‘Cost Center Accounting (CO-OM-CCA)’ helps you to track where costs are incurred in your enterprise. All the costs, such as salary and wages, rent, water charges, etc., incurred are either assigned or posted to a cost center.
What is a ‘Cost Center’?
A ‘Cost Center’ is an organizational element within a controlling area.
You may define cost centers according to your specific needs; the most common approach is to define a cost center for each of the bottom-most organizational units that are supposed to manage their costs. So, typical cost centers could be canteen, telephone, power, human resources, production, etc.
There are other ways of designing cost centers; you may create cost centers representing geographical requirements or responsibility areas or activities/services produced, etc.
After defining individual cost centers, you will assign each one of the cost centers to one of the cost center categories. All cost centers of a controlling area are assigned to a standard hierarchy.
What is a ‘Cost Center Category’?
A ‘Cost Center Category’ is an indicator in the cost center master record that identifies what kind of activities a particular cost center performs. SAP comes delivered with default categories such as administration, production, logistics, marketing, development, management, etc. If necessary, as in other cases, you may create your own categories. The categorization is useful for assigning certain standard characteristics to a group of cost centers performing similar activities.
SAP also allows you to store special indicators (such as lock indicators) for each of the cost center categories. These special indicators serve as defaults when you create a new cost center.
What is a ‘Standard Hierarchy?
A tree-like hierarchy structure grouping all the cost centers (of all the Company Codes belonging to a single controlling area) so defined is known as the ‘Standard Hierarchy’ in CO. This is the SAP method of grouping all the cost centers in a controlling area, which helps in analyzing the cost summary at the end of the nodes of the hierarchy (cost center or cost center groups or at the top level). A cost center can be attached to any number of cost center groups, but you cannot assign the same cost center more than once within a cost center group.
The standard hierarchy helps in easy maintenance of the cost centers/cost center groups for creation of new ones or changing existing ones. It supports drag-drop functionality.
You may use alternate hierarchies to group cost centers according to your internal reporting requirements. You can have any number of alternate hierarchies but it is mandatory that you have one standard hierarchy. The alternate hierarchy is also known as the master data group.
Explain Posting of Costs to ‘Cost Centers.’
When you create accounting transitions in FI/FI-AA/MM, you typically post to one or more GL accounts. While doing so, provided you have already configured in such a way, you also require the user to input the cost center for that transaction, so that when the transaction is posted the values (costs) flow not only to the GL but also to CO to the appropriate cost center. The system will create two posting documents: one for FI and another for CO.
Additionally, you will also be able to post non-financial information such as direct labor hours from HR or PP modules to cost centers in CO.
What is an ‘Activity Type’?
‘Activity Type’ helps you do define the service/action (for example, human labor, machine labor, repair hours, etc.) performed or provided by a cost center. It forms the ‘basis’ for allocating costs to other cost centers or internal orders, etc. You may assign an activity type to an operation so that they are reflected in PP; a CO document is created with the costs of the operation allocated from the cost center that produced the operation to a production order, when the operation is completed in PP.
You may group activity types into activity type groups for easy maintenance.
You need to arrive at the activity price, which needs to be attached to that particular activity type for planning or recording the actual. The activity price is calculated by dividing the total costs by the total planned/actual activity quantity (hours, units, etc.).
It is not necessary that all the cost centers have activity types associated with them. If there is no output from a cost center, then there will be no activity type for that cost center.
Where do You Assign Activity Type in Cost Centers?
There is no direct assignment. You plan the output for a cost center first by using Transaction KP26. Then, plan the value of that cost center with the budget for a period in Transaction KP06. ‘Planned Activity expenditure’/‘Planned Activity Quantity’ gives the ‘planned activity rate,’ which you can use to valuate your activity confirmations in manufacturing orders. You can also define your activity prices on your own, but you have to run the ‘price revaluation’ if you want to revaluate your actual activity prices.
What is a ‘Resource’ in CO?
‘Resources’ are goods/services, consumed by CO objects such as cost center/internal order/WBS element, which are supplied (internally or externally) to an organization in order to produce business activities. The resources are used only in planning and not for tracking the actual.
There are three types of resources:
- Type B (used in base planning object)
- Type M (refers to a material)
- Type R (exists only in CO-OM)
The ‘Statistical Key Figure (SKF)’ is used as the basis (tracing factor) for making allocations (assessments/distributions). They are the statistical data such as number of employees, area in square meters, etc. You will make use of a SKF when you are faced with a situation where it is not possible to use any other conventional method or measure to arrive at the share of costs to be allocated to cost centers.
Suppose that you are incurring a monthly expense of USD 5,000 in the cost center cafeteria, the cost of which needs to be allocated to other cost centers. You can achieve this by the SKF. Imagine that you want this to be allocated based on the ‘number of employees’ working in each of the other cost centers such as administrative office (50 employees) and the factory (200 employees). You will now use the number of employees as the SKF for allocating the costs.
In SKF allocation, you have the flexibility of using two different SKF Categories; namely, Total value or Fixed value. You will use fixed values in situations where the SKF does not change very often, as in the case of the number of employees, area, etc. You will use total values in situations where the value is expected to change every now and then, as in the case of power use or water consumption and the like.
Explain the ‘Planning’ steps in CO-OM-CCA.
The three steps involved in planning in cost center accounting include:
Configuration required for planning
- Configure a Plan Version
- Create or Copy Plan Layouts
- Create Plan Profile
- Insert Plan Layouts into Plan Profile
Completing the planning activity
What is a ‘Plan Version’?
A ‘Plan Version’ is a collection of planning data. The version controls whether the user will maintain plan data or actual data or both. You may create as many versions as you need, though SAP provides you with the necessary versions in the standard system.
Each version has information stored in the system per fiscal year period. The version ‘000’ is automatically created for a period horizon of five years, and is normally the final version as this allows for storing actual information as well. You will be using the data in version ‘000' for all the planned activity price calculation. Once planning is completed, you need to ‘lock’ that version so that no one will be able to modify the plan data.
What is ‘Integrated Planning’ in CO-OM-CCA?
‘Integrated Planning’ helps you to transfer data from other SAP modules such as PP, HR, FI-AA, etc. If you have planned data in these modules and just transfer these into CO, without making any changes, then you do not need plan again in cost center accounting. Before using integrated planning, you need to activate the integration in the planning menu.
Note that integrated planning is possible only when there has been no data planned on that version before activating the integrated planning.
Explain ‘Plan Layout.’
A ‘Plan Layout’ is nothing but a data entry screen or template that you use to input plan data.
In most situations, it would be more than sufficient to use SAP supplied planning layouts; however, you may create your own by copying one of the existing layouts and altering it with the help of report painter. While creating a custom layout, note that you have the flexibility to create up to nine lead columns (giving the details the nature of the data associated with the value columns), and any number of value columns (plan data such as amount, unit, etc., corresponding to the lead column).
You also have the option of using MS-Excel spreadsheets as the data input screen in lieu of the SAP plan layouts; but to achieve this you need to activate the ‘integrating with Excel option’ while assigning the layout(s) to a planner profile in IMG.
You need to define a plan layout for each of the three planning areas in CO, namely:
- Primary Cost and Activity Inputs
- Activity Output/Prices
- Statistical Key Figures
A ‘Plan Profile’ (or Planning Profile) helps in controlling the whole process of planning by logically grouping the various plan layouts together. It determines the timeline for planning. You can have more than one planning layout per plan profile.
Before you actually start inputting the data, you need to set the plan profile so that the system knows what layout needs to be used for the planning exercise.
How do You Copy ‘Plan Data’ from one period to another?
SAP allows you to copy planning data, created manually earlier, from one fiscal year to the other or from one period to a different period within the same fiscal year. You have the option of copying existing plan data to a future period as new plan data or copying actual data from one period to another as plan data.
What is the recommended Planning Sequence, in CO?
SAP recommends three steps in the planning. In all three steps, the planning can be carried out manually or automatically. You may use assessment, distribution, and indirect activity allocation or inputted costs for planning. You can also have centralized planning (cost element planning for all the cost centers) and decentralized planning (planning for individual cost centers) in your organization.
What are the two options for entering Plan Data?
SAP provides you with a choice of two options to enter your plan data. You may use Form-based entry or Free entry.
In form-based entry, all you need to do is fill in the plan data in the rows corresponding to the characteristic values (cost centers, cost element, etc.) displayed on the screen. But, in free entry, you have the freedom of inputting even the characteristic values.
What are ‘Distribution Keys’?
The SAP system uses ‘Distribution Keys’ to distribute planned values across various periods. With the standard distribution keys supplied by SAP, you will be able to achieve the type of distribution you need:
- DK1 (equal distribution)
- DK2 (distribution as done earlier)
- DK5 (copy values to period where there is no value)
Differentiate ‘Activity-Dependent ‘and ‘Activity-Independent’ Costs.
As you might be aware of already, there are two types of costs; namely, variable costs and fixed costs.
Variable Costs, such as material costs, factory labor, etc., are always dependent on an activity, and will vary depending on the activity. The higher the activity the more will be the expenditure towards variable costs. In short, these costs are directly proportional to the level of activity. In SAP CO, these costs are known as ‘Activity-Dependent Costs.’
In contrast to the variable costs, ‘Activity-Independent Costs’ or fixed costs do not usually vary with the level of activity. And you may need to incur these costs irrespective of whether there is an activity. Costs such as costs towards security, insurance premiums, etc., fall under the category of fixed costs.
What is a ‘Mixed Cost’?
There are instances where you will come across a costing situation where the costs cannot be strictly segregated into either fixed or variable costs. These costs are known as semi-fixed costs or semi-variable costs or mixed costs, because a portion of the total costs is fixed and the remaining portion is a variable cost.
The classic example is the charges for electricity in a production environment, where there is a basic minimum charge payable to the electricity provider (or towards heating requirements of the buildings) which remains fixed whether there is some production activity or not. When there is production, you will use more electricity, which varies with the level of production.
Explain ‘Manual Primary Cost Planning.’
‘Manual Primary Cost Planning’ is used to plan for costs associated with the external procurement of goods and services. You will plan both fixed and variable costs, and also mixed costs, if necessary. You will plan costs such as salaries, wages, etc., as activity-dependent costs; the costs towards security, etc., will be planned as activity-independent costs.
You need to note that planning fixed primary costs is not vastly different from that of planning for variable primary costs. When you plan for the variable primary costs you need to mention the activity type associated with that. You may further break down this cost into fixed and variable proportions. The ‘fixed primary costs’ or ‘activity-independent primary costs’ are planned using the primary cost elements on various cost centers, based on the activity performed on a particular cost center.
You may use any of the following SAP supplied planning layouts:
- 1–101— Activity-independent or activity-dependent primary costs
- 1–103— Activity-independent costs
- 1–152— Activity-independent costs (on a quarterly basis)
- 1–153— Cost-element planning (two versions simultaneously)
- 1–154— Cost-element planning (previous year’s actual displayed in the lead column)
- 1–156— Central planning (Cost element planning from Cost center perspective)
SAP provides you with two ways of handling Primary Costs Planning; namely:
- Inputted Costs Calculation
- Distribution
Distribution helps in planning primary costs from one cost center to the other. The cost center from where the costs are distributed is known as the sender (or pooled cost center or clearing cost center) and the other cost centers to which the costs are distributed or where the costs are received are known as receivers.
Note that you will be able to distribute planned/actual primary costs only. Also note that the pooled cost center does not incur any of these costs but acts only as the ‘clearing center’ for distribution to other cost centers. During the process, you will use the SKF or the regular percentage method as the distribution rule for achieving the distribution. The distribution cycle helps to carry out the whole planning exercise.
Explain ‘Manual Secondary Cost Planning.’
‘Manual Secondary Cost Planning’ is required when you need to plan consumption quantities of a sender cost center’s planned activity from the point of view of the receiving cost center. The activity inputs may be planned either as the activity-dependent costs (variable) or as activity-independent costs (fixed).
The ‘activity-dependent primary cost planning’ is used only when you need the services such as repair hours on a specified activity type. On the other hand, you will use ‘activity-independent primary cost planning’ when you need services such as maintenance hours, which are not restricted to a particular activity.
The system uses the ‘planned calculated activity price’ for posting the secondary cost. It is possible to carry out ‘manual secondary cost planning’ for activity types categorized as Category-1 (manual entry/manual allocation). Note that it is important that you perform reconciliation of planned consumption of an activity at the receiver cost center to the volume planned at the sender’s level; otherwise, you will get a warning message when the system calculates the activity price.
Explain ‘Assessment’ in Secondary Cost Planning.
‘Assessment’ is one of the methods used in ‘automatic planning of secondary costs’ in cost center accounting. You will typically use this method when you need to allocate costs from one cost center to other cost centers. The original costs, even if they are primary, from the cost center are grouped and reclassified as secondary while allocating the same to other cost centers (imagine that you are collecting primary costs such as postage, telephone, courier expenses, fax charges, etc., into a cost center called 1000, now group these costs for assessment using a secondary cost element to receiver cost centers: 2000 and 3000).
You need to define an assessment rule (either ‘percentage’ or ‘SKFs’ or ‘fixed amounts’) for affecting assessment. You would have now noticed that this is similar to the distribution used in ‘primary cost planning.’
So, why do you need an assessment? Assessment is required when you need to allocate secondary costs, and when you do not need the details you would otherwise get from distribution.
What is an ‘Allocation Structure’?
You need to define or use a secondary cost element, called the ‘assessment cost element,’ while you carry out the ‘assessment’ in ‘automatic secondary cost planning.’ Instead of defining individual assessment elements (for a group of primary cost elements) in individual segments, every now and then, you may define various assessment elements in an ‘Allocation Structure,’ and use them repeatedly.
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