 Cost Element Accounting

 Cost Center Accounting

 Internal Order
 Product Costing
 Cost Object Controlling
 Profitability Analysis (CO-PA)
 Profit Center Accounting

1. Cost Element Accounting

Cost Element Accounting helps to structure revenues and expenses. It
consequently, makes them a critical piece of any organization’s complete managerial
accounting picture.

Cost Elements
The cost elements are the foundation of cost Element Accounting, the Controlling
Subcomponent that acts as the basis for all the others. Although Cost Element
Accounting does not offer much functionality. Still, we must implement it for an
organization to use all the other Controlling Sub-components. And also to display
revenues and expenses in Controlling.

Cost Accounting
Cost Accounting is the area of cost accounting where you track and structure the
costs incurred during a settlement period. Therefore it is not an accounting system
as such, but rather a detailed recording of data that forms the basis for cost
accounting.

Specialty of Cost Elements in SAP Controlling

In an integrated accounting system like SAP, we don’t need to enter cost data
separately. This is because each business transaction that involves costs, updates
the CO component with detailed information on the cost element and on the account
assignment object itself.

Consequently, each consumption transaction in MM (Material Management) flows

directly through the General Ledger account (cost element) to the corresponding
account assignment object.

Similar is the case with Billing in SAP SD (Sales & Distribution) and External
transactions for invoice verification.

Classification of Cost Elements in SAP Controlling

Cost Elements classify an organization’s valuated consumption of production factors
within a controlling area. Furthermore, a cost element corresponds to a cost-relevant
item in the Chart of Accounts.
We can classify between primary cost and secondary cost elements.

Primary Cost/Revenue Elements

A primary cost or revenue element is a cost-relevant item in the chart of accounts for
which a corresponding GL account exists in Financial Accounting.

As per SAP, we can only create the cost or revenue element if we have first defined
it as a G/L account in the chart of accounts. And then further created it as an account
in Financial Accounting.

Thus, the SAP system checks whether a corresponding account exists in Financial
Accounting or not.

Examples of Primary cost elements include:-

 Material Costs
 Salary costs
 Revenue
 Sales Deduction

However, in S4 HANA, we don’t need to create a Cost Element master record

separately; this is because now all cost element categories are part of GL Master.

Secondary Cost Element

We can create and administer the Secondary cost elements only in the Cost
Accounting (CO). They portray internal value flows, such as those found in internal
activity allocation, overhead calculation and settlement transactions.

In SAP ERP When we create a secondary cost element, the System checks whether
a corresponding account already exists in Financial Accounting. If one exists, you
cannot create the secondary cost element in cost accounting.

Examples of secondary cost elements include:-

 Assessment of Cost elements

 Internal Activity Allocation with Cost Elements
 Order Settlement with Cost Element
 And Overheads with Cost Elements

In S4 HANA, now secondary cost elements are part of the chart of accounts. We can
also merge the secondary cost element with GL Master.

Master Data Cost Elements

A key aspect of the Cost element is Master Data Cost Elements. Here we create
primary and secondary cost elements.

At the beginning of Cost Element Accounting, we first learn how to create cost
elements. Further, we would discuss the difference between the cost element types
and categories.
Primary and Secondary Cost Elements in SAP
Cost elements are separated into primary cost elements and secondary cost
elements. Since both have their own use and importance in SAP Controlling. Thus,
you should understand both of them carefully.

Primary Cost Elements

Primary cost elements are created based on expenses accounts. They always have
the same number as the expenses account. In other words, there is a 1:1
relationship between the expense account and primary cost elements.

In SAP ERP Financial Accounting on expense accounts, we will post all the entries
in Controlling on the primary cost elements.

To clarify, if a cost element exists for this expense account, we must first create it as
a primary cost element. So that it can reflect the postings in the controlling module.

Secondary Cost Elements

Secondary cost elements are created in controlling and are used for all activities that
are executed in controlling.

Certainly, these Secondary Cost elements do not cause any change in any values in
the Financial Accounting module.

Importantly, the balance of the secondary cost element is always zero. For example,
it includes cost allocations, order settlements, and so on.

Lastly, for the secondary cost element, no General Ledger exists.

Cost Elements Categories – Primary and Secondary

We categorize the cost element by a cost element category. There are different cost
element categories for primary and secondary cost elements.

Below is a list of cost element categories available for Primary and Secondary
Cost Elements.

Category Primary Cost Elements

01 Primary costs/reducing revenues

03 Accrual/deferral per surcharge

04 Accrual/deferral per debit actual

 Category Primary Cost Elements

11 Revenues

12 Sales Deduction

22 External Settlement

Category Secondary Cost Elements

21 Internal Settlement

31 Order/project results analysis

41 Overhead Rates

42 Assessment

43 Internal Activity allocation

It’s essential to assign the correct cost element category to the cost elements. Hence
it guarantees an integrated value chain with correct results in Controlling in SAP.
Create Primary Cost Element – KA01
Creation of Cost Elements in SAP
Depending on your process for the master data creation, you can decide whether
you want to create cost elements manually or automatically.

Manual Creation of Cost Elements in SAP

If we create the cost elements manually, we need to define a process. In this
process, the person who creates the expenses accounts informs you about the new
account before executing any posting. Otherwise, you won’t be able to see this
posting in SAP Controlling.

Automatic Creation of Cost Elements in SAP

If you want to create cost elements automatically, you need to do
some configuration.

So here, the first setting we do is in the Chart of Accounts.

Further, we need to indicate those cost elements which the system creates
automatically.

Use Transaction Code (TCode) – OB13

Steps to Create Cost Elements Automatically

Next IMG => Controlling => Cost Element Accounting => Master data => Cost
Elements => Automatic Creation of Primary and Secondary Cost Elements =>
Make Default Settings

Further, we will make the default settings via the chart of accounts, which is
assigned to your controlling area.

From now on, the cost element will be created automatically with the assigned cost element
category. This is when we create a General Ledger account in the range of intervals.

Creation of Batch Job

SAP also enables you to create cost elements with a batch job, which means you
also have to maintain the default settings.

You can enter intervals or single expense General ledger accounts. Likewise, you
can enter account numbers that don’t exist as General ledger accounts and create
them as secondary cost elements.

However, for this, you need to assign a cost element category for the secondary cost
element category for the cost element.

Cost Elements Batch Input Session Creation TCode for – OKB3

Cost Element Groups

You can place cost elements into cost element groups. These groups are often used
in reporting to define assessment cycles, and settlement profiles many more.

I recommend that you use cost element groups as much as possible in the
configuration. Because in this way you can easily adjust the settings at this time,
such as changing the cost element groups.
Reporting Options
Reporting options for Cost Element Accounting is quite limited within standard SAP.
This is because we require them only for reconciliation purposes.

Cost Element Report TCode – S_SL0_21000007

2. Cost Center Accounting

Cost Center in SAP reflects the organizational structure of a company and displays
the areas of responsibility. It is truly important because it defines the basis for other
modules and overhead reporting.

Furthermore, Cost Center is one of the cost objects in cost of production calculation.
We use it for Overhead Management in Product Cost Calculation.

Use of Cost Center Accounting in SAP Controlling

 Cost Controlling– We use cost center accounting for controlling purposes

within the organization. The costs incurred by the organization should be
transparent.
 Profitability Check– This enables us to check the profitability of individual
functional areas and provide decision-making data for management. This
further requires that all costs be assigned according to their source. However
source-related assignment is especially difficult for overhead costs.
 Analyse Overhead Cost– With Cost center Accounting you can analyse the
overhead costs according to where they were incurred within the organization.
Dividing an organization into cost centers allows us to follow several goals.
Though it depends on the cost accounting method.
 Cost Determination– Assigning costs to cost centers allow us to determine
where costs are incurred within the organization. This further helps us to plan
our cost in a better manner.
 Cost Check– If we plan costs at the cost center level, we can check cost
efficiency at the point where costs are incurred.
  Assignment of Overhead Cost– If we need to assign overhead costs
accurately to individual products, services or market segment. Then we need
to further allocate the costs to those cost centers directly involved in the
creation of the products or services.
 Assignment of Activities– From these cost centers we can then use
different methods to assign the activities and costs to the relevant products
services and market segment.

How to activate Cost Center Accounting in SAP

Before using Cost Center Accounting, we need to activate it in Controlling Area.
Transaction Code OKKP or IMG. Then, follow the below steps:-

 Open the Activate Components/Control Indicators folder on the left side of the
screen.
 In the Activate Components Selection, choose Component Active from the
Cost Center field.
 If you select the account assignment: activity type (AA: Activity Type)
checkbox, the system allows you to assign costs directly to the activity type of
a cost center.

This is advantageous if you have more than one activity type assigned to a cost
center and want to use automated activity price calculation.

What is Cost Center Master Data

Cost center represents an area of responsibility that is an organizational unit within
an organization. We have to assign all cost centers to a cost center category to
create cost center Master Data. We use the cost center categories in activity
planning and default specific characteristics when creating a cost center.

IMG => Controlling => Cost Center Accounting => Master Data => Cost Center =>
Define Cost Center Categories.
How to create Cost Center Master Data?
After you have checked the cost center categories and adjusted them to meet your
requirements, you can finally create a cost center. To do this goes to Transaction
KS01 or follow the menu path

Accounting => Controlling => Cost Center Accounting => Master Data => Cost
center => Individual Processing

We create Cost centers by controlling areas and having a validity date. We can’t
assign a number range to the cost center, but it has proven useful to start the cost
center with the company code number followed by a sequential number.

This consequently, allows the user to easily identify the cost center of a specific
company code within the controlling area. Further, enter the number of the cost
center you want to create and adjust the validity date.
Important Fields of Cost Center Master
We can enter the user who is responsible for controlling this cost center.

User Responsible
We can enter the user who is responsible for controlling this cost center. By pressing
(F4) we can search for users in the system. This field is not mandatory.

Person Responsible
The person responsible is a mandatory field and there is no input help. In this field,
we enter the person that is responsible for the budget and the actual costs on this
cost center.

Department
We can assign the cost center a department. This is not a mandatory field and there
is no input help.

Cost Center Category

The cost center category is a mandatory field that defaults some characteristics of
the cost center. We can use it in activity-type planning.
Hierarchy Area
We need to assign every Cost Center to a hierarchical area. We can enter either the
top-notch of the hierarchy or a sub-notch of the cost center hierarchy. The system
changes the assignment automatically in this field if we move the cost center to
another notch in the hierarchy.

Company Code
We must assign all cost centers to a company code.

Business Area
The Business area is an organizational unit within the Financial Accounting module.
SAP recommends no longer using the Business area and instead using profit
centers and segments. However, if you want to use the business area, you need to
activate the scenario FIN_GSBER in your leading ledger.

Functional Area
The Functional area is an organizational element used to display the P & L
statement in cost of sales accounting.

Currency
The currency is defaulted by the controlling area currency. In general, the system
maintains a cost center in the company code currency. We can change the currency
only at the beginning of the fiscal year.

Profit Center and its connection with Cost Center in

SAP
Sometimes we activate Profit Center Accounting scenario in the Financial
Accounting module. Or we use classic Profit Center Accounting. In that case, the
system expects an entry in the Profit Center field. However, if we don’t assign a profit
center to the cost center, the system executes a warning message.

Cost Center Standard Hierarchies

We must define a cost center standard hierarchy for the controlling area when we
activate cost center Accounting. The standard hierarchy is equivalent to a cost
center group that contains all cost centers within the controlling area. It can also
have multiple cost center groups and represent the structure of the company.
3. Internal Order
We use Internal Orders in SAP to represent projects. In comparison to Cost Center,
these are comparatively limited.

Internal Orders don’t reflect the organizational structure. Instead, they represent a
variety of projects like Research and Development projects, Exhibition Events or
SAP Implement project costs.

Functions of Internal Order in SAP Controlling

1. Control Cost– Internal Order collects & controls cost for a specific purpose or
task.

2. Assign budget– We can also assign a budget for these tasks. This helps the
system to automatically monitor these tasks. And it also ensures that it will not
exceed the set budget.

3. Does all cost specific jobs– Internal orders are used to plan, collect, analyze
and monitor the cost of a specific job or task. SAP system also enables us to monitor
our internal orders throughout their entire life-cycle. This starts from initial creation,
through the planning and then finally posting all the actual costs to the final
settlement.

4. Order Management– Order management within a company usually differentiates

between sales-oriented orders and internal orders. While the Sales-oriented orders
(production or sales orders) are intended mainly for the logistical control of input
factors and sales activities.

Remember, since we cannot create complex structures with Internal Orders. Hence,
if we need to create project hierarchies. It is better to check out the Project System
module of SAP ERP.

Categorization of Internal Orders

Internal orders are categories as either:-

a. Orders used only for monitoring objects in Cost Accounting ( such as

adverting or trade fair orders)
b. Productive orders that are value-added, that is orders that can be capitalized
such as in-house construction of an assembly line.

This can be used for the collection of cost of revenue information for:-

1. Overhead Cost Analysis

2. Investment Cost
3. Product Cost
4. Result Data to know Profit or Loss

Classification of Internal Orders

Internal order may be settled either internally or externally. We can classify them by
their types. And these types are categorized by internal order categories.

An internal order type provides the following default parameters.

1. Budget Profile
2. Settlement Profile
3. Planning Profile
4. Object Class
5. Functional area to be updated
6. Release Status
7. Control indicators for revenue postings
8. Commitment item & integrated planning data

Internal Order Transaction Code

The Tcode for Internal order in SAP is OKKP. (Remember it for your SAP CO
interview purpose).

Master Data is what enables you to create Internal Orders. Here we will see how to
configure it so that you can create and use internal orders.
Types of Internal Order in SAP
The type of internal order in SAP Controlling determines not only the screen layout
and the number range but also the functionality of the internal order. There are
different types of orders.

Real internal orders or internal orders with revenue postings

Unlike the Cost Centers in SAP, internal orders can receive revenue postings. For
instance, we use Internal orders with revenue postings for specific customer projects
or intercompany recharges. This helps us to have a control that determines whether
the system have already recharged costs or not.

Statistical Internal Order

We assign statistical orders to a cost center. We post Costs both on the cost center
and Statistical internal order. It is not possible to settle Statistical internal orders. We
can create a Statistical internal order and assign it to the marketing cost center.

However, the real posting is on the cost center. For example, if we have marketing
cost center and want to see the media (flyers, billboards and flairs) costs. We then
create one Statistical internal order each for these flyers, billboards and flairs and
design those Statistical internal orders to the marketing cost center.

Internal Orders for Investment

We use internal orders for investments to display Assets under Construction (AUC).
While we can settle costs directly to Asset Accounting. We still have to assign every
internal order to an AUC, which the system creates automatically with the order.
There are also many more possibilities for internal orders for investment, especially
in the investment management module.

You can create an order type by using Transaction KOT22_OPA.

Different Status of Internal Order in SAP CO
in SAP Controlling, Internal Orders have a status that is driven by the status profile
assigned to the internal order type. The internal order has a system status and a
user status.

In general, the system status for internal orders has seven main statuses:-

a. CRTD– System creates order. Doesn’t all any actual postings. Allows
Planning and budgeting.
b. BUDG– System allocates budget to the order. As soon as a budget for the
order is maintained, the internal order gets the status BUDG
c. REL– System releases the Order. Also allows actual postings.
d. TECO– Order is technically complete. We cannot assign any purchase orders
to internal order anymore. While we can still do Postings.
e. CLSD– Here Order is closed. System doesn’t allow doing any more business
transactions. Only allows settlement of internal orders with status REL or
TECO.
f. LKD– Order is locked. Can’t do any more business transactions. Also the set
of the deletion flag is not allowed when the order is locked.
g. DLFL– Order is marked for deletion. We can set the deletion indicator.

Internal Order Planning

Let’s discuss the planning functions of Internal Orders. The following section shows
you the different ways to plan internal orders as well as the major planning aids.
Planning Integration
In the internal Order, you find a characteristic called plan-integrated order. This
ensures that we can update the activity inputs in planning directly on the cost center.
When we have these characteristics activated, we can also settle internal orders in
the plan. For technical reasons, we can’t set these characteristics for statistical
internal orders.

Budgeting
You learned how to maintain planning data on internal orders. You can control the
planning data with the help of plan/actual comparisons in different reports.

In addition to the planning, we can budget the internal orders. These can be year-
independent budgets or year-based budgets.

Further, a budget is a commitment to not exceed the actual cost. Also, the budgeting
is activated in assigning a budget profile to an internal order type.

Tcode to create a budget profile for Internal Order in SAP is – OKOB

Steps to create

IMG => Controlling => Internal Order => Budgeting and Availability Control =>
Maintain Budget Profile => Maintain Budget Profile- Click on the new entry to create
a Budget profile.
After the creation of the budget profile, we have to assign it to the internal order type.
Transaction Code- KOAB.

Maintain Budget
To maintain a budget on an internal order, you first need to create internal order. You
don’t necessarily have to release an order to be able to maintain a budget for single
internal order or an order group. T code – KO22.
Actual Postings
There are two types of internal orders:

 Real orders and

 Statistical internal orders.

While internal orders also allow revenue postings and can be settled, statistical
internal orders can do neither. They only receive postings statistically the real
postings go to a cost center.

However, Statistical orders enable you to differentiate costs on a cost element within
a cost center. For example, if you have a cost center for marketing costs and you
have different brands you can create a statistical internal order by brand and hence
do reporting at the brand level.

T Code- KO01

If you select the Statistical Order checkbox, the internal order requires another
account assignment in addition to the internal order assignment when posting. You
can either enter a cost center in the Actual Posted Cost center field or leave the field
empty.

If you enter a cost center, the system does not require an additional cost center
when posting to the internal order. If you leave this field empty, you need to enter a
cost center in addition to the internal order during posting.

Summary
Internal order in SAP is a short living cost object used in and part of Controlling.

In this blog, we discussed different functionalities for Internal Orders. Internal Orders
can have plan data and budget data. We learned the difference between planning
and budgeting and how to use the availability controls across modules to make sure
your budget won’t exceed. We also discussed the difference between real internal
orders and statistical internal orders and their usage.

Understanding the internal order concept is important if you want to learn SAP
CO perfectly as it is a very important component of SAP Controlling.

Internal Order is closely associated with another key component of CO i.e. Profit
Center Accounting. As we can transfer the cost to Profit Center from internal order
for profitability management. Thus, learning this also helps you in doing work upon
other elements of SAP controlling as well.
4. Product Costing (Product Cost Calculation)
Product Costing is the core module that creates Cost Estimates. It relies on the
correct setup of master data in Logistics. Hence the cost estimates help plan and
analyze costs and their different components.

The benefit of using Product Costing is, we get a standard price that we can release
to the Material Master. And this we can use for at least one period of inventory
valuation of the manufacturing goods.

Product Cost Calculation Areas in Controlling in SAP

It is a tool used to estimate the standard cost per unit of a product & to determine the
cost of goods manufactured and cost of goods sold.

This tool contains the following areas.

1. Product Cost Planning

2. Cost Object Controlling
3. Actual Costing or Material ledger

Key Component of Product Cost Calculation

a. Material Cost
b. Process or Conversion Cost
c. Overheads
d. Manufacturing or production Overheads
e. Administrative Overhead
f. Selling and Distribution Overheads

Product Cost Planning

Product Cost Planning is an area within Product Cost Controlling where we can plan
costs for materials without reference to orders. We can also set prices for materials
and other cost accounting objects.

Further, we can use product Cost Planning to analyze the costs of our products such
as:-

a. Manufacturing Materials
b. Services
c. Other intangible goods
Component of Product Cost planning

 Cost Estimate with Quantity Structure– Costing materials based on a

quantity structure in Production Planning (PP).
 Cost Estimate without Quantity Structure– Costing materials without a
quantity structure in PP.
 Price Update – Transferring the results of material cost estimates to the
material master.
 Reference and Simulation Costing– Planning new products and services
using base planning objects.

Backbones of SAP Product Costing

 Product Cost Controlling
 Product Cost Planning
 Cost Object Controlling
 Master Data
 Unit Cost Estimate
 Costing Sheet
 Costing Variant
 Material Ledger

Prerequisites to use Product Costing in SAP

Apart from activating the MM and PP, there are some other requirements for
applying Product Costing in SAP Controlling. These are as follows:

 Create the controlling area

 Then assign the company code to the controlling area
 Next, maintain the company code for Material Management
 Assign the Plant to the company code
 Also, create the valuation Classes in Material Management. These you need
for the account determination of any material movement. You can assign
these valuation classes in the automatic account determination process.

Why do you need to Know SAP CO Product Costing?

Product Costing in SAP is the most important part of SAP Controlling. Thus, to
know the controlling, you certainly need to know Product Costing. Moreover, if you
wish to make a career in SAP Management Accounting, or if you want to upgrade
your S/4HANA Finance profile with controlling knowledge, you must gain expertise
on product costing in SAP.

Now, let’s go ahead learn the components.

Components of SAP Product Costing
1. Master Data
2. Cost Component Structure
3. Special Procurement Key
4. Costing Variant
5. Costing Sheet
6. Cost Estimate

The activity type is used to assess activities in production such as

personnel hours or machine hours.
We plan the price of the activity type on the cost center and activity type
levels. In SAP Product Costing, we maintain the activity types in the
routing/recipe and the cost center to the work center/resource.
You will learn about routings, recipes, and work centers/resources in the
following sections.
You need to coordinate with production to know the units they use for the
activities. I recommend that to avoid rounding differences, you should keep
the units the same for production and Controlling (Activity Unit = H). It’s also
easier for the analysis if you don’t have to convert the confirmed times.
Surely, the cost center category (CCtr categories F) is important for the
assignment of the cost center.
(d) Work Center
The work center in Production Planning or the Process Industry module represents
the place where you do the work. You can display the work center with Transaction
CR03. Additionally, both the work center and the resource display have a Costing
tab.

(d.1) Cost Center

The cost center represents the place or department that is responsible for the
production cost. Thus, if you create the Costing tab in the work center or routing,
then the assignment of a cost center is mandatory. Please note that its various forms
depending on the size of your organization. For example, production line 1, machine
1, and so on.

(d.2) Activity Overview Section

In the Activities Overview section, you need to assign activity types to the activities
that the system maintains in the configuration for the work center.
Firstly, the system assigns every line to an activity type. Secondly, the system also
checks whether there is a price plan for the combination of cost center (assigned to
the work center/resource). Likewise, it also checks whether the activity type is
maintained in the Activities Overview.

Importantly, if you will not assign any activity type to the single lines in costing, then
you cannot calculate any cost for the single activity.

In addition to the activity type, you need to assign every activity to a formula. Now,
this formula determines how the system calculates the value at the work
center/resource with the routing times.

(e) Routing
The routing contains the activities that you need to perform to produce the product.
You work with routings if you use the classic Production Planning module. To display
a routing, you need to go to Transaction CA03.

The routing has different operations per activity. Noteworthy, every activity is linked
to a work center
Cost Component Structure
Cost component splits break down the cost of a material, process, or activity type.
Consequently, the cost component structure determines which costs you
should consider in the cost component split. We use the cost components for the
analysis of the product cost in Product Costing and Profitability Analysis. Noteworthy,
there’s a little strategy involved here. Before creating the cost component structure,
you have to think about how you want to structure your cost of goods manufactured
(COGM) in the best manner.
.

The details view defines in section control where only variable costs or fixed and variable
costs are shown in the cost estimate. The usage of fixed and variable costs is optional.
Further, the variable costs depend on the activity type. Likewise, its decrease or increase is
dependent on the activities in the manufacturing process.

Special Procurement Key

The system maintains the special procurement key in the material master in the
Costing 1 view. You can use the special procurement key to access cost estimates
in another plant. For example, if you produce materials in Plant A but sell them from
Plant B, you can display the costing in Plant B with the special procurement key.
That too without creating all the master data that is required for the costing in Plant
B.

Costing Variant
To create a cost estimate, you need to first create a costing variant. Though you can
create different costing variants for different purposes. For example, to calculate
standard prices, you should calculate commercial prices.

The costing variant determines the following main things:

 How we can evaluate the cost estimate

 Which master data we need to evaluate (e.g., which BOM usage)
 Where we can release the price (e.g., standard price, plan price, etc.)

The costing variant is structured in different pieces:

 Costing type in SAP

 Valuation variant
 Date control
 Quantity structure control
 Transfer control
 Reference variant
Costing Sheet in SAP
To apply overhead rates such as overhead costs in the costing, you need to create a
costing sheet in the SAP application. The costing sheet contains three components:
calculation base, overhead rates, and credits.

Let’s examine each now and discuss how you can create them.

(a) Calculation base

The calculation base defines the cost base on which we apply the overhead rates.
Likewise, the cost base is defined by cost elements, a cost element interval, or a
cost element group. It is one of the main components of the Costing sheet in SAP.

(b) Percentage Overhead Rate

Overhead rates are created based on dependencies. These determine the
characteristics that we can use to maintain the overhead rate. Subsequently, the
different ways in which you can maintain overhead rates depend on your
organizational structure and your cost component structure.

The Overhead Type defines for which type of cost (e.g., actual or plan) you want to
apply the surcharge. Like Actual Overhead Rate, plan Over Head Rate &
Commitment Overhead Rate.
(c) Credit
Credits define cost objects that get credited when the cost estimate gets debited with
the overhead surcharges. Here, for the credit, you can maintain a cost
center, internal order, or a business process.

(d) Costing Sheet Rows

The costing sheet in SAP is arranged in costing sheet rows. The calculation base is
on top of the costing sheet, and the surcharges refer to the basis by having an entry
in the form and To Row columns.

Cost Estimate in SAP Product Costing

It is the final result of the cost of a product which includes Material Cost, Different
Activities Cost, surcharge /Overhead Cost.

Refer to the image below.

Now that you’ve configured Product Costing in IMG settings, thus, now see how to
run cost estimates. Noteworthy, it is an End User Activity.

Next, Use Tcode – CK11N.

The list of components of SAP Product Costing is so big. It also involves a deep
technical aspect. This is to say, to learn it entirely, you need to learn the subject
thoroughly.

In the same way, to work on it in real-time, you need to practice it practically. Thus,
along with learning the basics, you should also focus on learning it practically. For
this, you need a lot of practice and work. I am sure if you have a real interest in this
subject, you sure can achieve your goal.

Product Costing Scenarios in SAP

This whole process of Product Cost calculation that I have explained is the scenario
of Product Costing in SAP Controlling. It involves the calculation of the cost of
production by using production order (manufacturing order). If the production order is
converted into complete status then we can calculate the variance. If it is there in the
pending status, then in that current period we will calculate WIP.

Hence those who look for SAP product Costing Scenarios must understand that it’s
the calculation that they need to learn here.
5. Cost Object Controlling – Product Cost by Order
The companies producing goods or services within Production
planning requires Cost Object Controlling. Similar is the case with Production
Planning for Process Industries sub module also.

If we are working with Product Costing to determine our standard Cost, then Cost
object Controlling determines our actual cost and any variances to standard cost.

Furthermore, the cost object controlling is presented by production order, process

Order, Product Cost Collector or sales order. It depends on the type of cost object
controlling we are using.

Production Order
A production order is used for discrete manufacturing. These can only be processed
and backflushed in the linked system. Planned orders that we create in APO are
then converted into production orders in the linked system.

We can use the production order to specify:-

 What is to be produced
 When production is take place
 Which capacity is to process the order
 How much production costs

Cost object controlling enables you to determine the cost of goods manufactured and
sold goods.

In this blog, we collect and analyse planned and actual costs on individual cost
objects such as manufacturing orders, sales orders, etc.

What can you do with it?

a. Establish Planned Costs – In preliminary costing, you can determine plan

costs for each cost object.
b. Record actual costs for the cost objects– In simultaneous costing, you
collect actual purchasing and manufacturing costs.
c. Period-end processing– Here we calculate overhead and work in process
(WIP) analyse the cause of variances between planned and actual costs and
settle the results.

Use of Cost Object Controlling

 Determine whether the actual costs of an order matched or exceeded the
planned costs.
 Determine the production variances between actual costs and target costs
and these occurred
  Decide whether to accept a particular sales order will be profitable or not
 Identify areas in your company where you have particularly low costs and
therefore which cost objects you should concentrate on.
 Decide whether it would be more profitable to manufacture in-house or
outsource it.
 Determine whether and how the cost of goods manufactured can be reduced.

Pre-Requisites before implementing Cost Object

Controlling
a. Before you can use Cost Object Controlling, you need to calculate the
planned costs for each product in a cost estimate. For example, Standard cost
calculation.
b. Cost object Controlling access master data and transaction data in PP
module, Material Management, Sales & Distribution and Overhead Cost
Controlling.
c. You can also view the data of cost object Controlling in the Product Cost
Controlling Information system.
d. Complete the configuration of the Actual Costing/Material Ledger.
e. You need a Financial Accounting configuration for purposes such as
Capitalizing WIP (unfinished products) and automatically creating reserves.
f. Similarly, you need Profitability Analysis (COPA) to analyse the costs by
market segment.
g. Finally, Profit Center Accounting analyses the results by profit center.

All costs of actual data that refer to a cost object result in an immediate debit of the
cost object

At Period-End Activities
The closing activities at the end of the period allow you to do the following:-

1. Revaluate activities at actual prices.

2. Allocate overhead using template allocation and by defining overhead rates
for cost objects.
3. Determine the work in process (the value of unfinished goods)
4. Determine the variance between target costs and actual costs.
5. You can also transfer the calculated data to other objects and application
components.
6. Further, you can compile periodic reports regularly.
7. You can analyze planned costs, target costs, actual costs and quantity
information at various levels such as the plant, product group or individual
cost object. The data is always available in real-time.
Profitability Analysis (CO-PA)
Profitability Analysis is a sub-module of SAP controlling for which there is no
template. This means that each customer structures Profitability Analysis according
to their specific needs.

Operating Concern is the highest organizational element in the SAP organizational

structure. It serves as a valuation level for profitability Analysis. Thus, we should
create it before using the Profitability Analysis.

Although, we can assign multiple controlling areas to an operating concern. but, all
these controlling areas should have the same Fiscal Year variant. Though, they can
have different charts of accounts.

Since we cannot create reports in SAP that contain data of different operating
concerns. Thus, we should assign all the controlling areas to one operating concern
if we need group reporting.

Interestingly, the Process Flow of COPA in SAP FICO was quite complex as
compared to what it is now in S/4HANA.

Since in S/4HANA we don’t map condition types with value fields. Also, there is no
PA transfer structure as we get all the values from the universal journal.

Types of SAP Controlling Profitability Analysis – CO-PA

1. Costing-based Profitability Analysis

2. Account-based Profitability Analysis

Costing based Profitability Analysis – We use it the most.

Account-based Profitability Analysis – This we can activate either alone or add to

costing-based Profitability Analysis.

How to choose between these two?

Importantly, with S4 HANA Finance, Account-based CO-PA is recommended.

This is because the system stores the data from Account-Based CO-PA in the same
database table as the SAP Financial Accounting and Controlling documents.

To activate the New Profitability Reporting in SAP S/4 HANA Finance, we must
activate Account-Based Profitability Analysis.

For this Table ACDOCA in Universal Journal plays a major role.

Consequently, SAP HANA Simple Finance helps to enhance the features of account-
based Profitability Analysis.

Key Reporting Dimensions where SAP COPA benefits you

 Customer ( customer wise report)

  Products ( product wise profitability)
 Region ( Region wise profitability- East, North)
 Employee
 Sales Category (Domestic, Exports)

What is SAP COPA in S/4HANA Finance?

In SAP S4 HANA, one of the earliest innovations in CO-PA was through CO-PA
Accelerators. These accelerators showed how performance in CO-PA planning,
allocations and reporting processes would improve when it runs on SAP HANA.

Types of SAP COPA in S/4HANA Finance

There are two types of Profitability Analysis in Controlling in S/4HANA Finance.

 Account-Based CO-PA
 Costing-Based CO-PA

Although both of them have their importance. However, we need to know why
Account-Based CO-PA carries more value than Costing-based COPA in SAP
S/4HANA Finance.

So, now let us understand each of them separately and additionally know the key
difference between both of them.

1. Account-Based COPA
Account-Based COPA is simplifying COPA by accounts rather than value fields
(used in Costing based CO-PA). The advantage is that it is easier to reconcile to
the general ledger as there is no mapping involved.

Advantage of Account Based COPA

 It is easy to set up than costing based COPA.

 It takes much less time than configuring costing-based COPA. As the latter
involves the mapping of condition types, cost elements, variance as so on to
value fields.
 Account-based COPA has easier reconciliation with the general ledger
because you can look at the values in both modules using the same object
(GL account).
 You can use it along with costing-based CO-PA. This is to say, you can
activate both costing and account-based CO-PA at the same time by checking
the checkbox.

2. Costing-Based CO-PA
Costing-based CO-PA in SAP compromises the principle of a single version of the
truth in finance. It does so by creating two versions of profitability that lead to the
same old reconciliation issues experienced with SAP ERP.
So, if you are using costing-based CO-PA and are migrating to SAP S/4 HANA
Management Accounting, you can continue to use it. However, you should activate
account-based CO-PA as well.

Since it is not possible to migrate the history from costing-based CO-PA to account-
based CO-PA. So you may want to retain costing-based CO-PA for a certain period.
Once your business gets comfortable with the Account-based CO-PA, you may
deactivate the Costing-based CO-PA.

Costing-Based COPA vs. Account-Based COPA

This topic is a key area of consideration for many SAP customers. As I mentioned
earlier, the account-based method is preferred for CO-PA under SAP S/4 HANA.
Still, I want you to find out which one you prefer by seeing the following differences

1. Universal Journal in SAP COPA

Account-based CO-PA is built on the Universal Journal and underlying table
ACDOCA. Importantly, Universal Journal is the foundation of SAP S/4 HANA.

Since, for a long time, SAP customers have only used the costing-based method.
Thus, this change is a major shift in the process, design, configuration and
management side.

2. More Insights in Account-based COPA

With more insights available regarding COGS and production variances, account-
based CO-PA is no longer the poor cousin to the costing-based method.

3. Data Duplication issue in Costing-based

The costing-based method continues to keep its separate data model in SAP S/4
HANA. Thereby creating duplication of data and reconciliation issues.

Characteristics Extension of Data Structure in SAP

COPA
 Extensibility- the Universal Journal has extensibility features that come with
SAP S/4 HANA. Thus, you can easily extend the SAP COPA characteristics
to enhance your information needs.
 After you extend the CO-PA characteristics, they become part of the Universal
Journal.
 Extension of Coding Block- Extensibility was available even before SAP S/4
HANA through the extension of coding block in the general ledger.
 Extensibility in GL- The setup for extensibility in the general ledger and CO-
PA are separate activities. With extensibility as standard functionality in SAP
S/4 HANA, it is hard to see why anyone would want to implement costing-
based CO-PA. This is because all the dimensions that you need to report
profitability are part of table ACDOCA that the account-based method uses.
Configuration of SAP COPA
SAP CO-PA configuration is a critical process and not all SAP S/4HANA Finance
Consultants are equally comfortable in this work. So, having complete knowledge of
the configuration of SAP Profitability Analysis is an achievement in itself.

(I mean to say, if you know SAP CO-PA complete configuration in its entirety, it is an
added advantage for your profile and your career in SAP Finance).

The importance of SAP COPA configuration lies in its uniqueness. Here mention
two points in this regard below:-

– Few End-User Transactions in SAP COPA

CO-PA has unique functionality in the sense that it has very few end-user
transactions for data entry.

– Data Flows via Other Processes

Additionally, 90% of the data flows into CO-PA through other processes. These
include billing, inventory movements, allocations and so on. Usually, Non-Finance
users do these processes.

Pre-requisite to do SAP COPA Configuration

Align the Reporting Requirements
The first step to design CO-PA in SAP is to align the management and
operational reporting requirements. It also sets expectations with business users
for reporting possibilities. This goes a long way to make sure that the business
accepts the solution.

Understand Reporting Needs

A clear understanding of future reporting needs is an important prerequisite to
starting the design phase of implementing COPA in SAP.

This was a brief about the importance of CO-PA configuration in general. Now, we
will discuss changes in Profitability Analysis in S/4 HANA as compared to the
previous version of ECC.

Changes in COPA Configuration in SAP S/4HANA

Finance Vs. ECC
Many new things have come up in SAP ERP while migrating from ECC to HANA.
These have caused many good differences in SAP FICO as compared to S/4HANA
Finance. The CO-PA is one of them.

Here I mention a list of some elements where COPA gets some

modifications with this transition.

1. Operating Concern
2. Characteristics & Value Fields
3. Cost Elements
4. Universal Journal
5. COPA Planning

One by one we will know briefly about these elements and the impact of the changes
on them with SAP Controlling Profitability Analysis of S4 HANA.

Operating Concern, Characteristics and Value Fields

With SAP S/4 HANA, the majority of the configuration remains the same except in
certain areas where SAP has introduced increased functionality because of SAP S/4
HANA capabilities such as

 COGS splitting
 Production Variances splitting
 Removal of redundant tables

1. Operating Concern
What is an Operating Concern?

An operating concern is an organizational unit under which the CO-PA data model
resides and data is stored for reporting purposes. It also defines the boundary for
CO-PA data.

An operating concern is the highest organizational unit under which you want to
report profitability for the entire business. The fiscal year of the operating
concern should match that of the controlling area and the company code.

Change Impact
There is no change in the way the operating concern is defined under SAP S/4
HANA. However, all new implementations are likely going to be account-based CO-
PA.

In the past, the majority of customers used costing-based COPA and few went for
account-based COPA. For those who used the costing based method only,
activation of account-based COPA is something to consider during the upgrade.

This is a prerequisite for using the new CO-PA features in SAP S/4 HANA. Though,
you can continue the costing-based method as well.
If you don’t activate the account-based CO-PA during the upgrade, you will get the
error message FCO_CO-PA 006. If it is a Greenfield implantation, make sure
account-based CO-PA is active.

Costing based COPA is optional. During the migration to SAP S/4 HANA, there are
new configuration tasks that you need to perform. See below.

2. Characteristics and Value Fields

What are Characteristics in SAP COPA?
Characteristics are elements in CO-PA that define different segments of an
organization for which you want to measure performance.

You use value fields to define how that performance is measured. Both
characteristics and value fields are critical because these do the work of transacting,
planning and reporting in CO-PA.

Change Impact
With SAP S/4 HANA, there is no concept of segment-level and segment level
characteristics. This is because all characteristics are themselves segment-level
characteristics.

Transaction KEQ3, where you defined segment and non-segment characteristics are
no longer available for use.
3. Value Fields and Cost Elements
What are Value Fields?

Value fields are measurements through which you can record and assess your
organization’s profitability.

Additionally, Value Fields are used only in costing-based COPA. Example – Sales,
Cost of Goods Sold, Rebate, discount etc.

What are Cost Elements?

Cost elements are general ledger accounts that are used in Controlling for the same
purpose.

Change Impact
You still need Value Fields if you use costing-based CO-PA and nothing changes
there. In SAP S/4 HANA general ledger accounts and cost elements are merged into
one to reduce dual maintenance issues.

Additionally, P & L account now does what cost elements once did.

There are three ways in which you can define the P & L Accounts in SAP S/4
HANA.

1. P & L Accounts with no reference to CO.

2. P&L accounts for posting to cost centres, orders, projects CO-PA dimensions
and so on.
3. P&L accounts to document cost flow from senders to receivers.

Account-based CO-PA uses all of these types of P/L accounts in SAP S/4 HANA.

4. Universal Journal Entry

SAP ERP (ECC) CO-PA has multiple tables for updating CO and FI postings
depending on the method used. Although, for costing-based CO-PA there are
multiple tables (CE1XXX-CE4XXX). While for the Account-based CO-PA there are
tables COEP and CE4XXXX.

The SAP system updates several tables for the same source document which
caused reconciliation issues, redundancy etc.

Change Impact
Table ACDOCA now stores all values in SAP S/4 HANA under account-based CO-
PA. Further, it houses all values that we used to update in the past in table COEP.
Table COEP is no longer a table in SAP S/4 HANA. But it is there in SAP HANA
view. Additionally, General ledger, CO and COPA are all available in table ACDOCA
as single line items.

Characteristics Value in SAP COPA

There is no change here. If you are creating user-defined characteristics, you will
continue to maintain values for them through configuration. This is also true with
maintaining hierarchies of characteristics for reporting and analysis.

5. COPA Planning in SAP S/4 HANA

In SAP ERP (ECC), the planning functionality is available at the general ledger, cost
center and profitability segment levels. Since the system did not integrate these
levels, the users were doing them separately.

You could run Plan versus Actuals in SAP ERP, but they were separate processes.

Importantly, customers who had SAP Business planning and consolidation used it for
Financial Planning instead of native SAP ERP.

Change Impact
In SAP S/4 HANA, the native finance planning functionality of general ledger
planning, cost center planning and internal order planning is disabled by default. If
you still want to use these functionalities, you can activate them.

However, most customers like to use a single planning process of planning at the
Universal Journal. This helps to eliminate redundant and planning activities.