost Center Group: - These groups could be used for consistency and ease ofuse in reporting, planning, allocations, etc

You can also create any number of alternative groups. You can structure these, for example,according to organizational and/or functional viewpoints. Cost center groups enable you toperform evaluations for each decision-making, responsibility, or control area. They alsosupport the processes during planning and internal allocations

Business Requirement:Cost centers are majourly grouped as Production, Material, and SalesEtc. Under this major

groups further sub groups are there like under production Fabrication, Assembly, Testing etc

Suggested Business Process:Creation of Cost Center Groups (KSH1)

1.2.5 Activity Types

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General Explanation:Activity types classify the activities produced in the cost centers within a controlling area.

To plan and allocate the activities, the system records quantities that are measured in activity

Units. Activity quantities are valuated using a price (allocation price).

In Overhead Cost Controlling, costs based on the activity quantity of an activity type areposted separately in fixed and variable portions. When you divide the activities of a costcenter into activity types, you should consider whether the costs could be allocated effectivelyto the activity types.

The prices of the activity types of a cost center can be either entered manually, or calculatedby the system based on the costs allocated to the activities. Prices can be calculated eitherusing plan costs or actual costs.

You can plan, allocate, and control costs either at the activity type level of a cost center, or atthe cost center level. You can enter actual costs at the cost center level. Costs entered at the

cost center level are assigned using splitting

You can also assign the activity type of a cost center directly. This use was designed forcertain application areas (such as personnel costs and depreciation postings).

When the activities produced by a cost center are used by other cost centers, orders,processes, and so on, this means that the resources of the sending cost center are beingused by the other objects.

Typical examples of activity types for cost centers are machine hours, administrator hours, orunits produced.

Business Requirement:

Bellow Cost centers, work centers exist in production cost centers. A work center finds aplace in routing card.

For cost accounting purpose the hourly rate per cost center is used and the hourly rate forwork center is not available


Creation of Activity types (KL01): The activity type classifies the specific activitiesprovided by a cost center along cost allocation lines. Activity inputs from a sender costcenter mean that a receiver (another cost center or an order, process, and so on) isdrawing on the resources of the sender cost center. Valuation of activity quantities is madewith an allocation price calculated based on the managerial strategy chosen.

Change Activity Type (KL02): The activity type classifies the specific activities provided by acost center along cost allocation lines. Activity inputs from a sender cost center mean that areceiver (another cost center or an order, process, and so on) is drawing on the resources ofthe sender cost center. Valuation of activity quantities is made with an allocation pricecalculated based on the managerial strategy chosen. Make changes to the activity typemaster data either at the beginning or at the end of the fiscal year in order to ensure dataconsistency

Display Activity Type (KL03): The activity type classifies the specific activities provided by acost center along cost allocation lines. Activity inputs from a sender cost center mean that areceiver (another cost center or an order, process, and so on) is drawing on the resources of

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the sender cost center. Valuation of activity quantities is made with an allocation pricecalculated based on the managerial strategy chosen.

Deleting an activity type (KL04): - The activity type classifies the specific activities provided bya cost center along cost allocation lines. Activity inputs from a sender cost center mean that areceiver (another cost center or an order, process, and so on) is drawing on the resources ofthe sender cost center. Valuation of activity quantities is made with an allocation pricecalculated based on the managerial strategy chosen. You can only delete activity types in thecurrent Controlling Area if no transaction data exists for the activity type in the plan,commitments or in the actual for the given fiscal year(s). You are also not allowed to plan anystatistical key figures

Reviewing changes made to activity type (KL05): - Activity types created in the system mayrequire changes to correct errors made at the time of recording the master data or to updatethe data with additional information. The following screens provide an internal audit trail toverify what changes were made, when, and by whom. To review changes made to activity

type master data as a step in investigating other than expected results of activity typeallocations

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Create Activity Type

Specify

Activity Type IDand

Validity Date

Specify name,

description,

CCtr Category,

Activity Category,

Allocation Cost

Element

Check Lock

indicator to lock

Activity Type

Specify Out put

Unit

Save

Need for creation

of Activity Type

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1.2.6 Activity Type Group

General Explanation:You can gather activity types with similar characteristics into activity type groups.

You can use activity type groups to process multiple activity types in one business transactionwithin Cost Center Accounting. This is true for planning or assessment. During planning, forexample, you can display and plan multiple activity types in one transaction. You can also useactivity type groups during assessment (for example, assessment to specified activity typegroups).

As with cost elements and cost centers, the SAP System enables you to create andadministrate activity type groups in parallel. For example, you can create separate activitytype groups for planning and allocation purposes. You can also define additional activity typegroups, for purposes such as price analysis.

Create Activity Type Groups: Use this transaction to create Activity Type groups. Activity typegroups are flexible structures and can be used in collective master data processing, reporting,allocations, and authorization objects. Each sub group represents a level of summarization.An Activity Type group is unique within a controlling area.There is a business need or desire to group activity types for processing and reportingrequirements

Change An Activity Type Group: - Use this transaction to change an Activity Type Group.When Activity Type Groups are changed both activity types and other activity type groupsmay be added, revoked or re-assigned to the Activity Type Group being maintained. Activitytype groups are flexible structures and can be used in other activity type groups, collectivemaster data processing, reporting, allocations, and authorization objects.Each sub group represents a level of summarization.

Groups are unique within a controlling area. When deleting a group, notice that it is notdeleted from the controlling area, its relationship to the next superior node is revoked

Business Requirement:Make a group of Activity types

Suggested Business Process:Creation of Activity Types Group (KLH1)Changing of An Activity Types Group (KLH2)Transaction to view an existing Activity Types Group (KLH3)

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1.2.7 Statistical Key Figure

General Explanation:You can define statistical key figures as either:

Fixed values

Key figures defined, as fixed values are valid as of the posting period, and in allSubsequent posting periods of the fiscal year.

Totals values

Key Figures defined as Total values are valid only in the posting in which they areentered

Key figures defined as fixed values are valid as of the posting period, and in all subsequentposting periods of the fiscal year.

You can create, change and display statistical key figures individually or collectively.Individual processing lets you process only one statistical key figure. Collective processinglets you process multiple statistical key figures simultaneously.

Change Statistical Key Figure: - The purpose of this script is to demonstrate how to change astatistical key figure. When you make changes to key figures of the category Fixed values,you must enter a new fixed value. This new value is valid for all subsequent periods, until youenter another new value. When you make changes to statistical key figures of the categoryTotals values, you can first reset the values using reversed +/- signs, and then enter the newvalues.


ABC Engineering (India) Ltd. desires to distribute the expenses of service and administrativecost centers expenses on a logical basis to other cost centers.

Suggested Business Process:Creation of Statistical Key Figure (KK01)Change Statistical Key Figure (KK02)Display Statistical Key Figure (KK03)

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Create Statistical Key

Figure

SpecifyStatististical Key

Figure-ID

Specify name,description,

Unit ofMeasurement and

Key figure

category

Check Lockindicator to lockActivity Type

Specify Out putUnit

Save

Need for creation ofStatistical Key Figure

1.2.8 Statistical Key Figure Group

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General Explanation:You can gather statistical key figures into statistical key figure groups. You can use statisticalkey figures, or parts of them, when you need to process multiple statistical key figures in one

business transaction.

Creation of statistical key figure Group: - When several statistical key figures have beencreated, a statistical key figure group may be necessary for reporting and monitoring thecontents of the group. For example, a statistical key figure (SKF) type group could be createdfor all SKFs managed by Business Systems, all SKFs managed by Human Resources, etc.This will help assign responsibility for large numbers of SKFs.To create an organized way of monitoring statistical key figures by creating groups for skfswith user defined similar characteristics

Changes To Statistical Key Figure Group: - To make changes to a previously createdstatistical key figure group. Enter the statistical key figure group name or click on down facingarea which opens a statistical key figure group selection box. Leave the radio button

highlighted to all nodes and click on the green check mark. Make your selectionFrom the drop down list for the statistical key figure group you wish to make changes to andclick on the green check mark to continue

Display Statistical Key Figure Group: - To display a previously created statistical key figuregroup, enter the statistical key figure group name or click on down facing area which Opens astatistical key figure group selection box. Make your selectionfrom the drop down list for the statistical key figure group you wish to display and click on thegreen check mark to continue.


Make a group of statistical key figures

Suggested Business Process:Creation of Statistical Key Figure group (KBH1)Change Statistical Key Figure group (KBH2)Display Statistical Key Figure group (KBH3)

1.2.9 Cost Center Accounting planning

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General Explanation:The basic goals of cost centers cost planning are:

Plan and structure of companys future operations for specific period in monetary

terms Monitor efficiency by means of plan/actual comparisons

The cost and activity inputs section of planning facilitates in planning of both activity-independent and activity-dependent primary costs based on cost elements of cost centersperiodically. In activity-independent primary cost planning, planning will be done only for fixedcosts.

Activity-dependent primary cost planning enables to plan primary costs on a cost centre thatare dependent on the work performed by the cost centre, in terms of activity quantities.

In activity-dependent planning, provision is made to plan the costs dependent on theseactivities in fixed and variable portions. This means that the activity type price include twofixed cost portions per cost centre: Activity-independent plan costs and activity-dependent

fixed plan costs.

The Activity output/prices segment of planning assists in planning of which cost centersprovide which activity at what price. These planned prices are used to calculate the actualactivities value by considering actual quantities of activities, carried out at production costcenters.

Planning of statistical key figures (such as number of power units per cost centre that areused as tracing factors) is for periodic transactions such as assessment. These statistical keyfigures can be defined as fixed value or as a total value. The fixed value is carried over fromthe period in which it is entered to all subsequent periods of the same fiscal year. You need toenter a new posting only if the value changes. The total value posts the value only in theperiod. Where it was entered

Cost Centre Budget is used to budget all ABC Engineering (India) Ltd. costs an annual basis,

which in turn broken down in to period wise, to compare budget and actual to control the

costs at cost centre level.


In order to determine the overhead absorption / recovery rate it is imperative to prepare thebudget estimate of expenses that would be part of costs. ABC Engineering (India) Ltd. desiresa facility to prepare the budgets / overhead estimates as planned costs

Result analysis of Cost centers


Actual data is collected whenever the relevant business transaction takes place on online realtime basis. Thus comparisons by actual/plan reflect real time data to have firm control overthe costs at cost centre level.

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Cost Centre-Planning

SpecifyPlan Version,

Periods from & to

Fiscal Year

SpecifyCost Centr/Group,

Activity Type,Cost Element/

CE Group

Invoke OverviewIcon

Specify plannedcost for the givenactivity and givenCost Eleent for

each period

Save

Need to Plan costsand Revenues for

Cost Centre

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1.2.10 Cost Center Accounting- Actual Postings-Reposting

General Explanation:ABC Engineering (India) Ltd. can repost primary costs from one controlling object to anotherusing transaction-based transfers; the original cost element is always retained. This functionis designed to correct posting errors. Posting errors should preferably be corrected in theapplication component where they originate, so that external and internal accounting (FI andCO) is always reconciled.

In ABC Engineering (India) Ltd. the assignment of CO objects to the transactions in othermodules like FI, SD etc. is taken care of where ever possible, to post the entries automaticallyto the respective CO objects, in order to reduce the chances of error occurrence.

Posting errors involving assignment to a controlling object (cost centre or internal order) can,however, is corrected using a transaction-based reposting in CO.

Two kinds of reposting transactions are available for ABC Engineering (India) Ltd. to rectifyposting errors related to assignment to a controlling object: reposting costs (or revenues), andreposting line items.

The reposting costs (or revenues) transaction is simple transfer of cost (or revenue) from onecontrolling object to another. The reposting does not preserve a direct link between theamount transferred and the transaction that originally posted the costs (or revenues) to CO.

Alternatively, ABC Engineering (India) Ltd. can repost line items from CO documents. To dothis, the CO reposting document must reference the original FI document that posted thecosts to CO. This enables to track the movement of cost with in CO, and still preserve thelink with the originating FI document. In repost line items, facility is provide to enter multiple

receiver objects for a line item reposting, but the full amount of original line item must bereposted.


Errors are unavoidable and may result particularly during initial days of SAP live operations.Thus, there will be occasions where postings are assigned to the wrong controlling object,and ABC Engineering (India) Ltd. should be able to rectify posting errors related to erroneousassignment to controlling objects.

Suggested Business Process:Posting errors involving assignment to a controlling object, calls for transaction-basedreposting in CO

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Cost Centre-Repostings

SpecifyDocument Date,

Post date, Period

& Text

Specify source

Cost Centre, Cost

Element andamount

Specify Target

Cost Centre

Save

Need to Repost

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1.2.11 Cost Center Accounting- period- End Closing-Assessment

General Explanation:Assessment is the process used to transfer primary and secondary costs from sender costcentre to receiving controlling objects. In ABC Engineering (India) Ltd., cost centers is usedas senders, where as receivers can be cost centers, internal orders, or cost objects. Duringassessment, the original cost elements are summarized into assessment cost elements andassessed to the receiving object.

ABC ENGINEERING (INDIA) LTD., should consider the following sender and receiverrelations before allocating the costs: from which objects the costs are allocated, which objectscosts are allocated to, which costs should be allocated, how the costs are distributed amongthe receivers.

ABC ENGINEERING (INDIA) LTD. can combine sender and receiver relations using sender

and receiver rules.

Sender values can be posted values, fixed amounts as well as fixed prices. On the receiverside rules can be fixed amounts, fixed percentages, fixed portions and variable portions. Thetracing factor of the variable portion identifies a posted value on the cost centre as anallocation base. Provision is made to specify whether the variable portion is to consist ofcosts, consumption, statistical key figures, or activities. Plan and actual values can be usedas an allocation base.

In assessment, line items are posted for the sender as well as receiver, enabling theallocation to be recorded exactly. The system does not display the original cost elements inthe receivers.

Business Requirement:ABC Engineering (India) Ltd. anticipate automating the process of allocating primary and

secondary costs of some non-production cost centers to the production cost centers based on

predefined apportionment basis with statistical key figure, periodically (say monthly).

Suggested Business Process:ABC Engineering (India) Ltd. should execute assessment cycles periodically. Whenever thereis need for allocation based on new receiver rule, it calls for creation of assessment cycle.ABC ENGINEERING (INDIA) LTD. can modify the allocation basis whenever required, bychanging the appropriate assessment cycle.

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Cost Centre-Assessment

Specify

Period from & toFiscal Year

Specify Cycle

name

Execute

Need to run

assessment cycle

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INTERNAL ORDERS

1.2.12 INTERNAL ORDERS-Master Data-Internal Orders

General Explanation:Internal Orders describe individual jobs within a controlling area. Orders support action-oriented planning, monitoring, and allocation of costs. Through Internal orders ABCENGINEERING (INDIA) LTD. can analyze costs differently than in Cost Center Accounting forcost management.

Internal orders are created with reference to an order type. Each order must be assigned toan order type, which then transfers certain parameters to the order. Order types define thepurpose of the order and the way it is processed in the system. The order type may also beused to group together orders with similar characteristics. The order master data includesorganizational assignments such as company code, business area, and profit center.

ABC Engineering (India) Ltd. can choose between two kinds of internal orders based on itsrequirements, namely true orderor a statistical order.

ABC ENGINEERING (INDIA) LTD. uses the true order to collect costs and distribute themlater to different cost centers or other objects. In the initial posting, the costs are updated tothe true order. During periodic order settlement, ABC ENGINEERING (INDIA) LTD. shouldallocate the costs to the actual controlling objects.

ABC Engineering (India) Ltd. use statistical orders to evaluate costs that cannot be itemizedin detail in Cost Element Accounting or Cost Center Accounting. This can be achieved byassigning the costs to both the statistical order and the responsible cost center, which directlydisplays the costs on the order (statistical, for information purposes only) and the cost center(real costs), during posting. In ABC Engineering (India) Ltd. case, statistical orders are useful

in the situations like Communication Expenses (In order to track details of each ofcommunication expenses such as telephone, postage etc.), Insurance, staff welfareexpenses, Books and periodicals, Auditors remuneration, motor vehicle maintenanceexpenses etc.


ABC Engineering (India) Ltd. expects to automate the process of analyzing its cost andrevenues at order/job level when the corresponding financial documents are posted inFinancial Accounting.

Suggested Business Process:A new statistical or true order should be created wherever a different analysis is required on

specific job or order, which is not provided by cost centre or cost element accounting. In thebusiness scenario of ABC Engineering (India) Ltd., only statistical orders are envisaged forcreation.

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Create Internal Order

SpecifyOrder Type

Specify Ordername, short text,Business Area,

and assign otherappropriate cost

objects

Set status toRelease

Check StatisticalOrder in control

Data if the order tobe created is

statistical

Save

Need for creationof Internal Order

Specify SettlementRule (If not a

Statistical Order)

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1.2.13 INTERNAL ORDERS-Actual Posting-Reposting

General Explanation:

ABC Engineering (India) Ltd. can repost primary costs from one controlling object to anotherusing transaction-based transfers; the original cost element is always retained. This functionis designed to correct posting errors. Posting errors should preferably be corrected in theapplication component where they occurred, so that external and internal accounting (FI andCO) is always reconciled. Posting errors involving assignment to a controlling object (costcentre or internal order) can, however, is corrected using a transaction-based reposting inCO.

Two kinds of reposting transactions are available for ABC Engineering (India) Ltd. to rectifyposting errors related to assignment to a controlling object: reposting costs (or revenues), andreposting line items.

The reposting costs (or revenues) transaction is simple transfer of cost (or revenue) from one

controlling object to another. The reposting does not preserve a direct link between theamount transferred and the transaction that originally posted the costs (or revenues) to CO.

Alternatively, ABC Engineering (India) Ltd. can repost line items from CO documents. To dothis, the CO reposting document must reference the original FI document that posted thecosts to CO. This enables to track the movement of cost with in CO, and still preserve thelink with the originating FI document. In repost line items, facility is provide to enter multiplereceiver objects for a line item reposting, but the full amount of original line item must bereposted.


In ABC Engineering (India) Ltd., there will be occasions where postings are assigned to the

internal orders, and ABC Engineering (India) Ltd. should rectify posting errors related toerroneous assignment to incorrect internal orders.

Suggested Business Process:Posting errors involving assignment to a internal order, calls for transaction-based repostingin CO

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Internal Order-Repostings

Specify

Document Date,

Post date, Period

& Text

Specify source

Order, Cost

Element and

amount

Specify Target

Order

Save

Need to Repost

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PRODUCT COSTING

1.2.14 Cost object Controlling-Product Cost by Order

General Explanation:Automatic cost computation and collection is ensured through integration between CO andPP, thus every production order scheduled and executed the corresponding cost data arecollected, recorded and production are calculated. Complete details are set out in followingsection-Appendix.

The following process is part of period end activities:

Overhead Calculation: It is recommended to invoke this process at every period end (usuallya month) to valuate production orders including maintenance cost of Engineering Services.

Complete details of the above are set out in Appendix.


ABC Engineering (India) Ltd. expects to valuate all production orders online real timebasis to accomplish the following:

Determining cost based pricing policies

Valuating of inventories

Determination of Cost of goods (manufactured / sold)

Variance analysis (Planned yield vis--vis actual yield)

Suggested Business Process:In the IMG activity, create costing variants, valuation variants, costing sheets, cost componentstructures, line ids, settlement rules, variance keys, overhead keys.

Product Costing:The functionality of Product Costing is offered by CO sub module Cost Object controlling.This sub module has been designed to answer the question What costs have been incurredon what objects? An object could be a product, a Production order or a sales order.

This sub module offers solution to different business scenarios such as:

Production of materials to stock or internal consumption

Production based on a sales order (No valuated stock sale stock)

Rendering of intangible services

This sub module offers cost management function on real time basis for all the plants with inan enterprise.

Cost object controlling enables an enterprise to determine the cost of product viz. Cost ofgoods manufactured or cost of goods sold.

Cost object controlling offers information for the following business requirements:

Determining cost based pricing policies

Valuating of inventories

Determination of Cost of goods (manufactured / sold)

Variance analysis (Planned yield vis--vis actual yield)

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Cost object controlling is integrated with the following modules / (sub) modules for actual costcomputing for a given cost object ( say a product or an order);

FI, from where primary cost information are captured

MM, from where material cost information are captured CO-OM, from where the overhead information are captured

PP from where production cost information are captured

Cost object controlling has the following sub-components:

Product cost by order (Production order)Product cost by periodProduct cost by sales orderCost of intangible goods and services

This appendix discusses in detailed on product cost by order, which is proposed forimplementation in Ester Industries Limited.

Production order and costing:Basically, the Production cost of a product or order Cost of goods manufactured (COGM)consists of the following elements of cost:

Material costCost of conversion activities (direct production activities cost)Cost of indirect expenses incurred for conversion.

Material costs are collected from Bill of Materials (BOM). A BOM has multiple usages andone among them is computing cost of materials. In SAP it is possible to have production BOM

and costing BOM separately. Whenever a costing BOM is prepared separately productcosting is performed with this BOM. It is also possible to extend production BOM for usingcosting purpose. In ABC ENGINEERING (INDIA) LTD., production BOM would be used forcosting purposes.

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Cost of Conversion activities is also called cost of production activities. This costcomputation is accomplished as below:

In PP module, Plants are defined as central organizational units for production activities.These plants consist different Work centers, in case of discrete Production scenario orResources, in case of continuous processing scenario. Each of the work centers would haveset of Routings that defines steps and stages to complete Production process and so asResources have set of Recipes. Plant, Work centers, Routing are defined in PPmodule

The Plant, work centers, routing has set of activities that are performed to convert the rawmaterials to semi-finished goods or finished goods. The execution process of these activitiesconsumes men, machine and indirect material that have monetary value. The monetaryvalues of these activities are called Activity Price. These Activities and Activity price ofconversion are defined in CO module as a master data. Each of Cost centers utilizesthis master data, wherever relevant.

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Every work center / Resource (an entity in PP) is assigned to a Cost center (an entityin CO). Thus the production process and costing process are integrated.

As the PP module confirms production order the efficiency and effectiveness of production

results are available through data of Plant, work centre, routing / Plant, resources, recipes.The associate costs of conversion activities are collected invoking CO module and capturing

Activities and Activity prices from appropriate cost center.

SIWorkCenter Work Center Name Cost Center Cost Center Name

1 wk1-010

Raw materialinspection(Own/Masop) BA111010 Material Yard

2 wk2-020 Gas Cutting BA122090 Excavator

3

4

56

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

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Costs of indirect activities are collected through definitions in Costing sheet, which isattached to every production order through costing variant and valuation variant. This isexplained in detail under PP and CO integration in SAP

COGM is computed summing M activities and Indirect costs incurred in conversion incosting sheet.

Production Planning (PP) and Controlling (CO) integration in SAP:Integration of organizational entities in PP and CO has already been explained in the previoussection.

This section discusses the objects (such as production order in PP and costing sheet in CO)integration between PP and CO.

Production order that is created for production run monitoring and control is assigned with acosting variant. Costing variant contains a valuation variant assigned to it. Valuation varianthas a costing sheet attached to it.

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The purpose of Costing variant, Valuation variant and costing sheet are explained below:

Costing variant contains all control parameters for costing. This includes parameter thatcontrols how cost estimates are executed and which material prices / activity prices (forproduction or conversion cost computation) are used to valuate the costing items.Valuation variant is mainly to valuate the material issued for production and consumed. Herethe strategy is specified on priority basis, which price (standard price or moving average priceor price from info records of MM) needs to be defined. According to the set priority theappropriate prices are picked for costing the product / order.

Costing sheet collection of different items of cost and defines how the different overheadsare calculated.

Costing variant, valuation variant and costing sheets are defined and configured in COand are attached to Production order in PP

Thus the COGM is computed in SAP as summarized below:Material cost through BOMCost of conversion activities through definition of Plant, work center, routing / Plant,resources, recipes in PP and Cost center, activities and activities price in CO and theirintegrationIndirect expenses incurred in conversion activities through overhead definition and method ofcomputation in costing sheet that is attached to Production order (through coating variant and

valuation variant).

Deployment of Cost object controlling enables one to do:

Preliminary cost estimate computation at the time of order scheduling (Preliminary costing)Collection actual costs as the production order progress (Simultaneous costing)Valuating production order (Cost object) upon completion of order execution

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Broadly these activities are performed as detailed below:

Preliminary costing done during scheduling the Production order in PP, this is not discussedin detail in this document as it is out side the scope of the document.Simultaneous costing is performed as cost collection process, which is part of Processthroughout the period.Final costing is done at the time of order confirmation, which is part of Process throughoutthe period

Overhead application, variance analysis computation and actual costing are part of Periodend closing/processing. Period end closing is generally considered to be month endclosing.

Processes relating to Process throughout the period and Period end closing are discussedin detail in the subsequent sections, with an example.Macro picture of cost computation

The process of costing has very close alignment with Production process almost in everyrespect. Considering organizational units cost centers and work centers are inter-linked.Every Production order that is scheduled for Production is assigned with costing variant,valuation variant and a costing sheet, which collects the cost.

In the same way, at the every stage of Production activity the cost details such as materialcost, conversion cost through activity allocation (discussed later), indirect expenses arecollected and the cost of the Production order is determined which is distributed to theproducts manufactured under the given Production order.

The cost computation is done in the system, upon confirmation of Production order recordingthe quantity of goods produced and resources consumed.

Thus the costs of semi-finished goods are computed through cost capturing for each of thesemi-finished goods Production order and so as finished goods.

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In the following section (section covering process throughout the period and period endclosing), costing process of Production

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1.2.15 Profitability Analysis

General Explanation:Profitability Analysis (CO-PA) enables you to evaluate market segments, which can be

classified according to products, customers, orders or any combination of these, or strategicbusiness units, such as sales organizations or business areas, with respect to yourcompany's profit or contribution margin

Costing-based Profitability Analysis is the form of profitability analysis that groups costs andrevenues according to value fields and costing-based valuation

The actual postings represent the most important source of information in CO-PA. You cantransfer both sales orders and billing documents from the Sales and Distribution (SD)application component to CO-PA in real-time. In addition, an interface program is available tolet you transfer external data to the R/3 System. You can also transfer costs from costcenters, orders and projects, as well as costs and revenues from direct postings (G/L accountpostings in FI, orders received in MM, and so on) or settle costs from CO to profitability

segments


ABC Engineering (India) Ltd. expects segment wise reporting and combination of reports

through Profitability analysis by using Costing based method

Suggested Business Process:Operating concern need to be assigning to controlling area.

Desired Characteristics: -

PROFITABILITY ANALYSIS CHARACTERISTICS

SALES ORDER-WISEPRODUCT WISECUSTOMER

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controlling to be doc

Documents