SAP Controlling – A Detailed Guide on SAP CO and Its Components

Last Updated on January 1, 2023 by Pradeep

Introduction to SAP Controlling – (SAP CO)

What is covered in this Article?

(Click on the topic link to directly jump over it).

• How SAP Controlling Works
• Sub-Modules of SAP CO
• Cost Element Accounting
  • Classification of Cost Element in SAP Controlling
• Cost Center Accounting and its Use in CO
• Internal Order and its Functions
  • Categories of Internal Order
  • Classification of Internal Order
• SAP Product Costing
  • Product Cost Calculation Areas and Components
  • Product Cost Planning and Components
• Cost Object Controlling
  • Specification of Production Order
• Profitability Analysis
  • Types of CO-PA and How to choose the best one
• Profit Center Accounting
• Why and How to learn SAP Controlling

How does SAP CO Works?

SAP Controlling (CO) helps improve management across the financial spectrum by Planning and analyzing costs to deliver reports that influence decision-making.

Almost every SAP ERP Financial Accounting and Logistics process end with a controlling document. Hence the controller has to understand the value flow. He should also be able to realize errors early and correct them on time.

Further, the reports that he generates with controlling activity should be informative and include detailed information on any actual/plan variance.

SAP FI-CO Integration

SAP CO and FI modules are independent components in an SAP system. The data flow between these components takes place regularly.

Do Visit Page: SAP Controlling Online Training

SAP Controlling Components or Sub-Modules

The SAP Controlling module in SAP ERP contains a variety of components or sub-modules. These components offer great functionality for diverse controlling requirements.

Here is a list of those Components of SAP Controlling.

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

Now we will dive deep into each of these sub-modules of SAP CO and see how they work and what is their role in the implementation process.

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.

The speciality of Cost Elements in SAP Controlling

We don’t need to enter cost data separately in an integrated accounting system like SAP. This is because each business transaction that involves costs, updates the CO component with detailed information on the cost element and 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 the primary cost and the 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 ERP (ECC), 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 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.

Also Read: Material Ledger in SAP S/4HANA- Detailed Overview

2. Cost Center Accounting

The 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 analyze 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 costs 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 segments. 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 segments.

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

Remember, since we can not 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 categorised as either:-

1. Orders used only for monitoring objects in Cost Accounting ( such as adverting or trade fair orders)
2. 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 orders 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

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.

Also read: How to create vendor Master Data in SAP FICO

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 the cost of goods sold.

This tool contains the following areas.

1. Product Cost Planning
2. Cost Object Controlling
3. Actual Costing or Material ledger

Related: Preliminary Costing in SAP

Key Component of Product Cost Calculation

1. Material Cost
2. Process or Conversion Cost
3. Overheads
4. Manufacturing or production Overheads
5. Administrative Overhead
6. 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:-

1. Manufacturing Materials
2. Services
3. Other intangible goods

Component of Product Cost planning

The following are the key components of Product Cost Planning in SAP:-

• 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.

(Related: SAP Product Costing Interview Questions and Answers)

5. Cost Object Controlling – Product Cost by Order

The companies producing goods or services within Production planning require Cost Object Controlling. Similar is the case with the Production Planning for Process Industries submodule 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 taking place
• Which capacity is to process the order
• How much are production costs

(Learn: Key Changes in Controlling in SAP S/4HANA)

6. 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 can not create reports in SAP that contain data on 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.

Get Details on: SAP Product Costing Online Training

7. Profit Center Accounting

Profit Center Accounting is best used to calculate the profit or loss of individual, independent areas within the organization.

While Profit Center accounting performs a single Dimensional Analysis whereas Profitability Analysis performs a multi-Dimensional Analysis.

Related: Interview Questions of Profit Center Accounting

How to Learn SAP Controlling?

So, this was the basic guide on SAP Controlling for beginners. You got the key elements of SAP Controlling and learnt exactly the role of Controlling in SAP. However, it is just the conceptual knowledge that you read. SAP Controlling is more about practicals.

Hence, to get expertise on this subject, you must go a practical way to learn it. The best way to learn this subject is to get it implemented into the system with proper training that includes scenarios and case studies. Though you can watch videos on Controlling for the initial knowledge gain. But to fulfil the complete roles and responsibilities of an SAP FICO Consultant, you must go for full-fledged training. This means training where controlling is synced with financial accounting so that you can also understand the connection between them.

Later on you can go further to do controlling in S/4HANA also so that you can covert your profile from FICO to become an SAP S/4HANA Finance consultant.

Why you must learn SAP CO? – EndNote

You must know that while SAP Finance (FI) deals with Functional accounting in SAP implementation, SAP Controlling (CO) works clearly on Management Accounting. This is the main fundamental concept here in SAP FICO. Likewise, it is equally important in SAP S/4HANA Finance too.

Interestingly, in S/4HANA, Finance and Controlling are no more separate modules. Here SAP has merged both of them. Thus, SAP S/4HANA Finance consists of Finance and Controlling.

Do Visit:- SAP S/4HANA Finance 2020 Training

Learning SAP Controlling would help you get a better job in the SAP domain. You should also read relevant Interview questions that support your overall learning.

Lastly, I say Management Accounting in SAP S/4HANA Finance is deeper and carries many new features too. But, you must learn the basic SAP Controlling first before thinking about advanced controlling i.e. Management Accounting in S/4HANA Finance.

Do Read: Interview Questions on Profit Center Accounting

Watch Related Video: Introduction to SAP Controlling