ABC Engineering (India) Ltd

Controlling

ABC Engineering (India) Ltd.

To Be Document

Prepared by xyz
1. Organizational Structure

1.1 Organization Units

1.1.1 Client
General Explanation
The client is the highest level in the SAP System hierarchy. Specifications that you make, or
data that you enter at this level are valid for all company codes and for all other organizational
structures. 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 Explanation
An operating concern represents an organizational unit in your company for which the sales
market has a uniform structure. It is the valuation level for Profitability Analysis (CO-PA).

Business Requirement
operating 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.

Operating
Concern 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 Explanation
The controlling area is the central organizational unit of the Controlling (CO) component. You
use the controlling area to carry out cost accounting.
Postings are forwarded from Financial Accounting to Controlling. During posting, you can
specify any additional account assignments relevant for cost accounting (for example, cost
center or internal order). Controlling area is assigned to your company code to ensure that
this data is forwarded to Controlling for further processing for cost accounting.

Business Requirement
Controlling shall be centralized

Suggested Business Process:

Internal business transactions will be portrayed in the controlling area. Primary costs will be
transferred from external accounting and classified according to managerial accounting
perspectives. 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 their
source. When you create master data, the system will always assign the Controlling objects to
a controlling area and a company code.

The level of detail provided by the Controlling component will enable you to track specific
information for cost monitoring, business decisions and sales control. For example, the
Controlling component will contain subdivisions such as cost centers and internal orders in
addition 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 ABCE would be assigned to the Company Codes.

1.1.4 Company Code

General Explanation
The smallest organizational unit for which individual financial statements are created
according to the relevant legal requirements. A company can include one or more company
codes.

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

Business Requirement
There should be one centralized Company Code

Suggested Business Process:

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 organization’s valuated consumption of production factors within a

Controlling 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) account
exists in Financial Accounting (FI). You can only create the cost or revenue element if you
have first defined it as a G/L account in the chart of accounts and created it as an account in
Financial Accounting. The SAP System checks whether a corresponding account exists in
Financial Accounting.
Secondary Cost Elements: Secondary cost elements can only be created and administrated
in cost accounting (CO). They portray internal value flows, such as those found in internal
activity allocation, overheadcalculations and settlement transactions.
When you create a secondary cost element, the SAP System checks whether a
corresponding
Account already exists in Financial Accounting. If one exists, you can not create the
secondary Cost element in cost accounting.
Cost Element Categories: The cost element category has a technical control function. It
determines 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 account
number. 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 post
indirectly 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 corresponding
expense or revenue accounts in Financial Accounting. It is a prerequisite to create relevant
general 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 a
primary 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 like
assessments, activity allocations and settlements. Secondary cost elements can be created
only 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 assignment
determines the transactions for which you can use the cost element.

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

Primary costs/cost reducing revenues,

Revenues,
Sales deductions and
External settlement

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

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

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

Business Requirement:
ABC Engineering (India) Ltd. expects cost accounting records should be updated
automatically when the corresponding financial documents are posted in Financial Accounting
to 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

Need for creation

of Cost Element

Primary OR Select
Secondary ? T.Code KA01

Select
T.Code KA06

Specify
Cost Elementand
Validity Period

Specify
Basic Data

Specify
Cost Element
Category

Specify Cost
Centre, if assigned
to one cost centre

Save

Page6 of 38
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 number
of cost element groups for valuation, planning and allocation purposes as part of master data
maintenance. 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 ease
of use in reporting, planning, allocations, etc

Changing of Cost Element Group: This process is for changing a Cost Element Group. This
allows for values to be added or deleted from the group, or for other groups to be added or
deleted 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 cost
element groups to be viewed along with their values.

Business Requirement:
Cost element are grouped the Overheads.

Suggested Business Process:

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. Cost
Center Accounting lets you analyze the overhead costs according to where they were
incurred within the organization.

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

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

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

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

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

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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 of
responsibility. In ABC Engineering (India) Ltd. cost centers are created according to the cost
centre categories
Cost center categories
Cost centres have been classified into the following categories: -
1. Production
2. Service
3. Sales
4. Administration
5. Management
6. Research & development
7. Allocation cost centre

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

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

You use cost centers for differentiated assignment of overhead costs to organizational
activities, based on utilization of the relevant areas and for differentiated controlling of costs
arising in an organization
Master data determines the structure of the given application component in the SAP System
and 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. After
initial entry, the system displays the basic data tab page, which is ready for input. On this tab
page, 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 on
the 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 the
planned and identify the variance that serve as signals to take corrective measures at cost
centre level, by updating cost centre records automatically on online real time basis when
ever corresponding business transaction takes place.

Suggested Business Process:

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

Need for creation

of 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

Specify details in
address &
Communications

Save

Page10 of 38
1.2.4 Cost Center Group
General Explanation:
You can collect cost centers according to various criteria into groups. This enables you to use
cost 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 the
organization. The individual cost centers form the lowest hierarchical level.

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

Cost Center Group Creation: A Cost Center Group is an organizational unit storing a group of
cost centers. Cost Centers with similar characteristics may be grouped together in cost
center group. You can define any number of cost center groups for valuation, planning and
allocation purposes as part of master data maintenance. You can also arrange cost center
groups 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 of
use 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 to
perform evaluations for each decision-making, responsibility, or control area. They also
support the processes during planning and internal allocations

Business Requirement:
Cost centers are majourly grouped as Production, Material, and Sales…Etc. 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 are
posted separately in fixed and variable portions. When you divide the activities of a cost
center into activity types, you should consider whether the costs could be allocated effectively
to the activity types.

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

You can plan, allocate, and control costs either at the activity type level of a cost center, or at
the 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 for
certain 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 being
used by the other objects.

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

Business Requirement:
Bellow Cost centers, work centers exist in production cost centers. A work center finds a
place in routing card.

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

Suggested Business Process:

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

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

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

Page12 of 38
the sender cost center. Valuation of activity quantities is made with an allocation price
calculated based on the managerial strategy chosen.

Deleting an activity type (KL04): - The activity type classifies the specific activities provided by
a cost center along cost allocation lines. Activity inputs from a sender cost center mean that a
receiver (another cost center or an order, process, and so on) is drawing on the resources of
the sender cost center. Valuation of activity quantities is made with an allocation price
calculated based on the managerial strategy chosen. You can only delete activity types in the
current 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 any
statistical key figures

Reviewing changes made to activity type (KL05): - Activity types created in the system may
require changes to correct errors made at the time of recording the master data or to update
the data with additional information. The following screens provide an internal audit trail to
verify 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 type
allocations

Page13 of 38
Create Activity Type

Need for creation

of Activity Type

Specify
Activity Type ID
and
Validity Date

Specify name,
description,
CCtr Category,
Activity Category,
Allocation Cost
Element

Check Lock
indicator to lock
Activity Type

Specify Out put

Unit

Save

Page14 of 38
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 transaction
within Cost Center Accounting. This is true for planning or assessment. During planning, for
example, you can display and plan multiple activity types in one transaction. You can also use
activity type groups during assessment (for example, assessment to specified activity type
groups).

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

Create Activity Type Groups: Use this transaction to create Activity Type groups. Activity type
groups 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 reporting
requirements

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 groups
may be added, revoked or re-assigned to the Activity Type Group being maintained. Activity
type groups are flexible structures and can be used in other activity type groups, collective
master 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 not
deleted 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)

Page15 of 38
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 all
Subsequent posting periods of the fiscal year.

 Totals values
Key Figures defined as Total values are valid only in the posting in which they are
entered

Key figures defined as fixed values are valid as of the posting period, and in all subsequent
posting 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 processing
lets you process multiple statistical key figures simultaneously.

Change Statistical Key Figure: - The purpose of this script is to demonstrate how to change a
statistical 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 you
enter another new value. When you make changes to statistical key figures of the category
Totals values, you can first reset the values using reversed +/- signs, and then enter the new
values.

Business Requirement:
ABC Engineering (India) Ltd. desires to distribute the expenses of service and administrative
cost 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)

Page16 of 38
 Create Statistical Key
Figure
Need for creation of
Statistical Key Figure

Specify
Statististical Key
Figure-ID

Specify name,
description,
Unit of
Measurement and
Key figure
category

Check Lock
indicator to lock
Activity Type

Specify Out put

Unit

Save

1.2.8 Statistical Key Figure Group

Page17 of 38
General Explanation:
You can gather statistical key figures into statistical key figure groups. You can use statistical
key 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 been
created, a statistical key figure group may be necessary for reporting and monitoring the
contents of the group. For example, a statistical key figure (SKF) type group could be created
for 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 skf’s
with user defined similar characteristics

Changes To Statistical Key Figure Group: - To make changes to a previously created

statistical key figure group. Enter the statistical key figure group name or click on down facing
area 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 selection
From the drop down list for the statistical key figure group you wish to make changes to and
click on the green check mark to continue

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

Business Requirement:
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

Page18 of 38
General Explanation:
The basic goals of cost center’s cost planning are:
 Plan and structure of company’s 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 centers
periodically. In activity-independent primary cost planning, planning will be done only for fixed
costs.

Activity-dependent primary cost planning enables to plan primary costs on a cost centre that
are 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 these

activities in fixed and variable portions. This means that the activity type price include two
fixed 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 centers
provide which activity at what price. These planned prices are used to calculate the actual
activities value by considering actual quantities of activities, carried out at production cost
centers.

Planning of statistical key figures (such as number of power units per cost centre that are
used as tracing factors) is for periodic transactions such as assessment. These statistical key
figures can be defined as fixed value or as a total value. The fixed value is carried over from
the period in which it is entered to all subsequent periods of the same fiscal year. You need to
enter a new posting only if the value changes. The total value posts the value only in the
period. 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.
Business Requirement:
In order to determine the overhead absorption / recovery rate it is imperative to prepare the
budget estimate of expenses that would be part of costs. ABC Engineering (India) Ltd. desires
a facility to prepare the budgets / overhead estimates as planned costs

Result analysis of Cost centers

Suggested Business Process:

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

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Cost Centre-Planning
Need to Plan costs
and Revenues for
Cost Centre

Specify
Plan Version,
Periods from & to
Fiscal Year

Specify
Cost Centr/Group,
Activity Type,
Cost Element/
CE Group

Invoke Overview
Icon

Specify planned
cost for the given
activity and given
Cost Eleent for
each period

Save

Page20 of 38
1.2.10 Cost Center Accounting- Actual Postings-
Reposting
General Explanation:
ABC Engineering (India) Ltd. can repost primary costs from one controlling object to another
using transaction-based transfers; the original cost element is always retained. This function
is designed to correct posting errors. Posting errors should preferably be corrected in the
application component where they originate, so that external and internal accounting (FI and
CO) is always reconciled.

In ABC Engineering (India) Ltd. the assignment of CO objects to the transactions in other
modules like FI, SD etc. is taken care of where ever possible, to post the entries automatically
to 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 rectify
posting errors related to assignment to a controlling object: reposting costs (or revenues), and
reposting 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 the
amount 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 do
this, the CO reposting document must reference the original FI document that posted the
costs to CO. This enables to track the movement of cost with in CO, and still preserve the
link 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 be
reposted.

Business Requirement:
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 erroneous
assignment to controlling objects.

Suggested Business Process:

Posting errors involving assignment to a controlling object, calls for transaction-based
reposting in CO

Page21 of 38
Cost Centre-Repostings

Need to Repost

Specify
Document Date,
Post date, Period
& Text

Specify source
Cost Centre, Cost
Element and
amount

Specify Target
Cost Centre

Save

Page22 of 38
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 cost
centre to receiving controlling objects. In ABC Engineering (India) Ltd., cost centers is used
as senders, where as receivers can be cost centers, internal orders, or cost objects. During
assessment, the original cost elements are summarized into assessment cost elements and
assessed to the receiving object.

ABC ENGINEERING (INDIA) LTD., should consider the following sender and receiver
relations before allocating the costs: from which objects the costs are allocated, which objects
costs are allocated to, which costs should be allocated, how the costs are distributed among
the 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 receiver
side rules can be fixed amounts, fixed percentages, fixed portions and variable portions. The
tracing factor of the variable portion identifies a posted value on the cost centre as an
allocation base. Provision is made to specify whether the variable portion is to consist of
costs, consumption, statistical key figures, or activities. Plan and actual values can be used
as an allocation base.

In assessment, line items are posted for the sender as well as receiver, enabling the
allocation to be recorded exactly. The system does not display the original cost elements in
the 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 there
is 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, by
changing the appropriate assessment cycle.

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Cost Centre-Assessment

Need to run
assessment cycle

Specify
Period from & to
Fiscal Year

Specify Cycle
name

Execute

Page24 of 38
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 ABC
ENGINEERING (INDIA) LTD. can analyze costs differently than in Cost Center Accounting for
cost management.

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

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

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

ABC Engineering (India) Ltd. use statistical orders to evaluate costs that cannot be itemized
in detail in Cost Element Accounting or Cost Center Accounting. This can be achieved by
assigning the costs to both the statistical order and the responsible cost center, which directly
displays 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 of
communication expenses such as telephone, postage etc.), Insurance, staff welfare
expenses, Books and periodicals, Auditors remuneration, motor vehicle maintenance
expenses etc.

Business Requirement:
ABC Engineering (India) Ltd. expects to automate the process of analyzing its cost and
revenues at order/job level when the corresponding financial documents are posted in
Financial 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 the
business scenario of ABC Engineering (India) Ltd., only statistical orders are envisaged for
creation.

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Create Internal Order

Need for creation

of Internal Order

Specify
Order Type

Specify Order
name, short text,
Business Area,
and assign other
appropriate cost
objects

Set status to
Release

Check Statistical
Order in control
Data if the order to
be created is
statistical

Specify Settlement
Rule (If not a
Statistical Order)

Save

Page26 of 38
1.2.13 INTERNAL ORDERS-Actual Posting-Reposting
General Explanation:
ABC Engineering (India) Ltd. can repost primary costs from one controlling object to another
using transaction-based transfers; the original cost element is always retained. This function
is designed to correct posting errors. Posting errors should preferably be corrected in the
application component where they occurred, so that external and internal accounting (FI and
CO) is always reconciled. 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 rectify
posting errors related to assignment to a controlling object: reposting costs (or revenues), and
reposting 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 the
amount 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 do
this, the CO reposting document must reference the original FI document that posted the
costs to CO. This enables to track the movement of cost with in CO, and still preserve the
link 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 be
reposted.

Business Requirement:
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 to
erroneous assignment to incorrect internal orders.

Suggested Business Process:

Posting errors involving assignment to a internal order, calls for transaction-based reposting
in CO

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Internal Order-Repostings

Need to Repost

Specify
Document Date,
Post date, Period
& Text

Specify source
Order, Cost
Element and
amount

Specify Target
Order

Save

Page28 of 38
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 and
PP, thus every production order scheduled and executed the corresponding cost data are
collected, recorded and production are calculated. Complete details are set out in following
section-Appendix.

The following process is part of period end activities:

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

Complete details of the above are set out in Appendix.

Business Requirement:
ABC Engineering (India) Ltd. expects to valuate all production orders online real time
basis to accomplish the following:
 Determining cost based pricing policies
 Valuating of inventories
 Determination of Cost of goods (manufactured / sold)
 Variance analysis (Planned yield vis-à-vis actual yield)

Suggested Business Process:

In the IMG activity, create costing variants, valuation variants, costing sheets, cost component
structures, 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 incurred
on 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 in
an enterprise.

Cost object controlling enables an enterprise to determine the cost of product viz. Cost of
goods 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-à-vis actual yield)

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Cost object controlling is integrated with the following modules / (sub) modules for actual cost
computing 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 period
Product cost by sales order
Cost of intangible goods and services

This appendix discusses in detailed on product cost by order, which is proposed for
implementation 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 cost
Cost 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 and
one 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 product
costing is performed with this BOM. It is also possible to extend production BOM for using
costing purpose. In ABC ENGINEERING (INDIA) LTD., production BOM would be used for
costing purposes.

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Cost of Conversion activities is also called cost of production activities. This cost
computation 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 or
‘Resources’, in case of continuous processing scenario. Each of the work centers would have
set of ‘Routings’ that defines steps and stages to complete Production process and so as
‘Resources’ have set of ‘Recipes’. ‘Plant, Work centers, Routing’ are defined in PP
module

The ‘Plant, work centers, routing’ has set of activities that are performed to convert the raw
materials to semi-finished goods or finished goods. The execution process of these activities
consumes men, machine and indirect material that have monetary value. The monetary
values of these activities are called ‘Activity Price’. These ‘Activities’ and ‘Activity price’ of
conversion are defined in CO module as a master data. Each of ‘Cost centers’ utilizes
this master data, wherever relevant.

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Every work center / Resource (an entity in PP) is assigned to a ‘Cost center’ (an entity
in 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.

Work
SI Center Work Center Name Cost Center Cost Center Name
Raw material
inspection
1 wk1-010 (Own/Masop) BA111010 Material Yard
2 wk2-020 Gas Cutting BA122090 Excavator
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

Page32 of 38
Costs of indirect activities are collected through definitions in Costing sheet, which is
attached to every production order through costing variant and valuation variant. This is
explained in detail under ‘PP and CO integration in SAP’

COGM is computed summing ‘M activities’ and ‘Indirect costs incurred in conversion’ in

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

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 a
costing variant. Costing variant contains a valuation variant assigned to it. Valuation variant
has 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 that
controls how cost estimates are executed and which material prices / activity prices (for
production or conversion cost computation) are used to valuate the costing items.
Valuation variant is mainly to valuate the material issued for production and consumed. Here
the strategy is specified on priority basis, which price (standard price or moving average price
or price from info records of MM) needs to be defined. According to the set priority the
appropriate prices are picked for costing the product / order.

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

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

Thus the COGM is computed in SAP as summarized below:

Material cost through BOM
Cost 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 their
integration
Indirect expenses incurred in conversion activities through overhead definition and method of
computation 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

Page34 of 38
Broadly these activities are performed as detailed below:

Preliminary costing done during scheduling the Production order in PP, this is not discussed
in 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 ‘Process
throughout the period’.
Final costing is done at the time of order confirmation, which is part of ‘Process throughout
the period’
Overhead application, variance analysis computation and actual costing are part of ‘Period
end closing/processing’. Period end closing is generally considered to be month end
closing.

Processes relating to ‘Process throughout the period’ and ‘Period end closing’ are discussed
in 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 every
respect. 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 material
cost, conversion cost through activity allocation (discussed later), indirect expenses are
collected and the cost of the Production order is determined which is distributed to the
products manufactured under the given Production order.

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

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

Page35 of 38
In the following section (section covering process throughout the period and period end
closing), costing process of Production

Page36 of 38
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 strategic
business units, such as sales organizations or business areas, with respect to your
company's profit or contribution margin

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

The actual postings represent the most important source of information in CO-PA. You can
transfer 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 to
let you transfer external data to the R/3 System. You can also transfer costs from cost
centers, orders and projects, as well as costs and revenues from direct postings (G/L account
postings in FI, orders received in MM, and so on) or settle costs from CO to profitability
segments

Business Requirement:
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-WISE
PRODUCT WISE
CUSTOMER

Page37 of 38
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