Controlling
So under controlling, these are the major topics that we are going to see:
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- Cost Element Accounting
- Cost Center Accounting.
- Assessment and Distribution
- Internal orders
- Profit center accounting
- Product Costing (overview)
- Profitability Analysis (overview)
So these are the topics we’ll see. Let us have the first, the understanding of the basic settings.
So this is controlling. Until now we have seen the financial accounting part. First of all, what is the necessity for controlling? When there is financial accounting, what is the necessity for controlling again? See, in the case of financial accounting, we are posting accounting entries, we are posting into GL accounts. So several financial entries we have posted. Let us open SAP, FS10N. So we have our company code, DRLB. Say, for example, we have our 400302, fiscal year 2013. This is nothing but telephone expenses account.
If you see telephone expenses till now, say, from April to October, say, 130,900. Say, for example, if management has asked me, I want to know what the telephone expenses are. Then as a financial accountant, what I can say is Yeah, telephone expenses, we have incurred till now 1 lakh 30,900. If the management is going to accept, okay, there’s no problem for me. Then immediately, what do they say? No, Anand. I want to know the bifurcation, I want to know business area wise. Even business area wise, I can show him the report. I can go to another code, and there I can give business area. So business area wise, I can identify. Then not only in business area, say for example, department wise. I want to know the department wise because how many departments we have? Say, we have 10 departments, branches, so many areas are there. So I want to know department wise. Then in such a case, can I get the telephone expenses total, this 1 lakh 30,000, by department wise? Just impossible. Why? Because still now, I do not have, cost center accounting something like that, I cannot get it. So there comes the importance of controlling. Say for example, DRLB is our company code, Under this we have, say, finance division, P&A division that is nothing but personal and administration division, marketing division.
So like that, we have different divisions. Production division, like that. Again, under the finance division, we have corporate finance, corporate accounts, like that. Similarly, under P&A division that is personal and administration division, HR department, admin department, time office. So like that different departments are there. So this kind of organization structure, I do not have in financial accounting. Similarly, marketing, domestic marketing, international marketing. Again, under domestic marketing, we have Bangalore, Hyderabad, Delhi, Mumbai, Calcutta, Chennai, something like that. I want to know expenses by cost center. The lowest one is the cost center. Anything above that is called node. Node means that topmost hierarchy. This is the topmost hierarchy, the node and under that, cost center. Lowest one will always be the cost center. So if I want telephone expenses by department wise, I need to define departments as cost centers, post expenses to the cost centers, then I can see expenses by cost center wise. But we do not have this facility in financial accounting. So that’s why I need the cost center accounting, means I need controlling. So there comes the importance of the cost center accounting.
So department wise, I can get telephone expenses. Now below that, not only department wise, say for example, corporate finance department they have 3 telephones. Or, say, for example, each department we are maintaining vehicles. So vehicle wise, what we want is the total vehicle running expenses. So we can post it to a GL account like telephone expenses. And, subsequently, what I want to do is I want to know the expenses by vehicle wise also. Say, if each and every department, say, we have given 2 or 3 vehicles. So in financial accounting, I can post all vehicle running expenses like repairs and maintenance, fuel charges, driver salaries, everything I can post to the financial accounting into the GL account. But what management asked me is that, not only that, I want to know the expenses that are incurred for each and every vehicle. Vehicle wage expenditure, I want. Say, department wise means I can post to the department. Again, can I get vehicle wise expenses? Yes, that is also possible. That is possible means I have to define each and every vehicle as internal order. That internal order is linked to the cost center. Cost center is again linked to the division. So like that, we can even below the cost center, we can define internal order, and we can capture the expenses even at the lowest level. Similarly, if you want to know the telephone expenses by department wise, we can get it. At the same time, not only department wise, I want to know, say, one department is having 3 telephones. Telephone wise, I want to capture expenses. Means, I can do that. Say, for example, here marketing department is there. Marketing department, they are incurring lot of advertisement expenses. So we have a concept of internal order. We can capture expenses in any way, at lowest level, you can capture. All those things, we’ll see.
What I want to tell you is that the necessity of controlling is originating here because of the management requirement. Apart from that, say in Doctor Reddy Labs, we have, say, for example bulk drug division. At the same time, I have say pharma division. Pharma division means where we manufacture medicine, we bottle it, we’ll convert into strips and we’ll sell it. Bulk drug means anything manufactured in bulk, maybe paracetamol or crocin or anything. So there are 2 divisions there, I want to know division wise profitability. And if I have in this again, bulk drug division is manufacturing different products, say product 1, product 2. Again, pharma division, product 1, product 2 like this. I want to know the profitability of each and every division. So in such a case, I need to define each and every division as a SBU, that’s nothing but Strategic Business Unit, and I can arrive at the profitability of each and every division. And profitability of each and every product at product level also I can create, I can create the profit centers. And I can arrive at the profitability by profit center wise. So this kind of facility, we do not have in financial accounting because the profit and loss account we can create and prepare only at company code level. Below that, we cannot do that. Or business area wise, if you want, that is also not so easy. But arriving at the profit center wise profit and loss account is not so difficult. You need to do the configuration part. So that is called profit center accounting. If you are posting expenses to the cost centers, that is called cost center accounting. Say, for example, one more thing, you’re manufacturing your product. I want to know, cost of each and every unit whatever I manufacture, cost of the product, I want to arrive at. So that’ll be we’ll get it from product costing, how to arrive at the cost of the product because the cost will be divided into several things. Say, for example, what is primary cost? That is, what do you call direct expenses, say raw material cost, then labor cost, then comes to the direct overhead. Like this, the total cost. So this is prime cost and to that we are going to add overheads, factory overhead, sales and selling and distribution overhead, and then we add profit, then we’ll get the sales price. So all these things we want to get it. So all these things we can get it from from the product costing only. So this facility, we do not have again in financial accounting. This is one aspect.
Then coming to profitability analysis. Profitability analysis means analyzing the profitability. Say, there are 2 different things. Profit center accounting is different from profitability analysis. Profit center accounting is nothing but we are dividing the internal organizational units or strategic business units into profit centers and you are analyzing the profitability by division wise. That is called profit center accounting. We define profit centers that is profit center accounting. But in case of profitability analysis, analyzing the profitability by maybe customer segment wise, geography wise, country wise, state wise, district wise, whatever it may be. So we have to analyze the profitability. So that’s called profitability analysis by different dimensions. Let us see now.
Now when you come to the controlling, basic settings in controlling, cost element accounting, cost center accounting, assessment and distribution, internal orders, profit center accounting, product costing, and profitability analysis. These are the topics mainly dealt in controlling. Now what is controlling? Say for example here, till now we know financial accounting part. In financial accounting, we have general ledger accounts, and general ledger account like office rent, telephone expenses, wages, something like that, we have. Now in controlling, there is no place for assets and liabilities. So assets and liabilities are not at all considered because we take only costs into consideration. That is nothing but cost and revenues, both. We define again cost, whatever we have defined as general ledgers in financial accounting, we’ll be defining them as cost elements. In financial accounting, we defined all GL accounts. Now whatever the GL accounts that we are going to define here, that will be redefined as cost elements in controlling. Because unless you define it as a cost element, it will not be posted to controlling area at all. So first of all, what is meant by controlling area? We know chart of accounts, we know chart of depreciation, high level organizational object. So controlling the area where it will take care of your complete controlling requirements and cost accounting requirements. And it creates the background environment for creation of the costs, for posting of the costs, for analyzing the costs, for classification of the costs and presentation, MIS, management information system. The best accounting reports will get written from controlling. So like that, financial accounting, whatever we create as general ledger accounts will be redefined as cost elements here. Similarly, these are expenditure GL accounts, what about the income accounts. Income accounts, say for example sales, then miscellaneous income. So all these things are defined as revenue elements.
So all income accounts are defined as revenue elements. So now, whatever the GL accounts that we have defined in financial accounting are going to be redefined, all expenses as cost elements, incomes as revenue elements. Here, we have financial accounting box and we have controlling box. The data that should be flowing to the controlling, it originated from financial accounting. We are not going to post in a separate data into controlling. Whatever we post into the financial accounting except assets and liabilities, all the data which you are going to analyze the cost or classify cost, all those things will be posted to the controlling area. So for that purpose, we need to redefine all the GL accounts as cost elements. So whenever any document that you post in financial accounting, once you create controlling area and make the required settings, each and every document, whatever you post into the financial accounting towards cost or revenues will trigger one document, and that will be posted into the cost accounting. In cost accounting, we analyze the data, classify the data, and present in a different way and generate the reports, etc. Now in order to understand controlling, let us see the cost accounting organization structure.
The topmost organization structure in controlling is operating concern. Below the operating concern, we have chart of accounts, below that we have controlling area. Below that, we have company codes. Or in a different presentation, you see here, say we have our DRL group. Say here, I can define controlling area, DRCA, Doctor Reddy Labs Controlling Area.
So we have defined a controlling area. So, I’m just putting it above the company code or on par with our chart of accounts. So now we are going to have controlling area like this, and any number of company codes can be linked to one controlling area. Just like you remember, we have created chart of depreciation, any number of company codes can be assigned to one chart of depreciation. And here, we have created chart of accounts, and any number of company codes can be linked to one chart of accounts. Similarly, here, we are going to create one controlling area, any number of company codes can be linked to one controlling area, and controlling area contains the background all cost related environment. And say for example, we can link up these company codes DRLB and DRLP to one controlling area, just like chart of account. Any number of company codes you can assign to one controlling area, one chart of accounts. Similarly, any number of company codes can be linked to one controlling area so that all the cost accounting related reports can be generated, and the care will be taken by this controlling area. Now here, one thing we have to understand; in order to link up these company codes, there are two conditions that must be satisfied.
Condition one, whatever the number of company codes that you are going to link up to this controlling area, those company codes should have been linked to the same chart of accounts. See, for example, these two company codes are linked to this chart of accounts.
So here, there is no assignment shown for the third company. So if this company code is linked to another chart of accounts, in such a case, I cannot link up this company code to this controlling area. Because these 2 company codes (DRLB, DRLP) are linked to one chart of accounts (DRCA), these 2 company codes are linked to this controlling area (DRCA). When we are going to define this controlling area, one more condition is the fiscal year variant. So fiscal year V3, that is April to March. Here, v 3. Say for example, the third company code is K4. In case if it is a K4, then we cannot link up this company code to this controlling area. The reason is the presentation will be difficult. Say, for example, V3, that is April to March. Similarly, in case of, K4, that is January to December. So when you are making a presentation of the data, the periods should be the same. When one case is January to December, the other case April to March, so what about the overlapping periods? Again, there is a problem. So that’s why the main advice is that when we have one group of companies, better group those companies which have the same chart of accounts and the same fiscal year variant. It doesn’t mean that if the fiscal year variant is different, we cannot link up to the company code. Consolidation will be a problem for us. Consolidation means when we complete our financial accounting part, while preparing the balance sheet and payroll account, we consolidate the group totals. At the time of consolidation, again we’ll get a problem if the fiscal year variant is something different because you cannot combine April to March with the January to December. So that presentation is different, this presentation is different. So now I would like to reiterate that in order to link up one controlling area, any number of company codes can be linked to one controlling area provided this company code should have been linked to the same chart of accounts.
Moreover, one more thing is that the fiscal year variance should be the same. I can say that instead of saying the fiscal year variant is the same, I can say that the fiscal year breakdown should be the same. Fiscal year breakdown means, for example, V3. We know what is meant by V3. V3 is nothing but April to March with 4 special periods. Say we have one more fiscal year variant, say for example, say V1. V1 also, main period is April to March, but here, not 4 special periods, say here only 2 special periods. But main period is April to March. Similarly, V2. Say for example, this also, April to March, plus, say only 1 special period. So even in such a case, here, April to March is the same April to March. So in that case, fiscal year breakdown is the same. This is called breakdown. Because main fiscal year is the same, but special periods are different, so even in that case, I can link up. No problem. V1, V2, V3, all those things we can link up. And, in case if there’s a K4, then I cannot link up. K4 is completely the fiscal year variant is different. In this case, fiscal year variant is different, but fiscal year breakdown is the same. So that’s why here it says that in case if the fiscal year breakdown is the same, that is April to March, the system won’t bother about the special period. So even in such a case, we can link up to one controlling area. So these are the certain basic rules. I repeat once again, any number of company codes can be linked to one controlling area provided they should have been linked to the same chart of accounts and the fiscal year breakdown should be the same.
So operating concern is the topmost hierarchy in controlling, chart of accounts below, then controlling area, then any number of company codes can be linked to one controlling area. For that, chart of accounts should be the same. One more thing here, in case of finance accounting, we do not have comparison of revenues, etc. Say, cost planning. What is plan? What is actual? Say, for example, finance department plan is to incur 100 rupees on advertisement, and actual expenses we have incurred is 105. Variance is 5 extra. Similarly, one more other expenditure. Say 100 rupees, they have incurred only 98 but 2 rupees favorable here.
See, there is some expenses. 5 is adverse variance, 2 is favorable variance. Means, there is a variance in the incurring plan versus actual. So all these things we are going to see in cost accounting.
So with this background, let us create controlling environment, and we’ll create controlling area. In order to post cost accounting entries, we need to have controlling area in place. And for defining the controlling, we need to have certain parameters. Here go to Controlling directly, it is a separate sub module. General Controlling, Organization Structure, Maintain Controlling Area.
So controlling area is an organizational object wherein it facilitates the environment for making the cost related reports, cost analysis, cost classification, costing reports, everything can be done within that. Open ‘Maintain Controlling Area’. So okay OKKP the t code. Here we are going to maintain controlling area.
Click Maintain controlling area. So here, what we do, we have to create the controlling area. Go to New Entries. I remembered that we have DRL control area DRCA. We have already created.
Let us discuss again. Because from ECC6 EHP5 onwards, creating controlling area is mandatory. Without that, you cannot post in a single financial entry. That’s what I already told you. Now here, we have taken DRCA, controlling area, and cross company code cost accounting. Here there are two things, one is ‘cross company code cost accounting’, the other is ‘controlling area same as company code’. If you have only one company code under the group, I can take ‘controlling area same as company code’, that is single company code. Otherwise, better to always take ‘cross company code cost accounting’. If you take cross company code cost accounting, here you have the facility to identify so many currencies. But if you say only a single company code, controlling area is same as company code, you cannot see more than one company code currency, only one company code currency you can assign. Otherwise, better to take cross company code always because you’ll have more than one company code in future. That’ll be difficult otherwise. And currency type, I want to take. I don’t know whether it will accept now or not.
Controlling area currency I’m taking. Then in such case, system will give you a message stating that you have selected a type 20 controlling area currency because you want to record your controlling transactions in a currency other than the used in the financial accounting.
It need not necessarily. Though I take controlling area currency, I can choose INR, of course. So it says that if data flows from Co to FI. Generally, I told you data will be flowing from financial accounting to controlling. But what it says here, in case if data flows from vice versa, that is, from CO to financial accounting, such as through order reconciliation, etc, you must use currency type in the controlling area that is also used in the assigned company codes as a currency type for a parallel currency. Typically, these are the types defined in the group currency, hard currency, etc. So what this says is that, sya in case of organizational structure, say, we are using, for example here INR. See, in fact, there is a facility in SAP that for a single company code, you can have more than one currency. That means it is not just posting the accounting entries. I can maintain my books of accounts in more than one currency. That is one company code currency, two more other currencies I can maintain. I can maintain my books of accounts in completely three currencies. One is main company code currency, and the second and third, there are two other currencies we can use. Say, for example, USD and GBP, I want to maintain. So apart from my company code currency INR, I can define 2 more parallel currencies for the purpose of reporting. That’s what it says. But what it says is that in such a case, you choose that currency which is defined as parallel currency. That is important here. 20 I’ve taken. Currency, INR.
Chart of accounts, DRCA. Fiscal year variant, V3. And I’m creating one standard hierarchy. So DRLSTHIER. So that is nothing but at group level, I’m creating one topmost hierarchy that represents the topmost hierarchy in the cost accounting hierarchy. We’ll understand and we’ll discuss more when we go further regarding the standard hierarchy. Once we are done with, first to save it. Let me check whether it will allow me to save. Yeah.
I’m creating one more request now, CO settings for DRL group. I’m creating another request.
The second step is assignment of company code(s). So, say only DRLB we have linked up.
So, of course, any number of memory codes can be linked to one controlling area. So this is the DRCA controlling area. You can have company code 1, company code 2, Company code 3, like that any number of company code I can link up to this controlling area. So the company codes are linked to the controlling area.
Then Activate Components/ Control Indicators. For activating component, component not active for cost center, make it active. Then order management, component not active, make it active. Order management means internal order. The rest of the things, whenever it is required, we’ll do that.
Profitability analysis, unless we create operating concern, etc, we cannot create any profitability analysis segments. Profit center accounting, projects, sales orders, cost objects, something like that. So these things, we need not touch right now. As of now, whenever it is required, they’ll come. Whenever we go for the profit center accounting, I can activate it.
See that ‘All currencies’ is checked because the system will post all types of currencies to your controlling area. Below, of course, not required. Save it.
Message: Critical transport: control indicator in controlling area, is because the controlling area is a very critical transport indicator. Save.
Now what we have done here, first of all, basic data, we have created the controlling area where currency type I have taken currency INR, chart of accounts, fiscal year variant, standard hierarchy, all these things we have defined. Then coming to assignment of company codes, so here any number of company codes you can link up. One thing I would like to tell you here, I told you the condition in order to link up to one controlling area, the company code should be maintained, the fiscal year variant should be the same and it should have been linked to the same chart of accounts. Say for example, I will change my fiscal year variant. We have one more company code. Say here, if you go to New Entries for this controlling area.
So DLP, this is. So DLP also can be linked because DLP also is linked to the same chart of accounts. I’ll show you. Go to T code OBY6, Global parameters. Company code DRLB.
See DRLB, DRLP. Both companies are there. As you see this one linked to group company and DRCA chart of accounts, fiscal year variant V3.
This is DRLB. Now for DRLP Pharma, the same group.
Say I’m changing the fiscal year, because we have posted financial entries, I cannot change it now. Because we have posted in the cross company code. Let me create one more company code. Go to Enterprise structure, Definition, Financial Accounting, Edit, Copy, Delete, Check Company Code. Double click on ‘copy, delete, check company code’ because I want to copy it. So what I’m doing is from DRLB I’m copying it to company code say DRL1.
One more company code I want to create. It says something like this image below.
We have already done this exercise, if you remember. So do you want to copy GL accounts also? Yes. Do you want to allocate different local currency? No.
So even number ranges also will get copied. So it will copy everything. So already we have seen this exercise when we have done the intercompany postings. So system has copied it.
Go back to ‘Edit Company Code Data’.
See, DRL1, DRLB DRLP. Open DRL1. Here, doctor Reddy Labs Test company.
Now I want to see OBY6.
See now, DRL1, DRLB, DRLP. Now in case of DRL1, what I want to do is let me link up to same group DRLGRP. But here, I’m assigning different fiscal year variant. Say for example, K4.
Come here to controlling area, Maintain Controlling Area. So DRCA we have. Select it, go to Assignment of Company Codes.
Here now we have for the time being, only one company code has been assigned. Go to New Entries. See only DRLP is visible.
The DRL1 has not been visible. Observe this. If I go to OBY6, I have to come out again. Unless I come out, the system will not allow me. In OBY6. Say, DRL1.
Here, instead of fiscal year variant K4, if I change it to V3. Come back to maintain controlling area. Here select DRCA, go to Assignment of company codes. Click New entries.
See, second company DRL1 appeared here, because it’s the same chart of accounts and the same fiscal year variant. If both tallies, then only it’ll allow you to assign. Otherwise, it will not allow you. This is what I told you, if you have the same fiscal year variant, same chart of accounts. That’s why here it is showing very clearly. These two companies have the same chart of accounts, same fiscal year variant. So all these 2 companies you can assign here. So like this, we can maintain controlling area