Cost and Revenue Element Accounting Chapter 4 Cost and Revenue Element Accounting Cost Elements Primary Cost and Revenue Elements primary cost

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1 Cost element accounting records and groups the costs incurred during a particular settlement period. This is not so much cost accounting as it is the organized recording that is its basis. With the R/3 System s integrated cost accounting, explicit recording of most costs is not necessary because every relevant business transaction provides information about the cost element and the account assignment object automatically. Any consumption in the Materials Management component, any billing in the Sales and Distribution component (revenue), and any external invoice in the Invoice Verification component moves directly to the corresponding account assignment object via the general ledger account (cost element). The recording tasks can be restricted to a portion of the outlay and additional costs. For example, while you can copy fixed asset depreciation amounts from the Asset Management component, you must deal with accrued contractor payments in the Controlling component. Furthermore, cost element accounting in the R/3 System identifies which costs appeared in which departments and what cost flows occurred. It must display the costs explicitly for all types of account assignment objects (such as cost centers, orders, projects, or business processes). For cross-company-code or cross-business-area cost accounting, the cost flows in the Controlling component can require reconciliation between internal and external accounting. Reconciliation is also a responsibility of cost element accounting. Cost elements subdivide costs according to the type of consumption of goods and services. They record, group, and allocate the operational expenses of an organization on the basis of costing. The R/3 System distinguishes between cost and revenue elements in data entry and those used for assigning costs in cost accounting. The cost element category, a further organizational classification, makes finer distinctions between cost elements, such as the allocation methods permitted for a given cost element. A primary cost or revenue element is a relevant cost or revenue item in the chart of accounts with a corresponding expense account (general ledger account) in the Financial Accounting (FI) component. You enter costs and revenues in the R/3 System with the corresponding elements. Examples of primary cost elements include: Material costs Personnel costs Energy costs In addition to these primary cost elements (which the R/3 System debits directly via postings in the Financial Accounting component or the Materials Management

2 component, several other cost element categories have corresponding accounts in Financial Accounting and are treated as primaries. In order to enter all organizational expenses from one period, the R/3 System must include outlay and additional costs (see Accrual in this chapter). The accruals cost elements collect the relevant costs. A special cost element category distinguishes revenue elements and sales deductions from other primary elements. The chart of accounts also includes secondary cost elements, which have no corresponding general ledger accounts in the Financial Accounting component. You create and maintain these elements solely in the Controlling component in order to display the internal value flows in cost accounting for example, internal activity allocations, calculations of overhead rates, and settlement procedures. Examples of secondary cost elements include: Assessment cost elements Cost elements for internal order settlement Cost elements for internal activity allocation In order to simplify valuations, planning, and cost allocation in the R/3 System, you can combine cost elements into groups (for example, separate groups for salaries and bonuses). A cost element group can hold any number of cost elements. By combining cost element groups according to their intended purposes, you thereby create cost element hierarchies. This is useful in the information system, for instance, in order to arrange reports based on managerial accounting viewpoints. In addition, you can use groups for organizing data entry screens in planning. Figure 4-1 illustrates how the cost element groups are organized (according to a standard German managerial accounting system) to aid in planning and report creation.

3 The integrated R/3 System sends data relevant to cost accounting that arises from business transactions in other application components to the Controlling component. A purchase requisition or purchase order in the Materials Management component, for example, creates a commitment for a given cost center. For business transactions that create costs and revenues, the system automatically transmits data to the Controlling component when a posting is made to the Financial Accounting component. For example, a material withdrawal results in postings to the balance sheet and expense accounts; the posting to the expense account creates a corresponding posting to the Controlling component. Cost, revenue, and commitment postings arise from business transactions in the following application components: General Ledger Accounting (FI-GL) Materials Management (MM) Sales and Distribution (SD) Asset Accounting (FI-AA) Personnel Administration (PA-PA). When entering a document in the Financial Accounting component, you can enter further information for the Controlling component along with the values relevant to costs and revenues. You can enter the cost center, order, or other account assignment object responsible for the transaction. You can enter the relevant material components with quantities, times, or units of measure. The final actual costs are not always the responsibility of the cost center manager. For example, rising or falling prices that are unknown during planning can influence them. The R/3 System can determine the effects of price fluctuations for each posting transaction and include them in the document. These calculations occur during postings from the Financial Accounting component, arranging the values according to cost element and expressing them as percentages of the posted actual value. The Controlling component stores the data as totals in line items by document. In addition to the line items with external accounting information, the R/3 System creates separate line items relevant to internal accounting. The advantage of line items over a complete, common document is that you can store cost accounting data independently of the archiving deadlines in the general ledger and subledger accounting. Within these deadlines, the information system in Controlling can access not only to the line items in internal accounting, but also the original documents in Financial Accounting.

4 You can lock entire periods to prevent posting transactions in actual or planned data. You can, for example, control the use of transactions for primary postings, accruals, or periodic repostings. In addition, you can lock an account assignment object (such as a given cost center) to prevent actual and planned postings to primary or secondary cost elements. With the aid of substitution you can derive or change posting data. You can define logical rules based on all data used by the R/3 System for account assignments. The system then checks during posting whether the rule is fulfilled or not. If the answer is yes, it changes or inserts the required value. The R/3 System makes some posting data derivations automatically. For example, if you make a posting on a cost center that has an associated profit center, the R/3 System automatically makes a statistical posting to the profit center (see Figure 4-3). The posting document also receives the corresponding information. Likewise, the R/3 System makes some automatic checks for each posting to an account assignment object (see Figure 4-2). The system checks lock entries, as well as whether an object exists. In addition to the standard checks, you can define validations for custom checks. These are based on logical rules as with data substitution. If necessary, you can determine whether the R/3 System issues a warning message or an error message under given conditions. You can make real and statistical postings on controlling objects. The real postings are relevant to costs and can be allocated. Statistical postings serve for evaluation purposes only. For example, you can display vehicle costs simultaneously in the motor pool cost center and in an order created especially for the vehicle. Some objects record statistical data only (such as profit centers and statistical orders) and are therefore referred to as statistical objects. Objects recording cost-

5 relevant data are referred to as real objects. A posting relevant to cost accounting requires a single real object. 1 However, you can also make additional parallel postings to statistical objects. Figure 4-3 illustrates how the R/3 System determines whether to make a real or a statistical posting to a given object. In the first example (top row), the user enters a statistical order. The cost center, which is a mandatory entry in the master data of the order, receives the real posting. The second example (center row) shows a special case where the user enters a single cost center in addition to another real object, and the R/3 System makes a statistical posting to the cost center. The third case (bottom row) shows an additional special case. Cost centers can display revenues statistically only, with the real posting automatically following to an object in the Profitability Analysis (CO-PA) component. Fig. 4-3: Account Assignment Logic The cash and stockkeeping basis of financial accounting depends on incoming and outgoing payments and changes in inventories. Accrual of expenses, meaning the value of all goods and services consumed, generally takes place only when outgoing payments do not correspond to the effort in the balancing period. However, the costing basis of cost accounting deals with the valuation of internal consumption of goods and services. When assigning costs to posting periods, the 1 Exception: You can enter a cost center and a further real object. In this case, the R/3 System makes a statistical posting to the cost center.

6 time of consumption is always the guiding principle. Therefore, time-based accrual is necessary in order to derive costs from expenses. Common examples of expenses requiring accrual in cost accounting are employee benefit costs such as holiday bonuses. In order to avoid period-based fluctuations in cost accounting, accrual spreads the holiday bonus equally across all periods in the fiscal year. In addition, cost accounting may require a variant valuation of consumption than that in financial accounting. It is therefore useful to distinguish costs from expenses. Nonoperating expenses are not based on providing goods or services (such as a charitable donation) and thus do not appear in cost accounting. General expenses based on providing goods or services, on the other hand, are relevant to cost accounting. The values can remain unchanged. In order to use cost controlling as a planning and controlling instrument, however, you may enter a variant valuation of consumption independent of any commercial or taxation regulations. For example, the costing-based depreciation of a machine can differ from the accounting-based depreciation because the actual wear does not correspond to that which can be deducted from taxes. The consumption of production factors provided by an organization is not treated as an expense because the owner 2 is not paid a salary and does not pay interest on owner capital. However, cost accounting must take this consumption into account. If the organization merely matches the organizational activities by the cost of sales, the owner loses benefits equal to the potential amount available had the work or capital been invested in another organization (opportunity costs). You can deal with accrual through recurring postings in either the Financial Accounting component or the Controlling component. If the accounting-based and costing-based accruals equal each other, you should create recurring accrual postings in Financial Accounting, which are then posted to Controlling. In this case, reconciliation of accrual between the two components is automatic. The Controlling component provides several methods for calculating costing-based accrual. These methods are determined automatically using algorithms and are based on posted costs. If you want the costing-based variances to appear in the Financial Accounting component as well, you must make a follow-up posting 3. Costing-based accrual is most commonly applied as overhead. In this approach, you use a single tracing factor to combine any number of cost elements from which the R/3 System can calculate a value by applying an overhead percentage rate and display the resulting accrual cost element. For example, you can define a cost element for costing-based accrual of holiday and vacation bonuses applied to wages and salaries. Multiple levels are possible, in which the tracing factor itself is based on other accrual cost elements (such as employee benefit costs related to holiday and vacation bonuses). Some calculations are unsuited for the overhead method. For example, insurance contributions have no tracing factors. In this case, you could use the plan=actual method to transfer the planned costs of the accrual cost element in order to use them as the actual costs. 1 Here, individual proprietorships and partnerships; directors of corporations are salaried. 2 In Release 3.0, reposting in the Financial Accounting component must be done manually.

7 The target=actual method is useful in accrual calculations that depend on operating rates. The R/3 System takes the cost center s planned accrual costs, multiplies them by the operating rate, and uses the result as the actual costs. This method works well for costing-based depreciation of fixed assets, for instance. You can thus take accrual into account independent of the form, scope, and time of the actual expense in general ledger and subledger accounting. The Controlling component should remain reconciled with the Financial Accounting component. No costs should emerge in the balances that do not appear in Financial Accounting. For this reason, each debit that arises on an object (such as on a cost center) due to accrual is balanced by a credit on a special accrual object. When the expense actually occurs (for example, in time-related accrual, payment of holiday bonuses), the R/3 System posts the expense on the selected accrual object as a debit. You may then decide at a given time, usually the end of the fiscal year, to transfer the accrual object balances to the Profitability Analysis component, or to allocate them to the Cost Center Accounting component via distribution or reposting. The integrated R/3 System makes it simple to view and reconcile data from external and internal accounting. Value flows in Controlling that affect the organizational balance sheet and the profit-and-loss statement must be passed on to Financial Accounting. In order to meet these requirements effectively, the R/3 System compresses and evaluates Controlling data in the reconciliation ledger. If cost allocations cross company code, functional area, or business area boundaries, the reconciliation ledger registers these transactions and automatically assigns them to accounts. As illustrated in Figure 4-4, the reconciliation ledger includes all Controlling data in a summarized form suitable for the Cost and Revenue Element Accounting and Financial Accounting components. The data is not available on an object-by-object basis (say, for individual cost centers), but the object type information (CC for cost center) remains intact.

8 The reconciliation ledger has the following uses: It completely reconciles Controlling with General Ledger Accounting on an account-by-account basis. It serves as the basis for clearing entries in General Ledger Accounting, which ensures that the G/L value flow is identical to the value flow across company code, functional area, and business area boundaries in Controlling. It aids navigation in and entry to the Controlling component s information system from the viewpoint of the General Ledger Accounting component.