The application component Cost Object Controlling is integrated with a number of other application components including external accounting, further components in Controlling, and various application components in logistics such as Production Planning (PP) and Materials Management (MM). This section explains how Cost Object Controlling is integrated in the R/3 System. This is illustrated using the example of a manufacturing company.
Cost Object Controlling receives a wide range of information from other application components and also feeds data to these components.
Data Used by Cost Object Controlling
Direct costs are costs that can be assigned directly to particular cost objects. Direct costs are posted using primary cost elements. This means that these cost elements have matching expense accounts in Financial Accounting. A posting to an expense account therefore results in a cost that can be traced directly to a particular cost object. For example, the costs for an external activity provided by a supplier can be allocated directly to a cost object. This requires the incoming invoice to be assigned to the cost object. If the incoming invoice is entered in Financial Accounting (FI), the costs are immediately allocated to the cost object.
An example of a direct cost is a direct materials cost. When a raw material or semifinished product is withdrawn from inventory to be used in manufacturing a finished product, a posting is generated to an expense account in Financial Accounting. The relevant expense accounts are Raw Materials Consumption and Semifinished Goods Inventory Change.
You enter material withdrawals (called goods issues) in the application component Materials Management (MM). Such goods movements in MM automatically generate postings in FI. For raw materials, the system debits Consumption of Raw Materials and credits Raw Materials. For semifinished products, the system debits Semifinished Goods Inventory Change and credits Semifinished Goods Inventory. The direct materials costs are allocated to the cost object. The amount allocated is the same as the expense posted in FI.
Indirect costs are costs that cannot be assigned directly to particular cost objects. An example of an indirect cost is the cost of electricity for a machine that produces different products. Indirect costs are usually first allocated from financial accounting to the cost centers (see also: Cost Center Accounting).
Cost centers are areas that perform defined activities for other cost centers or cost objects. These activities are valuated and updated using secondary cost elements. A secondary cost element is a cost element that does not have a matching expense account in Financial Accounting. Secondary costs are therefore valuated consumptions of internal activities. (Internal activities are activities that are performed inside the company rather than purchased from outside.)
Indirect costs are also called overhead costs.
Sometimes cost centers also assign direct costs to the cost objects. This is so that the costs incurred at the cost centers can be monitored. The direct production costs (direct labor) are allocated from the cost centers to the cost objects.
An activity performed at a cost center can have a number of different components. For example, one hour of the activity type painting consists of the direct labor of the painter and the hourly rate of the painting machine. The value of a unit of activity of a particular type is called the price. A price can consist of both fixed costs and variable costs. Fixed costs are independent of the operating level, while variable costs vary with the operating level.
In the R/3 System, indirect costs can be allocated to cost objects with a number of different methods:
Internal activity allocation credits the cost center and debits the cost object. Internal activity allocation can be started manually in the menu of Cost Center Accounting or Cost Object Controlling. You can also start internal activity allocations through other business transactions. This means that the system automatically generates internal activity allocations when operations are confirmed in Production Planning (PP).
You can also link the PP confirmation to a goods movement in MM. When the confirmation is entered in PP, the system can generate a goods issue in MM in addition to the internal activity allocation. Confirmations in PP then cause a posting in FI in addition to the activity allocation in Cost Center Accounting (CO-OM-CCA). In repetitive manufacturing, you can also start activity allocations through goods receipt postings.
Overhead allocation credits the cost center and debits the cost object. You perform overhead allocation in the period-end closing process of Cost Object Controlling. You can allocate processes manually or through automatic process allocation. Processes can be charged with primary and secondary costs.
Allocation of process costs credits the process and debits the cost object. Automatic process allocation is started by template allocation and is performed in the period-end closing of Cost Object Controlling. Template allocation also enables you to allocate activity types. The cost center is credited and the cost object is debited. Cost objects can also be debited by repostings.
Primary and secondary costs are allocated to cost objects under the cost element of the secondary or primary cost, including the origin if desired (such as the material number and plant). You can view and analyze costs on cost objects at any time.
The R/3 System can also access this data during the planning stage. Cost estimates at the material level are created in the application component
Data Generated by Cost Object Controlling
* Only supported in Product Cost by Sales Order
Cost Object Controlling also generates its own data and sends it to other application components.
Here, too, functions in other application components can generate data in Cost Object Controlling and in other application components. For example, when a finished product is transferred to inventory, you enter a goods receipt in MM. This goods receipt generates a posting in FI (Finished Goods Inventory is debited and Inventory Change is credited). This in turn credits the cost object. The inventory level in FI is increased. You can also automatically create this goods receipt when you confirm in PP.
Semifinished products and finished products should be valuated with the standard price (see also:
The total inventory value is therefore the quantity of material in inventory multiplied by the standard price.
The standard price is usually calculated in a standard cost estimate for the material that you have created in the application component Product Cost Planning.
In some cases, costs may be incurred for a material before all (or even any) of the planned quantity has been produced. This means that an expense is recorded in FI that reduces the profit, even though this expense is part of the value-added process. To account for this, the value of the unfinished products (work in process or WIP) can be calculated during the period-end closing process in Cost Object Controlling and settled to FI. This settlement debits the work-in-process inventory account and credits the work-in-process inventory change account. Because the profit in Profit Center Accounting (EC-PCA) is usually calculated using period accounting, the work in process can also be transferred into EC-PCA.
Reserves (such as for unrealized costs) also can be transferred to FI and EC-PCA.
See also:Work in Process in Product Cost by Period Work in Process in Product Cost by Order Settlement in Product Cost by Order or Period Profit Center Accounting
Differences that exist on the cost object between the debit (posting of actual costs) and credit (delivery of finished products to inventory) also are transferred to FI. Settlement ensures that the actual costs (and not just the standard costs) are reported in FI. Settlement can also transfer the price difference to EC-PCA and Actual Costing/Material Ledger. This amount is also settled to Profitability Analysis (CO-PA), usually broken down into variance categories.
See also:Variance calculation
Note that not all costs entered in cost accounting have corresponding expense postings in financial accounting. Cost accounting often uses what are called imputed costs. There are different types of imputed costs:
A cost that is the same as the expense posted in financial accounting is called a basic cost.
Imputed costs are often one of the reasons the inventory values calculated in Product Cost Controlling are not used for valuation purposes in the annual balance sheet.
See also: For information on balance sheet valuation, see Inventory Costing.
In Profitability Analysis (CO-PA) the costs and revenues can be analyzed at the market segment level (such as for a particular product group or distribution channel in a particular region). In make-to-stock environments, in sales-order-related production with a valuated sales order stock, and in engineer-to-order environments with a valuated project stock, the revenues and the standard cost of goods manufactured of sales are transferred to CO-PA when the customer is invoiced. The standard cost of goods manufactured is calculated in the application component Product Cost Controlling. The cost component split (the breakdown into cost components) of the standard costs can be viewed in CO-PA. The purpose of CO-PA is to determine contribution margins. This is done by comparing the revenues against the standard costs and against other costs as well. Therefore you settle the variances to CO-PA as well. When you settle the cost objects, you can transfer the variances (broken down into variance categories) to the value fields of CO-PA. In Product Cost by Sales Order, you can also calculate additional results analysis data that can be settled to CO-PA.
For information on valuated sales order stocks, refer to the sectionValuated Sales Order Stock.
For information on calculating results analysis data that can be transferred to CO-PA (such as reserves), refer to the sectionResults Analysis.
For information on engineer-to-order environments, refer to the documentation Project System.
For information on the limitations involved with nonvaluated sales order stocks, refer to the sectionSpecial Case: Nonvaluated Sales Order Stock.
If you don’t want to valuate your inventories at standard cost during the year, or if the laws in your country do not allow you to do so, you can valuate your inventories at actual cost by activating the application componentActual Costing/Material Ledger (CO-PC-ACT). In this case, the price differences are settled to CO-PC-ACT as well, and are used there to determine the periodic unit price.
See also:Master Data of CO in Cost Object Controlling Master Data of PP in Product Cost Controlling Checking the Production Planning Master Data Before Costing Master Data of PP-PI in Product Cost Controlling Actual Costs in Cost Object Controlling