SAP Controlling (SAP CO) - An Overview by MotivationTech Kitchens

What is SAP Controlling (CO)?

SAP Controlling (CO) is an another important module of SAP ERP and essential module for any organization to facilitate management decisions to improve the company's profitability.  It reflects the expense and income flow from the transactions taking place within the company for internal management accounting purposes - as opposed to the FI module, which is designed to support external accounting. It also helps monitor internal costs within the organization and is, therefore, a management resource that lets the business stakeholders evaluate how well the business is doing. 

SAP CO module facilitates planning, recording, and tracking of business transactions. It also includes methods of monitoring and managing costs required for financial reporting. In other words, it deals with the coordination, optimization, and monitoring of all the business processes within the organization. It also helps one to schedule, monitor, execute, and report on costs. Controlling involves managing and configuring typical master data such as cost elements, cost centers, profit centers, internal orders, functional areas, and many more.

SAP CO Sub-Modules List

An SAP Controlling Module consists of various sub-modules. Each sub-module has its own purpose and functionality. The most common SAP CO submodules are:

• Cost Element Accounting
• Cost Center Accounting
• Profit Center Accounting
• Internal Orders
• Product Costing
• Activity-Based Costing
• Profitability Analysis (COPA)

Here is the detailed discussion on these sub-modules

Cost Element Accounting

A Cost Element accounting allows you to track the costs and revenues that occur in an organization. This SAP CO submodule makes use of the GL accounts. While creating a GL account in SAP, you also assign a Cost Element Category to it. Basically, a cost element category can be an Expense account or a Revenue Account. All of the Profit & Loss GL accounts are tagged to either an expense or a revenue element. For example, you assign an Expense Cost element category to all the GL accounts that you use to book costs in the system like Cost of Goods Sold, Consumption, etc. Similarly, you assign a Revenue category to all of the GL accounts that record revenues like Sales accounts, Miscellaneous Income, etc.

Cost Center Accounting

Cost Center Accounting provides information on the costs incurred by your business. You can use cost center accounting to analyze the overhead costs that incur within an organization. Almost all the organizations use this sub-module to track the overhead costs. Within this sub-module, you create a cost center master data. You create a cost center master data to track costs as per organization departments. In other words, it is an organizational unit in an SAP CO module that represents a clearly delimited location where costs occur. You assign a Cost Center to a company code in the master data. Also, you can group Cost Centers to provide a summary of cost information by creating a cost center hierarchy. You define Cost Center Hierarchies before creating a cost center master data. Also, when you post a journal entry in SAP to a cost element with an ‘Expense‘ category, you assign a cost center to it to book all of your costs at the cost center level.

Internal Orders

An Internal order is a cost object in an SAP CO Module that is used to monitor the costs for a specific project for a specific time period. They are not the same as cost centers in a way that internal orders are not permanent. Also, you can use an internal order to monitor costs for production activities.

Internal orders allow you to budget the costs as well. You can assign a budget to internal order and thus can limit the spending within that budget.

Just like you use the cost center to record transactions for expense accounts, you can use internal orders to capture costs for the expense GL accounts.

Activity Based Costing

Activity-Based Costing allows a better definition of the source of costs to the process driving the cost. It assigns the manufacturing overhead costs to the products or services. Firstly, it assigns the cost to the activities that are part of the overhead costs. Secondly, it assigns those activities to the products. This type of costing is mainly used in the manufacturing industry as it gives a true picture of the cost estimate. Also, it helps in identifying the products that are not profitable and service processes that are not effective. It segregates the Fixed Costs, Variable Costs, and Overhead Costs.

Product Cost Controlling

Product Cost Controlling allows management the ability to analyze their product costs and to make decisions on the optimal price(s) to market their products. It allows you to calculate the costs that occur during the manufacture of a product. As a result, you use this sub-module to plan costs and calculate the material prices. You can estimate the cost of goods manufactured and the Cost of Goods Sold (COGS) for a material by using this functionality.

To run the Product Costing, you need the material master data, Bill of Materials (BOM), Work Centers, and Routing. In fact, you create a bill of material for each internally produced Semi-Finished or Finished Goods Material. Also, it contains the list of raw materials and the quantities required to produce a semi-finished or finished goods material.

A Work Center is a work area or a machine where you perform the production work. You assign a cost center in the work center master data. Similarly, a routing helps in identifying the process to manufacture a material.

Profit Center Accounting

Profit Center Accounting provides visibility of an organization’s profit and losses by profit center. The methods which can be utilized for EC-PCA (Profit Center Accounting) are period accounting or by the cost-of-sales approach. Profit Centers can be set-up to identify product lines, divisions, geographical regions, offices, production sites or by functions. Profit Centers are used for Internal Control purposes enabling management the ability to review areas of responsibility within their organization. The difference between a Cost Center and a Profit Center is that the Cost Center represents individual costs incurred during a given period and Profit Centers contain the balances of costs and revenues.

Profitability Analysis (COPA)

A profitability analysis (COPA) sub-module in an SAP Controlling Module that allows you to analyze the profitability of an organization based on different market segments. Therefore, the transaction data from the Financial Accounting (FI), Sales & Distribution (SD), Materials Management (MM), and Production Planning (PP) flows to the COPA to generate the profitability reports. For example, whenever you create a goods issue or a customer invoice for a sales order, the values of COGS and Sales flow to COPA to analyze the profitability of a customer or a Product.

There are two types of COPA: Costing-Based and Account-Based. On the basis of the requirements of an organization, you can use any type of COPA. Also, an organization can use both types of COPA, if required. In COPA, you can use standard reports to analyze the profitability of any market segment like Material, Material Groups, Sales Area, Customer Groups, etc.

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