Gerd Lassmann, Zeitschrift für Betriebswirtschaftliche Forschung 11/84, pg ; Roever 1980, pg.686.

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1 Overhead costs are indirect costs that cannot be directly assigned to cost objects. Most organizations have registered a sharp rise in the ratio of overhead to total costs in recent years. According to one study, the proportion of employees working in areas that incur overhead increased from 25-30% in the 1950s to more than 50% in This applies not only to the service industry, where overhead is naturally higher, but also to manufacturing. The total cost of machinery construction includes overhead of approximately 50%. 2 A study in the United States in the mid-1980 s concluded that in the machinery and electronics industries the ratio of overhead to total costs approached 80%. 3 In manufacturing organizations, the proportional rise in overhead is often due to a change in the value-added structure, which generally results in shifts in cost structure. For example, increased use of automation leads to greater overhead at the expense of production costs; the monitoring and planning activities in automation are harder to assign directly than the manual activities they replace. Likewise, a reduction in manufacturing depth can shift costs into overhead areas because a larger number of procurement transactions take place. Overhead in planning, monitoring, control, and coordination in such areas as research and development, procurement, work scheduling, and maintenance are gaining evermore importance. Companies have applied traditional cost accounting approaches to direct cost areas and have wrung out the maximum savings, but the full extent of cost savings in areas of overhead have been untapped and the opportunities untouched until now. The R/3 System Overhead Cost Controlling (CO-OM) component helps you plan, allocate, control, and monitor overhead in your organization. By planning in overhead areas, you can develop standards that allow you to control costs and valuate internal activities. You can assign overhead to the cost centers where it occurred or to the activities that generated it. The R/3 System offers numerous tools for additional cost allocation, allowing you to easily and accurately assign costs based on their true origins and to treat them as direct costs. At the end of the accounting period, after completing cost allocations, the R/3 System takes the target costs (the planned costs adjusted based on the operating rate) and compares them to their corresponding actual costs. You can analyze the target/actual differences according to their causes and use the analyses for further control measures. 1 Gerd Lassmann, Zeitschrift für Betriebswirtschaftliche Forschung 11/84, pg ; Roever 1980, pg Prof. Dr. Péter Horváth et al., Das Wirtschaftsstudium 3/93, pg J.G. Miller and T.E. Vollmann, The Hidden Factory in Harvard Business Review 5/85, pg

2 This brochure describes the structure of the Overhead Cost Controlling component. The Cost and Revenue Element Accounting (CO-OM-CEL) component identifies costs and revenues incurred. It delimits the accrual-based outlay costs and additional costs. As part of cost element accounting, it also reconciles internal and external accounting within Controlling (CO) and Financial Accounting (FI). The Cost and Revenue Element Accounting component goes beyond the scope of overhead accounting, but it is discussed here due to its importance for the Overhead Cost Controlling component. The Cost Center Accounting (CO-OM-CCA) component allows you to determine where costs occurred in the organization. You assign costs to the subareas of the organization that can most easily influence the cost factors. Assigning costs by origin is especially difficult for overhead. The Activity Types (CO-OM-ACT) component enables you to use the activities provided by cost centers as tracing factors for costs as part of internal activity allocation. You can use the Overhead Cost Orders andprojects Accounting(CO-OM-OPA) components to plan, monitor, and analyze the costs and revenues of any organizational activity. In addition, you can use overhead cost orders for more detailed cost control of cost centers. You can assign budgets to the measures; the R/3 System can automatically monitor compliance. Activity-Based Costing (CO-OM-ABC), in contrast with the task-oriented, singlefunction view of Cost Center Accounting, provides an activity-oriented, crossfunctional view of a process in which multiple cost centers participate. The focus here is not on local optimization of costs, but on business process reengineering throughout the entire organization. By assigning process quantities on the basis of cost drivers, cost allocation achieves greater accuracy along the value-added process chain. The Activity Based Costing component also supports improved product costing in overhead areas. For more information on the Activity-Based Costing component, see the relevant SAP product information brochure. You can use the Controlling component in the R/3 System to reflect all common internal accounting approaches. You do not need to apply the various methods in their pure forms. Rather, depending on the requirements of your organizational subareas, you can implement them in parallel as part of a single overall cost accounting strategy. The R/3 System supports all functions necessary to plan and assign costs according to your organization s cost accounting approach. The R/3 System treats fixed and variable costs arising from activities separately at all stages of cost allocation. By using the Controlling component, you are not limited to a single methodology. You can decide which cost accounting methods work best for each subarea of your organization.

3 Figure 3-1 is a sample from the process selection matrix for the Overhead Cost Controlling (CO-OM) component, accessible via the component view of the Business Navigator. The column headings describe scenarios for various cost accounting methods; the rows depict business transaction functions. The cells name the functions intended for the given cost accounting method or methods.

4 SAP offers a series of implementation tools that help you carry out an R/3 System installation in a structured fashion. One of these tools is the R/3 Reference Model. It contains graphical descriptions of the scope of the business activities of the R/3 System application components and the business processes they support. You can use the Business Navigator to display the R/3 Reference Model using a component view or a process view. In the Overhead Cost Controlling component, the process view provides examples of how to apply the following cost accounting methods in the R/3 System: Cost assessment The cost assessment method represents planned and actual cost accounting operating on the basis of absorption costing. It does not split costs into fixed and variable portions, and it assigns overhead to cost recipients or products based on predefined keys. Overhead rate calculation Overhead rate calculation is similar to cost assessment in that planned and actual cost accounting operates on the basis of absorption costing, without splitting costs into fixed and variable portions. However, it uses the labor costs only to valuate the activity quantity framework based on routings. The remaining overhead is applied to cost recipients or products based on fixed percentages. Static standard costing In contrast to the two methods described above, static standard costing divides the cost center structure according to tracing factors or activity types and carries out activity quantity allocation. It does not split costs into fixed and variable portions. The (full) costs calculated are used to valuate the activity quantity framework based on routings. With the first three methods, you can use the costs of manufactured goods calculated using product costing in the Profitability Analysis (CO-PA) component to valuate products sold on the basis of full costing (based on cost-of-sales accounting). Marginal costing In contrast to static standard costing, this method splits costs into fixed and variable portions based on the division of the cost center structure according to activity types. The planned activity prices determined using price calculation are for valuation of the activity quantity framework based on routings. Analytical cost planning and the proportional costs calculated by it improve decision making based on marginal costs (for example, in determining shortterm price floors). At the same time, Cost Object Controlling determines the costs of goods manufactured on the basis of full costs. With this method, you can use the costs of manufactured goods calculated using product costing in the Profitability Analysis (CO-PA) component to valuate products sold on the basis of marginal or full costing (based on cost of sales accounting). In addition, cost splitting into fixed and proportional components allows you to identify real contribution margins on the basis of marginal costs. The Business Navigator displays the functions in the R/3 System required for the successful application of these cost accounting methods.

5 Along with monitoring and controlling overhead, the Overhead Cost Controlling component provides vital preparation for informative profitability analysis and for accurate product costing. Traditional costing using overhead rates allocates overhead in proportion to the direct costs, which saddles products with high direct costs with high overhead. In complicated product and organizational structures, this gives an inaccurate idea of a product s actual profitability. The R/3 System prevents this from happening. In addition to traditional cost assessment and overhead rate calculations, the Overhead Cost Controlling component offers advanced methods for assigning overhead. You can apply these methods throughout the organization or in individual, critical subareas. With them, you can create an exact picture of the internal activities and administrative processes necessary to produce and market a product or service. You can assign overhead based on resource consumption and the utilization of processes and activities. In many cases, the R/3 System automatically calculates the quantities required, which reduces the effort involved in carrying out activity-based costing. This efficiency counters a prime argument for retaining simple yet inefficient cost assessment and overhead rate calculation methods in an organization. The integration of the Overhead Cost Controlling component in the overall R/3 System environment also saves time and effort by minimizing the entry of required actual and planned data.