Cost Center Accounting 

Purpose

You use Cost Center Accounting for controlling purposes within your organization. The costs incurred by your organization should be transparent. This enables you to check the profitability of individual functional areas and provide decision-making data for management. This requires that all costs be assigned according to their source. However, source-related assignment is especially difficult for overhead costs. Cost Center Accounting lets you analyze the overhead costs according to where they were incurred within the organization.

Depending on the level of decision-making powers assigned to the manager of an organizational unit, you can distinguish between various types of responsibility areas within an organization:

Cost center

Recording costs with reference to plan values

Profit centers

Calculating operating results

Investment centers

Calculating Return On Investment

In the R/3 System you can create an investment center in the Profit Center Accounting component (EC-PCA). You do this by assigning balance sheet items to a profit center.

Dividing an organization into cost centers allows you to follow several goals, depending on the cost accounting method.

This 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.

Implementation

Cost Center Accounting (CO-OM-CCA) is often used in the first phase of an R/3 implementation, together with the main areas of Financial Accounting (General Ledger (FI-GL), Assets Payable (FI-AP), Assets Receivable (FI-AR)) and Overhead Orders (CO-OM-OPA).

You can also implement Cost Center Accounting without Financial Accounting. Some settings, however, such as chart of accounts, company code, must be made in the FI module.

Integration

The costs of each cost-accounting-relevant business transaction portrayed in the R/3 System through can be assigned through Cost and Revenue Element Accounting (CO-OM-CEL) 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, for example, to internal orders (CO-OM-OPA), projects (PS), cost objects (CO-PC) or market segments (CO-PA).

Features

Entering actual costs

Primary costs can be transferred to Cost Accounting from other components, for example, Materials Management (MM), Asset Accounting (AA), Payroll Accounting (PY).

Additional costs and outlay costs are recorded using the accrual method.

Allocating actual costs

You can use various methods to further allocate the actual costs you have recorded, according to their source. The R/3 System distinguishes between transaction-based allocations, which occur within one period, and period-based allocations, which occur at period end.

Planning activities and costs

You can use planning to define organizational targets and carry out regular cost-effectiveness checks. Variances can be calculated by comparing the actual costs and activities with the plan values. These variances serve as a control signal, which helps you to correct business processes, when required.

You can plan costs and activities to determine allocation (activity) prices.

Allocating plan costs

All actual allocations that occur for cost centers can also be planned (for example, distribution, assessment, indirect activity allocation).

Entering plan and actual statistical key figures

Statistical key figures are used as the basis for the indirect allocation methods, as well as for evaluations in the information system (for example, employees, telephones).

Activity Accounting

Activity Accounting uses the activity produced by a cost center as the tracing factor for the costs. You can use activities to measure the operating rate or the rate of capacity utilization for a cost center. The target costs of the cost center refer to the activity output.

Depending on the source of the costs, the activities of a cost center are divided into various activity types (for example, for the Work center cost center: Repair hours or Assembly hours.

Information system

The information system provides tools with which you can analyze the cost flows that have occurred in your organization. You can carry out standard recurring evaluations; and create special reports for unique tasks or situations.

Constraints

Note that you can only post revenues statistically on cost centers. The true posting must occur on a revenue-carrying object. This could be, for example, a revenue-carrying order (see: Account Assignment for Controlling Objects).