Controlling

Definition

Controlling, which is often termed “Management accounting” or “Managerial accounting”, involves

  • The design of qualitative and quantitative control instrumentsand performance measurement systems,
  • The establishment, coordination and operation of information flows,
  • The production, analysis, interpretation and presentation of results,
  • The provision of support to the management team in decision making processes.

The controlling function thus makes a considerable contribution to ensuring corporate success – if all the controlling components are correctly implemented and if all the controlling activities, such as

  • Planning
  • Acquisition / provision of information relevant to decision making
  • Analysis
  • Checking
  • Reporting
  • Provision of advice,

are carried out effectively.

The SAP ERP provides controlling support by means of the following components

  • Controlling of overhead costs – overhead management (CO-OM)
  • Controlling of product costing (CO-PC)
  • Profitability analysis (CO-PA)
  • Profit centre accounting (EC-PCA, new GL)
  • Process cost controlling – activity based costing (CO-ABC)
  • Project controlling – project systems (PS)

These components are integrated with all the other usual components (MM, SD, FI, PP ...), i.e. book entries made in the respective modules can automatically trigger CO book entries.

Overhead Management (CO-OM)

The basis of any controlling system is a well-functioning cost and activity accounting procedure.

The management of overhead costs involves the planning, allocation, management and monitoring of those costs that cannot or can only with great effort be allocated directly to individual products. Such costs are termed overheads.

Overhead costs are assigned to the place of origin in accordance with the (cost) type. To this end, the necessary organisational structures, such as result area and controlling area, and the account assignment elements such as cost centres (which model the structure of a business from the point of view of CO), internal orders, cost units, profit centres and profitability segments, must be created as master data in the system. (Organisation figure and cost centre hierarchy figure)

By planning the overheads area, target values and standards can be specified that permit checking of costs and evaluation of internal services in order to allow billing. (Planning masks figure, planning BI, if required)

All overhead costs are assigned to the objects (cost centres, orders etc.) on which they are incurred, or to the activities/processes that led to them arising. The SAP system provides an extensive set of instruments (performance/process settlements, distribution, cost allocation etc.) in order to allow billing of such costs to products, thus enabling correct charging of overheads to their actual source. (Menu system figure)

At the end of the accounting period, when all allocations and settlements have been made, the planned costs (theoretical costs) adjusted for the capacity utilisation, are compared with the actual costs. The deviation between the planned and actual costs can be automatically analysed with regard to the underlying cause and will then be the subject of further control measures as part of the controlling activities. (Deviation analysis figure)

Data and analyses need to be provided in line with management needs in order to provide optimal support for decision making processes. To this end, there is a comprehensive, pre-defined information system available which can be supplemented with other reports, and the data can also be transferred via standardised extractors to the BI/BO environment in order to allow flexible processing for the creation and distribution of visually attractive materials (SAP standard report).

The controlling unit provides information for management decision making processes. It forms a key element in the coordination, monitoring and optimisation of all processes within a company.

Income statements, such as the break-even analysis, provide a way of monitoring the profitability of individual parts of the company as well as the whole business.

Production Cost Controlling (CO-PC)

Product cost accounting, also often termed cost unit accounting, is an instrument for the comprehensive analysis of costs caused by the manufacturing of a product or the provision of a service, and for assessment of the work in process. Cost unit accounting is used

  • To determine the non order-related manufacturing and production costs per product unit
  • To determine the composition of the costs for each product and the value creation in each manufacturing step
  • To optimize the manufacturing costs for products by means of comparison calculations
  • To provide basic information for other SAP applications, such as prices for updates in the material master record and in the income statement
  • To assist with cost-oriented invoicing
  • To determine price thresholds for the marketing and sales team

Cost analyses can be carried out on the basis of products or customers, and can be tracked in detail periodically or on an order basis.

If the costs are monitored for a single production or process order (i.e. order-related), the cost-relevant processes – material withdrawals, time feedback, order-related incoming invoices and the receipt of incoming goods relating to the product – are recorded directly with individual orders, for which the deviation from the planned costs will be determined for the work in processand following completion.

If the costs are monitored in a periodic way, a product cost collector compiles the costs per product. This method is used in series production (make to stock and process manufacturing), where the manufacturing process does not change much over the course of time and for which retrograde feedback usually occurs due to the large volumes involved.

If analyses are created based on customer orders, the cost unit accounting provides information about the revenue generated and costs incurred. In order to allow periodic definition of the revenue and incurred costs and to determine the work in process, the cost of sales and also provisions, the results analysis provides a versatile and powerful tool that supports a range of result determination methods and (POC, ..) various accounting methods. This type of controlling is generally used for production projects, customer order-related manufacturing and assembly, and also for the handling of services.

Product Controlling is made up of various sub-modules:

The product costs planning (CO-PC-PCP) module is used for non order-related cost planning and price setting for materials and cost accounting objects (standard product costing)

Product cost planning incorporates the following components:

  • Costing of materials with access to a PP quantity framework
  • Costing of materials without access to a PP quantity framework
  • Price updating – importing of the results of the costing into the material master
  • Sample and simulation costing, i.e. non order-related and non customer-related costing

The cost object accounting (CO-PC-OBJ) module compiles the actual costs that are used for the creation of operational services, e.g. materials manufactured in-house. Objectives:

  • Support for make-or-buy decisions
  • Determination of lower price thresholds for goods
  • Carrying out of planned/actual analyses
  • Determination of inventory values

The cost object accounting module is divided into the following application components:

  • Periodic product controlling
  • Order-related product controlling
  • Customer order controlling
  • Controlling for intangible goods and services

The actual costing / material ledger (CO-PC-ACT) application component basically fulfils two different objectives: the management of parallel currencies / valuations and the actual costs accounting.

The material ledger can be used, for example, for the recording of transfer prices in order to portray value flows between internal organisational units with various valuation perspectives (legal, group and profit centre valuations).

The actual costing also determines a periodic actual price (periodic billing price) per material, in which all actual costs for the respective period are included. These can be used to revalue the material inventories for the period to be concluded. These periodic billing prices can also be used as standard prices for upcoming periods as well.

The CO-PC-IS information system product costing controlling component provides powerful reporting options for all the above mentioned functions.

Profitability Analysis (CO-PA)

Profitability analysis is used to assess market segments with regard to their income contribution and contribution margins. The segments can be classified, for example, according to products, customers, orders and any combinations of these or corporate units.

The aim of the system is to provide information to the areas of sales, marketing, product management and corporate planning, from the market perspective, in order to support controlling activities and decision making.

SAP supports two types of income statement: costing-based and accounting-based income statements.

·the costing-based income statement is an income statement providing a breakdown of costs and revenues based on freely definable value fields and costing-based valuation approaches. This guarantees a short term and complete income statement at any time.

·the accounting-based income statement is an income statement in account form with an accounting valuation approach. The main characteristic here is the use of cost and revenue types. It is possible for this income statement to be permanently coordinated with the financial accounts.

The two types of income statement can be used in parallel.

The results are presented in accordance with the cost of sales accounting method and equate to a break even analysis.

The master data and/or basic structures of the income statement can be freely defined in CO-PA. This also involves definition of the evaluation terms (characteristics) and the evaluation parameters (value fields) for the profit analysis. The valuation is done using account classification with the accounting method.

Using the characteristics recorded or taken from the primary processes (e.g. customers, articles, customer hierarchies) or CO-PA’s own derivation rules, further characteristics can be derived for the income statement. Multi-dimensional income objects can then be formed from a combination of the values of the characteristics, from which a result can be output by comparing the costs and revenues.

The actual data (revenues, costs) is usually taken from upstream applications. For example, customer orders and also invoices from the SD system can be transferred online to CO-PA. The transferring of costs from cost centres, business processes, orders, projects and also direct account assignments from the FI module or accounting for services from the CO module is also supported.

Costing-based income reductions or costs (standard product costing) can be automatically determined in the costing-based income statement by evaluating incoming customer orders.

Profit centre accounting (EC-PCA)

Profit centre accounting (EC-PCA, new GL) provides a further tool for the portrayal of income and assists by defining internal operational income for profit centres in an account-oriented way on the basis of the total cost accounting method or the cost of sales method

Since it is possible to show the restricted assets as well as book so called statistical key indicators (e.g. staff numbers, sq. m) to profit centres, all the standard controlling indicators can be determined, such asreturn on investment, cash flow, return on operating assets, working capital, operating cash flow, sales per employee etc.

A profit centre represents a management-oriented organisational unit (i.e. a unit for internal management and control). The division of the company into profit centres forms the basis for controlling relating to internal areas of responsibility and thus also for the delegation of corporate responsibility to decentralised units (in terms of “companies in a company”).

Profit centre accounting actually goes a step further – with this the contribution of individual company units (e.g. manufacturing level, sales, administration) to the company’s profit can be analysed using so called function areas.

The essential feature of a profit centre is the responsibility for results in terms of costs and revenues, whereby its area of responsibility is distinguished from that of a cost centre, which denotes the location for the origin of the costs.

Profit centre accounting involves a statistical statement of account. The profit centres are usually not true account assignments, but bookings from the operative applications are reflected from the profit centre perspective. The profit centre accounting can be utilised in the EC-PCA component as well as in the ‘new general ledger’ (for new customers).

Profit centre accounting is also sub-divided into the classic sub-functions such as management of master data (incl. profit centre derivation), planning, actual allocation/period accounts and reporting.

Project system (PS)

Projects are tasks with particular characteristics:

  • They are generally complex, unique and involve a considerable level of risk
  • They have specific targets, which are agreed between client and contractor
  • They are limited in duration and are also cost and capacity intensive
  • They are subject to certain quality requirements
  • They are usually of strategic importance for the company carrying them out

Large-scale projects, such as the construction of a complete facility, as well as smaller undertakings such as the organisation of an exhibition, require careful and precise planning of the numerous activities involved. The responsible project manager must ensure that the entire project is carried out on time, within the budget and with the right level of service, as well as making sure that the necessary resources and funds are made available in an optimal way.

Design planning defines the structures for the organisation and management of the project and divides the project into individual, hierarchically arranged structural elements. The criteria used for this sub-division can differ and are dependent on the type and complexity of the project e.g. on the responsibility and structure of the participating departments or groups of people or on the interrelationships in the context of manufacturing and assembly. The design planning is realised in the project system with the project structure plan (PSP). (insert figure)

Scheduling places the design planning elements in a temporal sequence. It defines, for example, which events in the project are dependent on each other and which activities are needed in addition or which must be defined in detail. Scheduling is realised in the project system using the network plan. (insert figure)

The project system provides all the functions required in order to plan, manage and monitor complex projects not just in terms of costs (as the internal ordering is sufficient for that), but also in terms oflogistics. Functions for capacity planning, volume planning and scheduling can be used here in order to portray the technical and also commercial aspects of the project.

CO and BW

As a data warehouse solution, SAP BW is optimised to save data for analysis in a compressed form and to provide flexible, user-friendly reporting tools. This also applies to data used for controlling.

SAP has developed the so called Business Content for all the above mentioned CO components. This involves pre-defined interfaces, data objects, data cubes and reports that allow CO data to be quickly loaded into BW for analysis.

You can find further information about SAP BW and BO here.