18 Controlling
Chapter 17 provided a brief overview of the accounting tasks through which business transactions are posted according to legal regulations. Controlling lays the foundations for strategic and operational corporate decisions. These decision-making processes require deep insights into corporate figures (mainly costs and revenues) from all areas of the enterprise. As its name implies, the task of controlling is to control the enterprise rather than monitor it.
This chapter describes the following:
- Tasks of controlling
- Organizational units used in controlling
- Settling overhead costs and product costs
- Profitability analysis
- Controlling reports in SAP
18.1 Controlling Tasks
To implement corporate governance and make strategic decisions, the business’s management requires information from all areas of the organization (e.g., sales and distribution, production, purchasing, etc.).The figures from financial accounting don’t provide sufficient information for this purpose because information that is required from managerial accounting (another name for controlling) has to be more detailed than in external accounting. Financial accounting is closely integrated with controlling because it’s the source of much of the latter’s data. Nevertheless, financial accounting can’t answer the following questions, as controlling can:
- How can costs be assigned to individual departments and products in the business?
- How can revenue/profit and costs be assigned to customers and products?
- Which revenues/profits and costs will be incurred in the future?
Information in controlling is usually monitored with the help of Key Performance Indicators (KPIs). KPIs are prepared in compressed (aggregated) form and reflect the success or failure of an enterprise. KPIs are determined from figures that exist in the SAP system and are provided by the individual user departments.
Key Performance Indicators
KPIs are critical to controlling. They provide information about a business situation in a quantifiable and aggregated form, help keep the business objective transparent, and ensure that the standard of success is measurable. The following are examples of KPIs from various areas of the business:
- Sales volume per customer: What is the average sales volume per customer?
- Absence ratio: What percentage of the planned working time is lost due to employee absences?
- Storage duration: How long are the goods or raw materials (and thus capital) stored in the warehouse on average?
- Service level: How many sales orders were delivered on the requested delivery date minus all returns?
- Total Cost of Ownership (TCO): What are the costs for operating a device or facility (e.g., an IT system like SAP) in a specific period?
KPIs can be either absolute (e.g., the number of employees) or relative (e.g., price per piece).
Controlling can be divided into two areas: operational and strategic controlling.
In operational controlling, costs and revenues are collected, and variances against the predefined plan are calculated and analyzed. One example of the question answered by operational controlling might be the following: Why did the production costs for a product increase?
The main tasks of operational controlling include the following:
- Ensuring cost transparency
- Identifying and taking countermeasures against bottlenecks
- Monitoring the ratio of costs and revenues
The core task of strategic controlling is to identify opportunities and risks for a business. In this context, the data lays the foundation for early warning systems in enterprises. If variances between actual and planned costs are identified, effective countermeasures and actions can be taken in the future.
The main tasks of strategic controlling include the following:
- Planning all business factors
- Ensuring the existence of the enterprise in the long term
- Implementing strategic plans in operational processes
The costs that a business incurs can be examined from various perspectives:
-
What costs have been incurred?
This question is answered in cost-element accounting by linking the cost elements with the accounts. -
Where have the costs been incurred?
Cost Center Accounting deals with this question by associating the costs with cost centers (departments). -
Why (for which products) have the costs been incurred?
This is answered in cost object accounting by associating the costs with work orders, sales orders, or projects. -
Which results are achieved per product, customer, or sales order, for example?
These questions are critical for Profitability Analysis where costs and revenues are associated with individual market segments.
The following sections describe these concepts in detail.
When you examine costs, you’re either assessing records from past transactions or projected (future) transactions. Costs from the actual consumption of goods and services are called actual costs, whereas costs of the future are planned costs. You additionally differentiate between full costs and variable costs. In full absorption costing, all costs—including the fixed costs (overhead costs)—from a specific period are allocated to the corresponding cost objects, which gives rise to the term fully loaded cost. In variable costing, in contrast, only the decision-relevant costs (strictly speaking, the variable part) are allocated.
Planned/Actual Costs
Table 18.1 illustrates how planned and actual costs are determined. You’ve planned your costs per cost element; the actual values are set based on those in SAP ERP Financials (FI) and compared to the planned values, and then possible variances are analyzed.
| Cost Element | Planned (in $) | Actual (in $) | Planned/Actual Comparison (in $) |
|---|---|---|---|
| Energy Costs | 10,000 | 12,000 | 2,000 |
| Rental Costs | 20,000 | 21,000 | 1,000 |
| Telephone Costs | 3,000 | 2,500 | –500 |
Table 18.1 Planned and Actual Cost Determination
You might also want to make similar planned/actual comparisons for different windows of time (e.g., a fiscal quarter or a year).
Full and Variable Costing
What’s the difference between variable costing and absorption costing? To answer this question, let’s assume you manufacture two products and generate sales volumes in dollars per product.
Variable costing (contribution margin accounting) only takes the variable costs, such as material consumption, into account. These costs depend on the production quantity in the sense that the material input will vary with the volume of goods produced. Table 18.2 provides an example that illustrates variable costing.
| Product 1 (in $) | Product 2 (in $) | Total (in $) | |
|---|---|---|---|
| Sales Volume | 10,000 | 16,000 | 26,000 |
| Variable Costs | 6,000 | 11,000 | 17,000 |
| Variable costing | 4,000 | 5,000 | 9,000 |
Table 18.2 Full and Variable Costing
Absorption costing takes both the fixed costs and the variable costs into account (Table 18.3). Fixed costs are incurred regardless of the production quantity (e.g., heating costs for a warehouse).
| Product 1 (in $) | Product 2 (in $) | Total (in $) | |
|---|---|---|---|
| Sales Volume | 10,000 | 16,000 | 26,000 |
| Variable Costs | 6,000 | 11,000 | 17,000 |
| Variable Costing | 4,000 | 5,000 | 9,000 |
| Fixed Costs | 2,000 | 4,000 | 5,000 |
| Profit | 2,000 | 1,000 | 4,000 |
Table 18.3 Absorption Costing
The profit can be determined only after you’ve considered all costs (both fixed and variable).
In the SAP system, the Controlling (CO) component answers questions concerning costs and revenues in enterprises. The following are the most important subcomponents in CO:
-
Overhead Cost Controlling
Overhead costs are costs that can’t be directly allocated to products or services. This component mainly manages cost centers and internal orders. In the SAP system, Overhead Cost Controlling is especially closely integrated with FI. This means that any overhead costs recorded in FI are mapped in the SAP system to the cost elements and cost centers. -
Product Cost Controlling
This area deals with product costing. Consequently, Product Cost Controlling retrieves a lot of data from Production Planning (PP) and Purchasing (MM). Cost object accounting is used to record the product costs in the SAP system, capturing the material usage and work performed per product. -
Profitability Analysis (CO-PA)
This area matches revenues from sales and distribution with costs from overhead cost and product cost accounting, so it receives critical data from Sales and Distribution (SD). This interaction provides information on the profitability or on the contribution margin.
These three main areas of controlling are introduced in this chapter. As in the previous chapters, however, let’s first take a look at the structures on which CO of SAP ERP are based.